Consistency needed on petrol prices across our cities

Repeated complaints of price-gouging by petrol retailers, and numerous court battles waged by the Australian Competition and Consumer Commission, leave the impression there are huge profits being made at the expense of motorists.

But how much control do petrol companies have over the retail price of petrol? Less than you think.

More disposable income usually translates to a pickup in spending.
More disposable income usually translates to a pickup in spending. Photo: Bloomberg

According to the ACCC, the price of unleaded petrol in Australia has three main components: the international price of refined petrol, federal government taxes, and the costs of transporting and selling fuel (including a profit margin).

The international price of refined petrol is the largest component, accounting for roughly 50 per cent of the bowser price. Australian government taxes – the fuel excise and GST – account for about 38 per cent.

They are both fixed components, and petrol retailers have little control over them.

That leaves roughly 12 per cent of the bowser price for refiners, wholesalers, distributors and retailers to cover their costs and make their profits. Costs they have to cover include shipping petrol around Australia, terminal and storage costs, delivering petrol across Australia, and wages, rent and other overheads. Once those costs have been covered there's not much left.


According to the ACCC, in 2010-11 the average amount that motorists paid as profits to petrol companies was just 2.2 cents per litre. Over the last 12 years, the retail sector net profit on petrol averaged 1.35 cents per litre.

According to the Australian Institute of Petroleum, the average annual net profit made by fuel suppliers over the last 12 years (across refining, wholesaling and retailing operations) is around 2 cents per litre of all fuels sold.

Those levels of profitability are similar to other countries.

So what should we make of this? It's worth taking a step back.

Illustration: Glen LeLievre.

Illustration: Glen LeLievre.

You'll often hear complaints that petrol companies are ripping us off because the price of crude oil in international markets has fallen dramatically yet the lower prices haven't been passed on to motorists.

If the price of West Texas Intermediate (WTI) crude oil has fallen 60 per cent per barrel in the last 18 months, you might hear someone ask, why has the retail price in Australia fallen only 17 per cent on average (both of which have occurred)?

That type of analysis is well-intentioned, but it seems to misunderstand the global supply chain.

Firstly, the key crude oil pricing benchmarks for the Asia-Pacific market, which includes Australia, are Tapis, Brent and Dubai – not WTI (the US crude benchmark).

As the ACCC explains: "WTI is not a good indicator of overall global supply and demand for oil. It is not relevant to Australia because Oklahoma, where the price is set, is constrained by infrastructure and laws that are primarily set up for importing oil into the US. WTI is difficult to export to places like Australia. In turn, this means that movements in the price of WTI do not significantly affect the price of fuel in Australia."

So if you want to talk about international crude oil prices, you want to talk about Tapis or Brent. They're the ones that service the Asia Pacific region.

Secondly, Australia's wholesale prices for petrol are more closely linked to Singapore's prices of petrol and diesel, not to crude oil prices.

There's a reason for this. 

As the ACCC explains, Australia's refineries cannot produce all of Australia's petrol needs so some of it has to be imported.

Petrol is an internationally traded commodity so, if local refiners were to receive lower prices in Australia than they could get in international markets, local product would be exported rather than sold locally at a lower price. Therefore, locally produced fuel is priced at a level comparable to what it could be sold for in the Asia-Pacific region.

The largest trading centre for petrol in the region is Singapore. So the key petrol pricing benchmark for Australia is the Singapore price of unleaded petrol, called Mogas 95.

Australia's petrol prices track Singapore's refined fuel benchmark closely. 

"International refined fuel benchmarks, as opposed to crude oil prices, are central to determining Australian retail prices. This is why it is more important to focus on movements in refined fuel prices as opposed to movements in crude oil prices," the ACCC says.

However, since oil and petrol are traded internationally in US dollars you also have to take the exchange rate into account (because we need to buy US dollars before we can start trading).

The Australian dollar has weakened considerably in the last 18 months – it's lost roughly 18 per cent in value, from US95c to US72c, since July 1, 2014 – so retail petrol prices have been higher than they might have been had the dollar been stronger.

But it's hard to say how much the weaker dollar is accounting for bowser prices. 

The ACCC has consistently found the retail petrol market is competitive, despite repeated efforts to find evidence of price fixing between the big retailers.

The wholesale petrol price of unleaded petrol is currently at a near 11-month low of 107.1 cents per litre (lowest since February 4).

The issue for Australian motorists at the moment, as CommBank economists point out, is getting some consistency on price between our capital cities. 

There is a difference of 25 cents a litre across our capital cities at the moment.  Sydney and Adelaide motorists are getting their petrol near the cost price of the petrol marketing groups, but gross retail pricing margins are more diverse, and higher, across the other capital cities.

Ross Gittins is on leave.


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