Canberra's burning issue: do we pay too much for petrol?
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Canberra's burning issue: do we pay too much for petrol?

We're annoyed enough to whinge about prices, but not suffering enough to change our habits.

A debate is raging across this city, as though someone had poured fuel on it.

Motorists are fuming. Chief Minister Andrew Barr has warned of a "dramatic government intervention". Greens minister (and avid cyclist) Shane Rattenbury is defending drivers, and considering unleashing hitherto unused powers to cap petrol prices.

Market failure? Shane Rattenbury, a strong supporter of public transport, may impose a cap on petrol prices.

Market failure? Shane Rattenbury, a strong supporter of public transport, may impose a cap on petrol prices.Credit:Jay Cronan

And Liberal leader Alistair Coe, ostensibly a free marketeer, is suggesting he won't stand in the way of unprecedented (in the modern era, at least) central economic controls.

What's going on? Is there a genuine market failure in the capital? Or is this just an out-of-control hyper-whinge?

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The answer is probably more the latter than the former. Let's look at what's happening.

Do we pay more?

Yes, Canberrans pay more than most Australians – because most Australians live in larger cities that have more effective competition among fuel retailers. In the December quarter, we paid about 7.4 per cent more for petrol than the national average, the Australian Bureau of Statistics' price indices show. We paid about 8.5 per cent more than did Sydneysiders.

But Sydney's market is nothing like Canberra's, so let's look at comparisons elsewhere. Some smaller cities, such as Hobart, Cairns and Wollongong, have prices similar to ours. Other smaller cities, such as Newcastle and the Gold Coast, are notably cheaper. In other words, size isn't everything when it comes to competition.

The good news? We're a long way from paying the country's highest prices. The Australian Competition and Consumer Commission monitors fuel in 191 towns and cities. Canberra's prices rank 48th on the list – about 18 cents a litre cheaper than in Broome, which has the most expensive petrol in the land.

Why do we pay more?

It's no secret. Unless you're a Marxist, you'll accept that petrol is sold at the price where service stations' willingness to sell matches motorists' willingness to buy – supply and demand. Influences on the price include the volume sold, the number of sellers and buyers in the market, and the wealth of those buyers.

On these points:

  • ACT stations sell less petrol than stations in larger, denser cities, so higher margins are to be expected.
  • The national capital is subject to tightly controlled planning, which means stations here have less flexibility to shift to sites that better match demand.
  • Canberra's median (and average) income is the highest of any city in Australia. Put simply, we can pay more, so we do.

The ACCC offers a couple of extra insights:

  • Coles has an unusually high share of the ACT market, limiting competition further. The supermarket giant owns 26 per cent of Canberra's stations. By comparison, it has a 19 per cent share of the national market.
  • Unlike the largest cities, Canberra's fuel needs to be trucked in from refineries far away. This is only a small factor, though it does contribute to our higher prices.

"But hang on," I hear you ask. "How can those servos in the tiny towns near Canberra sell petrol at a much lower price? They don't have any competition!"

But they do have competition. It's just that their competitors aren't next door; they're in other towns further along the road, whether in Canberra or elsewhere. Drivers passing these places don't need to fill up at them – motorists will only stop if the price and convenience suits them. These regional stations also tend to have lower costs than city stations, which helps them keep their margins low.

If we were really hurting, the queues at the cheap stations in Fyshwick and at the airport would be far longer.

If there's a single factor that most explains the capital's premium prices, it's us. Canberrans, collectively, may be annoyed enough to complain about fuel costs, but we're also comfortable enough not to change our habits. If we were really hurting, the queues at the cheap stations in Fyshwick and at the airport would be far longer.

ACT petrol retailers respond to this in a perfectly rational way: they don't drop their prices as quickly as do retailers elsewhere. Nor should they.

Why don't we have price cycles?

Price cycles are a sign of robust competition. They exist in the petrol markets in Australia's five largest cities. A cycle begins when a retailer (usually an independently owned station) drops their price to gain a larger share of sales. Buyers respond, and other retailers quickly drop their prices to compete.

Canberra doesn't have these cycles, but that's hardly sinister. No Australian city of the ACT's size has them; the markets are simply too small.

And, as mentioned above, motorists here just aren't poor enough (in general) to bother sparking a price war. ACCC chairman Rod Sims points out that Canberra has the widest range of petrol prices of any city in the country. If drivers really wanted to send a message, we could do so easily. On the whole, we don't.

What will the government's inquiries do?

The Barr government has initiated a wide-ranging Legislative Assembly inquiry into the city's petrol prices. It's also ordered the ACT's competition watchdog to investigate the market.

Don't expect any revelations about cartels or anti-competitive practices, or indeed anything much that we don't already know.

The ACCC, whose staff have specialist understanding of petrol market practices, has already decided, on more than one occasion, that an investigation of Canberra's fuel retailers is unnecessary. It sees nothing particularly unusual about this city's prices.

Nonetheless, that doesn't mean the ACT government is powerless. It can, and should, make the market work more effectively.

It's already taken a step forward, by legislating this week to ban supermarket-owned servos from advertising their "discount docket" rates. Later this year, these stations will need to display the prices that drivers without the special dockets pay. A small step, perhaps, but anything that improves transparency in the market is good for consumers.

Another step might be to adopt the opposition's policy of implementing a "fuel-watch"-style sytsem; a website or app that displays regularly updated prices at each petrol station in the city. Again, that would improve transparency, though experiments elsewhere suggests these schemes have only a marginal effect on prices (or even no effect at all).

What can drivers do?

Motorists can do what we've always been free to do: shop around. In Canberra, that typically means driving the extra handful of kilometres to the airport or Fyshwick – if we really think it's worth it. Some of us do. Most of us don't.

The other obvious, longer-term step is to use less petrol. Motor vehicles in general are becoming more fuel-efficient. But consumers are responding in a bizarre way: they are buying cars with bigger engines. This is a choice, which has costs. There's another benefit to smaller cars: they're usually cheaper.

It's also worth knowing that, even in Canberra, we pay less for fuel than do motorists in most other wealthy countries (we pay less than drivers in many not-so-wealthy countries, too). In the OECD, only the United States and Canada impose lower taxes on petrol than does Australia.

Perhaps the root of our road rage is the simple fact that we notice fuel prices more than other prices. Many of us drive past the large, electronic signs at service stations several times a day. It's human nature to remember the losses (price rises) while forgetting the wins (price falls).

Did you know that Canberrans also pay 17 per cent more for women's shoes (seriously) than the average national price? Seven per cent more for sports fees? Six per cent more to dine at a restaurant? (On the flipside, pork here is 12 per cent cheaper, bread costs 7 per cent less, books 5 per cent less.)

If we're going to interfere with the market, an inquisition into the price of high heels makes rather more sense than the current petrol panic.

Markus Mannheim edits The Public Sector Informant and writes regularly about government.

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