The Australian Competition and Consumer Commission has released its fifth quarterly report into the Australian petroleum industry. The report examines petrol prices up to the end of December 2015.
Significant issues this quarter include that quarterly average prices were lower than previous quarters, but not as low as might have been expected given lower crude oil prices. Reasons for this include high refiner and retail margins. The recent resolution of litigation between the ACCC and a number of petrol retailers will make price information available to consumers and motoring organisations, which should increase competition and put downward pressure on retail margins.
The report found that the quarterly average price in the five largest cities (i.e. Sydney, Melbourne, Brisbane, Adelaide, and Perth) was 124.4 cents per litre (cpl), which was 8.8 cpl lower than the previous quarter and 11.4 cpl lower than in the June quarter 2015.
“This decrease in prices over the quarter was welcome news for motorists,” ACCC Chairman Rod Sims said.
“However, retail petrol prices were not as low as might have been expected given the level of crude oil prices. There are two reasons for this. Firstly, there were high refiner margins during the quarter.”
Brent crude oil prices in December 2015 were at their lowest level in over 11 years, and were significantly below their long term average.
However, Mr Sims noted that: “motorists are not fully benefiting from low crude oil prices as they use petrol in their vehicles, not crude oil, and the difference between crude oil prices and international refined petrol prices (i.e. the refiner margin) in 2015 was high”.
The annual average difference in 2015 was around USD 16 per barrel, compared with an annual average of around USD 8 per barrel over the last 20 years.
“While international refined petrol prices are strongly influenced by the price of crude oil, they are also determined by their own global supply and demand conditions. As global demand for petrol was relatively strong in 2015, prices remained high relative to crude oil prices. These high refiner margins are outside Australian control,” Mr Sims said.
“The second factor was the high gross retail margins in Australia in the quarter.”
Gross indicative retail differences (GIRDs) are indicative of the margins achieved by retailers on the sale of fuel, and may reflect overall retail profits. The ACCC’s September quarter 2015 report had noted that quarterly average petrol GIRDs in the five largest cities (11.8 cpl) were at their highest level since the ACCC began monitoring in 2002. In the December quarter they increased further, by 0.6 cpl to 12.4 cpl.
“The ACCC believes that retail prices have been unreasonably high in the second half of 2015 and in early February 2016 wrote to the major petrol retailers seeking an explanation for the high retail margins. I expect to receive their responses shortly,” Mr Sims said.
In December 2015 the ACCC’s Federal Court proceedings against Informed Sources and five petrol retailers (7-Eleven, BP, Caltex, Coles, and Woolworths) were resolved by way of court enforceable undertakings.
As part of the resolution, from 20 May 2016 Informed Sources will make price information available to consumers for free on a near real-time basis at the same time as it is received by retailers. Even more important, the pricing information exchanged between petrol retailers will also be made available to third parties, including app developers and motoring and consumer organisations.
“The settlement of these proceedings was a big win for motorists. Making this pricing information constantly available to consumers will improve price transparency. It will allow them to make better informed purchasing decisions and therefore create greater competition in petrol pricing. We therefore hope it will lead to downward pressure on retail margins,” Mr Sims said.
Further insights from the report can be found in the key messages of the December quarter 2015 petrol monitoring report, which is below.
On 9 December 2014 then Minister Bruce Billson directed the ACCC to monitor the prices, costs, and profits relating to the supply of unleaded petroleum products and report at least quarterly for a period of three years.
Under these arrangements the ACCC will produce two types of reports:
- quarterly ‘macro’ reports looking at petrol price movements and what drives them overall; and
- market studies looking at ‘micro’ issues in considerable depth, including analysing the price drivers of petrol in regional markets.
Informed Sources operates a petrol price information exchange service which allows for subscribing petrol retailers to exchange prices on a near real-time basis. The ACCC was concerned that this arrangement allowed for the highly frequent and private exchange of information between petrol companies, which had the effect or likely effect of substantially lessening competition for the sale of petrol.
Key messages of the Report on the Australian petroleum industry – December quarter 2015
Resolution of ACCC proceedings relating to petrol price information sharing will improve price transparency for consumers
In December 2015 the ACCC resolved Federal Court proceedings against Informed Sources (Australia) Pty Ltd (Informed Sources) and five petrol retailers (7-Eleven, BP, Caltex, Coles, and Woolworths) by way of court enforceable undertakings.
Informed Sources operates a petrol price information exchange service which allows for subscribing petrol retailers to exchange prices on a near real-time basis. The ACCC was concerned that this arrangement, which allowed for the highly frequent and private exchange of price information between petrol companies, had the effect or likely effect of substantially lessening competition for the retail sale of petrol.
