We do the maths on how petrol prices are calculated and show that one element is rising fast, masked by the falling crude oil cost

We do the maths on how petrol prices are calculated and show that one element is rising fast, masked by the falling crude oil cost

The price of petrol at the pump is high because of oil company retail pricing decisions.

Local oil company retailers are pocketing some of the gains from the falling crude price.

As the crude oil price continues to fall dramatically, prices at the pump have declined.

But they have not fallen as far as they should have.

MBIE maintains a weekly monitoring service of retail Unleaded 91 prices and some of the components built into the pump price.

The following analysis uses that data (crude prices and excise taxes), and applies current exchange rates and GST to derive the "oil company component" to import, refine and distribute petrol to our local petrol station.

In our analysis, the "oil company component" is not the same as the oil company margin. "Margins" imply profit and that is not knowable. Oil retailers also buy or price refined product based on international benchmarks, our's usually retailed to a Singapore refined price benchmark. But they have options and their final margin has always been included in the "component".

  18-Jan-2015 18-Jan-15 18-Jan-2015
What you are paying for at the pump ... Actual Could be Should be
       
US$ crude oil price / barrel $45.00 $45.00 $45.00
@ Today's exchange rate 0.7830 0.7830 0.7830
equals NZ$ crude oil price / barrel $57.47 $57.47 $57.47
or NZ$ crude oil price / litre 0.3615 0.3615 0.3615
Excise taxes per litre ...      
  • National Land Transport Fund 0.5652 0.5652 0.5652
  • ACC levy 0.0990 0.0990 0.0990
  • Petroleum or Engine Fuel Monitoring Levy 0.0005 0.0005 0.0005
  • Local Authorities Fuel Tax 0.0066 0.0066 0.0066
       
Oil company component (import, refine, distribute) 0.4707 0.4000 0.3000
       
+ GST at 15% 0.2255 0.2149 0.1999
       
= Price per litre at the pump - Unleaded 91 $1.7290 $1.6488 $1.5327

The core reason we pay too much for petrol has turned from being the taxes we impose on ourselves (the Excise taxes, plus the GST), to the share the oil company retailers are keeping from their trading.

Until 2010, this industry was fiercely competitive. Over the previous six years, the oil company component averaged 30c per litre of the pump price. It did move around, but competition kept it coming back to this long run average.

Then in 2010, Intratil and the NZ Super Fund bought the Shell retail distribution network. Margins did not move much for a while (they rose to about 32c/litre over the first year), but then they started  a relentless climb.

Oil company component ... NZ$ / litre of the
  (import, refine, distribute) Retail pump price
  (average)
2004 0.3012
2005 0.2750
2006 0.3044
2007 0.3095
2008 0.3090
2009 0.3010
2010 0.3178
2011 0.3510
2012 0.4002
2013 0.4289
2014 - first half to June 0.4597
2014 - second half from July 0.5165

Over the five years 2006 to 2010, the oil company component went up just +5.5% or about +1% per year.

In the five years 2010 to 2014, the oil company component went up +62% or an average of +12.5% per year. The average is interesting, although you can see from the table above that most of the increase has come in the past two years, and the fastest rise has been over the past year.

If the oil company retailers stepped back from their aggressive pricing to live on "only" 40c per litre as they were able for the whole period to 2012, our pump prices would fall by 10c/litre at the pump.

If competition sent margins back to the long-run average of 30c per litre, prices below $1.60/litre would be possible right now.

According to data released by Infratil when they purchased the Shell distribution system in New Zealand, the retail petrol market is dominated by two retailers; Z Energy with about 29% market share and BP with about 28% market share. Mobil, Caltex, Gull and a few minnows supply the balance. On a per household basis, consumption of petrol and diesel is not growing. In fact 2014 may have seen it back to 1989 levels or about 1,150 litres per year per household. Fuel efficiency is rising faster than distance travelled.

All up, total supply is a bit more than 2 bln litres of petrol per year.

There does seems to be room for a new entrant to compete on price.

As you drive around your neighborhood, if you see pump prices below $1.70/litre, please email us a photo, location and a date and we will post them here for readers information.

Auckland central prices on January 18 2015

Albany, Auckland , January 16, 2015

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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24 Comments

Excellent article, conclusion: buy Z shares ?

I would say, hell no they are toast.
 

Oil producers claim they aren't hurting too badly because they have hedged their production, who do you think is holding the other side of that hedge?  Zero sum game remember.

Yep, plus system loss....
 

prices in the regions 10c + lower than the cities also.
Just filled up in levin for 89c/L diesel!! 30 mins south on kapiti coast was 107c, in welly 112c. 
Crazy price differences

Didn' t the ETS come into effect in 2010?
So it would not have been until 2012 when carbon prices crashed that the oil company margin took off. Which coincides with the Marsden Point refinery CCR project upgrade.

Cost of living is high here....
 
