ACCC report into the prices of unleaded petrol

There were two three key findings in the Australian Competition and Consumer Commission (ACCC) Monitoring of the Australian petroleum industry - Report of the ACCC into the prices, costs and profits of unleaded petrol in Australia released in December 2009.

1. The most influential factors on retail petrol prices are the international price of refined petrol (Singapore Mogas 95), the exchange rate between the Australian and US dollar, and the weekly retail price cycle.

2. After reaching a peak in July 2008 – prior to the global financial crisis – at above 160 cpl, prices fell rapidly. This culminated in a low during December 2008, before increasing moderately – by 20cpl – up to February 2009, and; since then remaining stable.

3. Profits are, at best, slim in petroleum refining and marketing, with retail profits less than 1 cpl, but relatively stable.

Monitoring

The report is the second, under direction from the Minister for Competition Policy and Consumer Affairs, who has requested the ACCC monitor prices, costs and profits relating to the supply of unleaded petrol products for a period of three years. In February 2008, reports coverage was increased, when the minister required the ACCC to expand the monitoring to include diesel and LPG prices.

The monitoring is undertaken in accordance with Part VIIA of the Trade Practices Act 1974 (the Act). The ACCC's functions include the holding of price inquiries, examining proposed price rises for goods or services, and monitoring an industry or business that the minister directs it to, then making the results publicly available.

Part VIIA of the Act also enables the ACCC to compel the provision of information and documents (Section 95ZK) where appropriate.

Prices

Even though the report concluded that between March and June 2009, the retail prices remained relatively stable, there was some rapid and volatile movement prior to this. After the July 2008 peak, retail prices had a large fall of 62 cpl. This closely followed the decrease in Mogas 95 of 62 cpl over the same period. The retail price did however recover by 27 cpl from the low of December 2008 to peak again in July 2009. Mogas 95 increased by 29 cpl during this time, as international demand for refined product recovered after the initial hit from the global financial crisis.

The ACCC noted that "… retail prices generally followed movements in Mogas 95 closely". However, they did highlight that there were divergences between local and international prices from time to time. They concluded that these small differences were due to local competitive factors and the time it takes for changes in international prices to flow through the supply chain and into the Australian marketplace.

It was identified that the regular weekly price cycle was well-established and evident in the capital cities, though not in regional cities and country towns. The monitoring data suggested that these cycles had become more stable and greater in magnitude in recent times. There has been, during 2009, a change in the cheapest day of the cycle. It was discovered that, in Sydney, Melbourne, Brisbane and Adelaide, the low-price day had moved from Tuesday to Wednesday.

The analysis of wholesale prices, the link between supply – refining and importing – and the retail sector, proved more complicated. This is due to the provision of non-fuel related services in the price makeup. These bundled services can include distribution, brand, card and credit costs. As the value of these elements is based on the worth each refiner–marketer places on the service, it becomes difficult to benchmark pricing.

The monitoring process determined that the TGP (terminal gate price), a price at which fuel can be purchased at a wholesaler's terminal on a truck-by-truck basis, was the most appropriate benchmark for wholesale price. TGP is a fuel only charge, as the customer bears the cost of transport and the seller makes the fuel available without additional services, such as branding.

Most transactions occur under differing contractual pricing arrangements, which vary from the TPG model. However, by using it as an indicator, the ACCC concluded that the wholesale price, on average, was close to the TGP in each capital city [if they use it as indicator they are going to conclude this so not sure what point they are making].

Costs

The major cost associated with the refining of fuel is the cost of crude oil, which alone accounts for 90– 95% of the total production cost. Since 2002, the price of energy commodities has increased, with the price of crude oil spiking in 2007–08. Other costs that contribute to the final price in the production of fuel include energy, labour and maintenance.

In 2008–09, costs exceeded revenues, due in part to the fact that the purchase price of crude oil was higher than the price received for petrol after importation and refining. The Australian Institute of Petroleum, in its publication Maintaining Supply Reliability 2008, estimates that the time taken to purchase crude from overseas, ship it to Australia and process it can be more than 30 days. In that time, the price of petrol can vary significantly. Timing therefore affects the extent to which petrol costs can be matched by revenues.

Even though the charge for petrol is the most significant item for a retail business, at 80% of total costs, estimating the costs of operation in a retail environment is difficult. Other expenditures required for the operation of a retail outlet include merchandise for convenience stores, salaries and employee benefits, rent and leasing, depreciation, and repairs and maintenance.

The problem faced in compiling the report was in attributing the operating expenses to fuel sales alone. The ACCC went to some effort to proportion operating costs to various parts of a retail business. Once this was recognised, the operational expenditure attributed to fuel was further dissected based on the volume of each product sold.

Profits

The ACCC find it difficult to analyse the profits of the separate sectors of the downstream market separately, because some of the companies are vertically integrated, or operate in one or more of the sectors simultaneously. This fact makes definitive statements on the profitability of each individual component – refining, wholesale and retail – difficult to make.

When taken as a whole over the past seven years, net profit was within the range of 2 to 6 cpl, with an average of 3.1 cpl. The ACCC estimate that the retail component of the overall net profit was 0.4 cpl. The impact of the global financial crisis, with its swift price devaluation of crude oil and impact on the Australian dollar, was highlighted by the report. It found that these contributed to a combined industry net loss of approximately A$1 billion on the sale of petrol in 2008–09.

A closer look at the report indicates that, industry-wide profit is greatest at the upstream points – exploration and the production of crude oil. The downstream market displays a much lower percentage of return – earnings before interest and tax – on petroleum sales and assets. The report indicates that the return on sales for refiners, wholesalers and retailers combined is 3.2% (returns on assets are 9.7%). Colleagues in the upstream sector made nearly 15% return on sales and 35% return on assets during the same period.

Observations

The report concluded that volatility in industry profits has been due to instability in the financial performance of refining, supply and wholesale. This unpredictability reflects its exposure to international factors – refinery margins, international petrol price movements, and changes in the value of the Australian dollar – as well as contractual pricing arrangements.

In contrast, even though they may be slim, there have been stable retail sector profits for petrol.