On 15 December 2015 Coles settled the proceedings with the ACCC by agreeing to exit the Informed Sources service at the expiration of the current term of its agreement (15 April 2016) and not to enter into a similar price exchange service for a period of five years. The Court noted the undertakings and, by consent, discontinued the proceedings against Coles.
On 21 December 2015 Informed Sources and the four remaining retailers settled with the ACCC by agreeing to make the petrol price information public. From 20 May 2016 Informed Sources will make the price information available to consumers for free at the same time as it is received by retailers. The price information exchanged between petrol retailers will also be made available to third parties (including app developers and motoring and consumer organisations) on reasonable commercial terms and at the same time it is received by retailers. The ACCC expects that these parties will develop products that will assist consumers in their decisions about when to by petrol and from whom.
BP, Caltex, Woolworths, and 7-Eleven also agreed that they will not enter into, or give effect to, any price information exchange service unless the price information is made available at the same time to consumers and third parties.
The Court noted the undertakings and, by consent, discontinued the proceedings against Informed Sources and the four petrol retailers. This brought the proceedings to an end.
Making the price information available to consumers and third parties on a near real-time basis will improve the functioning of retail petrol markets in three ways:
- it will enable motorists to more easily compare prices across retail sites (particularly through well-tailored apps)
- it will enable motorists to more effectively time their petrol purchases (i.e. purchase close to the bottom of the price cycle more often)
- it will enable greater public scrutiny of the behaviour of petrol retailers.
The more information on petrol prices which is available to the public, the better informed motorists will be about when to buy petrol and from whom.
Retail petrol prices decreased for the second consecutive quarter
Retail petrol prices continued their decline in the December quarter 2015. The quarterly average price in the five largest cities (i.e. Sydney, Melbourne, Brisbane, Adelaide, and Perth) was 124.4 cents per litre (cpl), which was 8.8 cpl lower than the previous quarter and 11.4 cpl lower than the June quarter 2015.
The decrease in retail prices in the five largest cities was broadly in line with the fall in international refined petrol prices, which decreased by 8.0 cpl.
Brisbane has relatively high prices among the larger cities
Since July 2009 annual average retail petrol prices in Brisbane have been consistently above those in the other four larger cities. Over the six and a half year period between July 2009 and December 2015, Brisbane retail prices were on average 3.2 cpl higher than the four other larger cities (ranging from a high of 4.4 cpl in 2014-15 to a low of 2.5 cpl in 2010-11 and the first half of 2015-16).
Given that wholesale prices, or terminal gate prices (TGPs), are broadly the same across the larger cities, and transport costs in Brisbane are likely to be similar to the other cities, the high relative retail prices in Brisbane are likely to reflect factors at the retail level.
Gross retail margins remain at historically high levels
Gross indicative retail differences (GIRDs) are the difference between retail prices and published TGPs. They are indicative of the margins achieved by retailers on the sale of fuel, and may reflect overall retail profits.
The ACCC’s September quarter 2015 report noted that quarterly average petrol GIRDs in the five largest cities (11.8 cpl) were at their highest level since the ACCC began monitoring in 2002. In the December quarter 2015 average GIRDs increased by 0.6 cpl to 12.4 cpl.
The ACCC believes that retail prices have been unreasonably high in the second half of 2015, and in early February 2016 wrote to the major petrol retailers seeking an explanation for the high retail margins.
Crude oil prices were at their lowest level in over 11 years
Brent crude oil prices continued to decrease in the December quarter 2015. The average price over the quarter was USD 44 per barrel, down by USD 7 per barrel from the September 2015 quarter. The monthly average price in December 2015 was USD 37 per barrel, which was the lowest monthly average price (in nominal terms) since June 2004.
Crude oil prices have been extremely volatile over the last 40 years, varying in real (inflation adjusted) terms between a low of around USD 16 per barrel in December 1998 to a high of around USD 144 per barrel in June 2008. The average price in real terms over the last 40 years was around USD 58 per barrel.
Brent crude oil prices decreased in the December quarter 2015 due to an increase in global oil supplies and reduced demand for crude oil, associated with mild winter temperatures in the Northern Hemisphere and weak economic sentiment in many major economies.
Refiner margins are at double usual levels
International refined petrol (Mogas 95) prices were on average USD 59 per barrel in the December quarter 2015, a decrease of USD 10 per barrel from the previous quarter.
Throughout most of 2015 the difference between crude oil prices and international refined petrol prices (i.e. the refiner margin) was relatively high. The annual average difference in 2015 was around USD 16 per barrel, compared with an annual average of around USD 8 per barrel over the last 20 years. While international refined petrol prices are strongly influenced by the price of crude oil, they are also determined by their own global supply and demand conditions. As global demand for petrol was relatively strong in 2015, prices remained high relative to crude oil prices.
