This week saw an announcement by the Tasmanian Premier that his government had decided to implement fuel price reporting laws as a means of lowering fuel prices and, if that action doesn’t deliver lower fuel prices, the Tasmanian Government would introduce a regulatory cap on retail fuel prices across the State.
The announcement appears to have come as a surprise to not only industry, but to stakeholders internal and external to the State Government – and certainly was not informed by any consultation with industry.
“The Tasmanian Government announcement appears to be part of a theme being advanced by the Premier’s and Chief Ministers of the three smaller capital city markets of Canberra, Darwin and Hobart – all of which have now rattled the sabre of regulation in recent weeks believing that prices should be lower than they currently are”, said ACAPMA CEO Mark McKenzie.
But in evidence provided to a recent Inquiry conducted by the Northern Territory Government, ACAPMA drew the attention of the Government to the fact that most commentators – particularly motoring bodies – are drawing false conclusions about the relative retail margins of service station operators.
These errors were being made because these commentators appeared to believe that current-day average terminal gate prices are a proxy for the price payed by service stations for the fuel in the ground on any given day.
Yet, as we all know, many fuel retailers purchase fuel under contract in line with ‘smoothed’ pricing mechanisms – not instantaneous wholesale price – and that is particularly the case in markets like Canberra, Darwin and Hobart.
This wholesale fuel purchase behaviour, coupled with rapidly declining prices (which means that a price paid 4 weeks earlier was likely to be much higher than today), dramatic reductions in fuel volumes due to the COVID19 economic shutdown (which means previously purchased stock takes longer to cycle through to end-customers) and the absence of a discount price fuel cycle (as exists in the larger capital city markets), provide all the explanation needed for the anomalies observed in these three markets.
“It beggars belief that, in the same breath as talking about the fact that we are living in unprecedented times, the Premier’s and Chief Ministers in these smaller markets believe that they should have seen normal fuel market behaviour during the COVID19 Downturn”, said Mark.
That said, the right to introduce price regulation in retail fuel markets is ultimately the prerogative of all Australian Governments. There are also obvious complexities that will need to be successfully navigated for fuel price regulation, given that fuel is subject to significant indirect taxes levied by the Federal Government – and a State/Territory price cap therefore runs the risk of negatively impacting on Federal Tax revenues..
But does fuel price regulation work?
The model that all three governments (i.e. ACT, NT and Tasmania) have foreshadowed is a price cap. Notionally this means setting a fixed increment (e.g. 20 cents) above a wholesale benchmark. But which benchmark should be used?
When asked this question, political representatives have suggested using the Terminal Gate Price (or TGP) but, as we have already discussed, this instantaneous benchmark does not necessarily reflect the actual buy price for the fuel in the ground – unless we have had a long period of very stable oil prices and finished fuel import prices (including exchange rates).
Such a strategy therefore runs the risk of governments setting a price cap that is not actually representative of real-world economics for fuel retailers.
“Recognising that there are around 2500 fuel businesses competing with each other – not just 6 big ones – who each have different cost profiles and wholesale purchase profiles, the application of a uniform market cap runs the risk of two adverse market outcomes”, said Mark.
The first occurs if the cap is set too low. Under this scenario, service stations with high costs and low volumes (e.g. those in regional areas and outer ring metropolitan areas) will simply not make enough money to remain viable and would likely be forced to close – with consequent impact on local access to fuel and a concentration of market competition.
The second occurs when the cap is set too high, Under this scenario, fuel retailers that normally discount will simply keep their price higher than they otherwise might as a reasoned market response to the limiting price regulation and track close to the cap – ultimately resulting in motorists paying more in fuel costs over time.
“In short, the price cap proposal is dangerous from a motorists’ perspective – let alone an industry and jobs perspective”, said Mark.
“It does beg the questions of what problem are we trying to solve and how well do Regulators really understand the complexity and vagaries of fuel market pricing”, said Mark
It is interesting to note that definitive research produced by the Federal Government (see https://www.energy.gov.au/sites/default/files/Australian%20Petroleum%20Statistics%20-%20Issue%20284%20March%202020.pdf) shows that average petrol and diesel prices in Australia are the fourth and fifth lowest of all OECD economies By comparison, those countries that apply fuel price regulation typically rank amongst the top 10 highest fuel prices in the OECD.
“It remains to be seen how these recent threats against our industry will play out but if history is any guide, government fuel price regulation in these three markets will likely increase average fuel prices for motorists over time – not lower them”, concluded Mark