This is telling. Are you awake. Prices drop on World Market. But not here, in debt land.
http://www.movehub.com/blog/living-costs-world-map

What about 95/98 octane. Drove from ChCh to eastern BOP last week and the differential to 91 was anywhere from 6-21cents and mostly at the bigger end, total ripoff. Noted a servo selling at $1.60 in Rotorua on Tuesday, Rotorua has always been comparatively cheaper.

Rotorua has two Gull service stations.  Wherever there is Gull, prices are more competitive. The cheaper petrol was one of the pluses when we lived there.  Wish Gull was in the South Island :-(

This article might be a little one sided.
Marsden Point were struggling with a low refining margin not very long ago.
Z have invested a bit of money into the operation and will want a return.
And we all know compliance costs only increase.

Lower oil prices are good for the lower income worker where their salaries need to go up.  This is like a tax cut to them or an extra $10 - $20 per week in the pocket.  As well as the oil service stations still overcharging compared to overseas, truck transport companies will be benefiting from the lower oil price and again probably not passing on the lower oil prices to its customers.
Additionally we should see cheaper flights too with lower fuel costs though some airlines are probably stuck in fixed contracts at $110 per barrell and will only see the benefits of lower oil price after March 2015.  Addtional to this when oil is cheap then the viability of fracking can also pull back on lower oil prices. 

Same old story, enabled by a naive New Zealand public and the inept commercial sense of government.
Workers and small  (and sometimes large) New Zealand owned businesses continue to be embattled and experience deteriorating conditions.  And are subject to market forces. 
And the large monopolies and cartels don't have to work too hard, they profit rather from control of their enviroment and market place.  Thus they cream our wealth away from us.  There is a reason why they pay insane prices to gain control industries who have pricing and position power.
My right wing view is that we need market forces.  But it's strange to observe that such are applied to workers and small businesses.  But the big industries in Energy, Government Services and Finance particularly are let free of this discipline. Let free to do what they want.  How does a supposedly right leaning national party let this happen.
Time for some trustbusting me thinks.

But the big industries in Energy, Government Services and Finance particularly are let free of this discipline. Let free to do what they want.  How does a supposedly right leaning national party let this happen.
 
Crony capitalists to the core.

And congrulations David for doing this analysis.  One might think it an obvious one to do, but nobody in the media sits down and does the proper work.
Other media has covered it.  Mainly by filming a reporter standing outside a petrol station with a microphone. Hopeless.
So thanks.

The interesting problem is what high use industires will do with the with the windfall profits,
IATA suggest the windfall to the airline industry is globally around 20b$.
http://www.iata.org/publications/economics/fuel-monitor/Pages/price-analysis.aspx
 
Should industries repay debt? there are significant positive feedbacks in the economic cycle from this.
 
 

Z's cash flow available to shareholders in the 12 months up to latest  Sept 2014 results is negative after netting out working capital changes and CAPEX by my calculations - and while you can argue this is for growth - market share slipped - so it was in fact required to " maintain unit volumes and competitive position " as defined by Buffett as what is maintenance or business as usual CAPEX.
 
So they are desperate to get some $'s to pay the divvy in excess of $ 100 m last time round. I would maintain there has been very little in depth analysis in economic terms of their most recent result other than the usual cheerleaders.
 
That's why prices are being held up.

JB.  I decide then to hold up my income to previous high levels.  And I deserve it because  -aah - I decide I deserve it.
Accordingly I will inform my current customers that they will from now be paying much more and they will oblige.  Yeah right.
What you are explaining to me is that Z can keep up it's prices.  Which means they are a monopoly.  If they paid too much for that position.  Their problem in my view.

The problem with the mbie margins is they don't take into account the ever uncreasing range of discount offers available. Its pretty easy to never pay the price on the board.

If there is so much money to be made raise the cash and go for it like Gull has. Not that many barriers to entry.

Lots of barriers to entry actually Trader X.  Most of which are physical and natural.  It's petrol and requires ships and a multiple of other things.   It's not deciding to set up a cafe, which while hard enough is small bikkie by comparison.
All the same there have been a number who have tried, and some have succeeded.  Look at the history of Europa.  But eventually the monopoly will eliminate them, or buy them out.  To remove competition, and to regain control of our wallets.
Remember these guys don't make money from efficiency and for providing a service that matches the money they extract.   They make money because they have control.

You can do all the calculating you want and pontifcate as to the moral point of view of fuel pricing but face it the fuel companys and the crude producers and anyone who buys and sells any part of it can charge what ever they like.

Unless you own a (cool) Tesla with a few solar panels at home. Everyone else will be at the mercy of the oil companies or start drilling a very deep hole in your backyard!

You still have to pay the RUC taxes, since you are going to use the roads.

I'd love to say the tax rate is too high (there's more tax than fuel cost) but I think Auckland and soon Chch & Wellington are going to need it for infrastruture upgrades - price to pay for lower population.  Just wish they'd move to higher quality than the cheap aggregate (for the main city-to-city and arterial intra-city routes.  much lower ongoing consumption cost with the smoother road surface)

No RUC for full electric cars...Tesla and others of the same ilk are the future.

Perhaps the government should invest in Gull so there will be increased competition. Perhaps the AA should invest in Gull too.