Historically high retail and refiner margins are the key difference between retail petrol prices in the December quarter 2015 and 2004-05
In the December quarter 2015 the price of Brent crude oil in USD, and the AUD-USD exchange rate, were broadly similar to those in financial year 2004-05.
A comparison of the components of petrol prices in those two periods, shown in the chart below, highlights that the main differences between retail prices in the December quarter 2015 and 2004-05 were historically high refiner margins and retail margins.
Components of retail petrol prices in 2004–05 and December quarter 2015 in cents per litre, five largest cities
Source: ACCC calculations based on data from FUELtrac, Informed Sources, Platts, the Reserve Bank of Australia (RBA), Fuelwatch, and information provided by the monitored companies.
Over two thirds of the difference in retail prices between the two periods (23.8 cpl) is due to increases in the refiner margin (8.0 cpl) and the retail margin and retail GST (8.7 cpl). Wholesale margins increased by 5.0 cpl and excise and wholesale GST increased by 2.5 cpl.
Prices in regional locations also decreased during the quarter
The ACCC monitors petrol prices in around 190 regional locations across Australia. Quarterly average prices across all regional locations decreased from 138.9 cpl in the September 2015 quarter to 130.7 cpl in the December 2015 quarter, a decrease of 8.2 cpl. This was in line with the 8.8 cpl decrease in the five largest cities over the same period.
In December 2015 the monthly average differential between prices in all regional locations and the five largest cities was 6.3 cpl. The differential reached a record high in January 2015 of 17.6 cpl, but by June 2015 it had fallen to 0.7 cpl. Between July and December 2015 the monthly average differential generally ranged between 5.0 cpl and 7.0 cpl.
Changes to the ethanol mandate in New South Wales are likely to see some consumers pay more for petrol
Ethanol is added to petrol to produce various grades of ethanol blended petrol (EBP). The most common type of EBP is E10, which is regular unleaded petrol (RULP) containing up to 10 per cent ethanol. There is no Australian Government mandate covering the supply of EBP in Australia. NSW is currently the only state to have a mandate on the supply of EBP. However, a mandate is scheduled to commence in Queensland from 1 January 2017.
The NSW ethanol mandate was introduced in 2007 and currently requires that 6 per cent of the total volume of petrol sold in NSW be ethanol (implying that EBP should be 60 per cent of total petrol sales). However, latest data from NSW Fair Trading indicates that in the third quarter of 2015 ethanol as a proportion of total petrol sold in NSW was around 2.8 per cent.
In late December 2015 the NSW Government announced reforms to the ethanol mandate. These included: extending the mandate to service stations which sell three or more types of automotive fuel and enforcing it at the retail level; empowering the Independent Pricing and Regulatory Tribunal (IPART) to regulate the wholesale price of ethanol; and implementing an education campaign to inform consumers of the benefits of ethanol and dispel supposed myths about ethanol use.
In a report prepared in October 2015 IPART assessed options to increase the uptake of ethanol (including some of the options announced by the NSW government) and concluded that the:
… options would not achieve the 6% ethanol mandate and would add to the costs of the current policy. The additional cost burden would initially disproportionately fall on smaller service stations, and would likely ultimately be passed on to consumers through higher prices.
While recognising environmental benefits that may be associated with the use of biofuels, in the past the ACCC has commented that the NSW ethanol mandate has had a significant impact on competition and consumers:
- it has affected the competitive dynamic between retailers by reducing the availability of RULP at many retail sites
- it has reduced consumer choice; some motorists who cannot, or choose not to, use E10 in their vehicles have, because of the reduced availability of RULP, had to use premium unleaded petrol (PULP), which has higher margins than RULP
- since PULP retails at a much higher price than RULP, it has meant that these motorists have been paying significantly higher prices than if they had continued to purchase RULP.
The ACCC notes the comments made by IPART in its assessment of various options to increase the uptake of EBP in NSW (see chapter 5) and is concerned about the possibility that consumers may face higher prices and a lack of choice.
 The price of Brent crude oil in the December quarter 2015 was around USD 44 per barrel and in 2004-05 it was around USD 46 per barrel. The AUD-USD exchange rate in the December quarter 2015 was around USD 0.72 and in 2004-05 it was USD 0.75.
 There are a couple of points to note about this comparison. The average retail price in 2004-05 includes the effect of the Queensland government subsidy of 8.4 cpl at the retail level, which lowered the price of petrol to motorists in Queensland. The subsidy was abolished from 1 July 2009. To calculate a retail margin for Brisbane on a similar basis to the other capital cities, we have reduced Brisbane terminal gate prices by 8.4 cpl. This means that the wholesale margin in 2004-05 is around 1.6 cpl lower than it would have been without the adjustment. The December quarter 2015 average retail price includes E10 rather than RULP prices in Sydney.