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Australian Fuel Price Variations

Australian Fuel Price Variations

The Australian ACAPMA organization has reported on local fuel pricing that makes interesting reading.

Fuel industry is always under pressure to justify its prices. Fuel industry sells a product that people purchase on a grudge basis. As a result, they will always complain that the price is too high, creating continuous media opportunities for politicians and motoring associations to make public statements criticizing the industry for fuel price practices.

While few (if any) industries are subject to such strong and constant scrutiny of product pricing, the political justification for this scrutiny has been historically developed along the lines that fuel is the highest weekly expenditure item for Australian households – and therefore reducing this cost would free up additional revenue for expenditure on consumption that would grow the economy.

Analysis of data from the Australian Bureau of Statistics shows that expenditure on dwelling costs (i.e. rent and mortgage payments) and on food & alcohol are significantly higher than transport costs (i.e. car repayments, insurance, registration, tolls and public transport fares).

The ABS data shows that household transport costs grew by just 7.2% over the last 5 years compared with growth in domestic fuel and power (26%), medical care and health (26%), dwelling costs (25%) and communications costs (10%).

“If you look closely at the real data on household expenditure, you see that while fuel is a significant cost for many Australian households, it is in no way the highest cost – and that growth in household fuel costs pales in comparison with other essential household costs like electricity and telecommunications”, said ACAPMA CEO Mark McKenzie.

Further, the dramatic improvements in fuel efficiency of Australia’s passenger car fleet suggests that the amount of fuel people need to purchase each week is declining, putting downward pressure on total weekly fuel spend over the medium term (In fact, the Federal Transport Minister recently stated that new fuel efficiency standards being considered for Australia will potentially lower household fuel costs by an average of $500 per year).

Setting aside whether the justification for continued scrutiny on petrol prices is valid or not, it is worth looking at the nature of the pricing criticisms that have been levelled at the Australian retail fuel industry – and the underlying assertions that are used as the basis for these criticisms.

Up until very recently, the criticism of fuel service stations has been one of alleged price collusion with commentators suggesting that industry players must be meeting in discrete smoke-filled rooms in each of Australia’s cities to discuss and agree prices.

So, more than 10 years ago, the Australian Government directed the ACCC to look at fuel prices to determine whether there was any evidence of price collusion (or other uncompetitive behaviour) – and it has been competently doing so ever since.

The ACCC has utilized its strong discovery powers to collect financial data (revenue and costs) from the industry and then analyzed this data to produce a large number of reports known as the Report on the Australian Petroleum Market.

The problem is that the ACCC went on to (in its’ own words) ‘name and shame’ the highest price competitors and encourage motorists to take their business to lower priced competitors – who it also named.

Such behavior by the ACCC – a federal government agency acting as the ‘national referee of market competition’ in this country – is wholly inappropriate, as it suggests government bias towards some market participants over others.

But the action is also baseless given that it has apparently been derived from an assertion that is as unsound as the previous one of price collusion.

That being, that all fuel service stations are the same. “The assertion that all service stations are the same – and therefore should be charging the same prices – is patently absurd”, said Mark

You only have to drive around any capital city or regional town in Australia to see that service stations vary in physical size (and therefore have different lease and power costs), prominence of location (bringing variable property costs), opening hours and staffing numbers (and therefore different labour costs), and asset age (bringing different equipment maintenance costs)

In addition, the business architecture of fuel retail businesses varies from company owned and operated, to franchise, to small businesses operating under a brand agreement, to independently branded.

Some businesses operate from fuel service stations that they own, while other businesses lease sites from third parties.

All these factors mean that even if the Nation’s fuel service stations were being supplied fuel at the same wholesale price – which is also incorrect – their costs to sell the fuel they stock varies markedly, thereby providing part of the explanation why fuel prices vary between fuel service stations.

But there is an even bigger factor driving the variation in fuel prices. One that is being driven by changes in consumer behavior both here in Australia, and around the world.

Convenience!

Changing consumer behavior, particularly the Australian consumer’s increasing desire to minimize time spent on dull activities (like grocery shopping) and their tendency to purchase fewer items in multiple trips (as opposed to one big shop every two weeks or so), is driving a “convenience revolution” in the Australian service station industry.

Astute retail businesses are seeing an opportunity to transform their businesses into a 21st century version of the corner shop (in metro areas) or the old general store (in regional Australia)

“The result is that some well-known brands are replacing their ‘chips, chocs and drinks’ counters with mini supermarkets, as well as providing prepared food and café style services that offer great food to people on the go”, said Mark.

The delivery of these services comes at a much higher cost than a fuel retailer who is just selling fuel. Consequently, the historic opportunity to discount fuel to match competitor prices (using the profits from selling drinks and lollies) is lost in the face of higher operating costs.

While the average fuel prices offered by these fuel plus convenience retailers tends to be higher than those of the traditional fuel only retailers, it is worth noting that this new breed of fuel retailers are apparently being rewarded by customers in a market that everyone believed was solely price-centric.

“Fuel only retailers will continue to sell fuel to motorists who just want the cheapest fuel, while fuel plus convenience retailers will target those motorists looking for (and prepared to pay a little more for) convenience”, said Mark.

In short, fuel service stations in Australia are not the same. The Australian motorist’s demand for increased convenience – and the industry’s response to same – is the reason why fuel prices vary between fuel service stations. Source: Acapmag PWKD01062018

Last modified onSunday, 03 June 2018 23:30
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