INDEPENDENT NEWS

Gordon Campbell on the Commerce Commission fuel report

Published: Wed 21 Aug 2019 11:48 AM
Gordon Campbell on the damning Commerce Commission report on the fuel industryFirst published on Werewolf

Oil companies have always struggled to win public affection. Over the past 20 years, Gallup’s annual US poll of public perceptions of the leading business sectors has found oil companies either coming in dead last in public esteem, or sitting just above Big Pharma, and Big Government.
Similarly, yesterday’s interim Commerce Commission report on the fuel industry will do nothing to endear the major oil companies to the New Zealand public. Apoparently, the fuel industry is an oligopoly where the Big Three (BP, Mobil and Z) that import 90% of this country’s fuel also control the supply, pricing, profit margins etc etc, from wharf to petrol pump, thereby all but throttling genuine competition at every stage along the way.
We pick up the tab. In polite CommComm-ese, the draft report concludes that “wholesale prices are higher than what we would expect in a competitive market” and that “this flows through to retail pricing where competition in many areas occurs only between the majors and the resellers they supply.” Less politely, we’re being ripped off – fleeced, according to PM Jacinda Ardern.
The Commission’s report totally vindicates the damning picture that Ardern painted last October. Back then, she usefully put the situation in its historical perspective:
In 2008, we had one of the lowest pre-tax costs in the OECD. Today, New Zealand has the highest pre-tax cost for fuel in the OECD. Between 2008 and 2017, the margins importers were taking for themselves more than doubled, from 7 percent to 16 percent. That increase represents a transfer of wealth from petrol consumers to producers to the tune of hundreds of millions of dollars a year.
That bad situation has only got worse:
To break it down just a little bit further, between 27 October 2017 and 28 September 2018— this is where we have data—petrol prices have risen roughly 39c, of which 6.8c at that point could be attributed to taxes and levies; 22c, roughly, to importer costs; and 9.8c to importer margins. I do not see that as acceptable.
Regionally, there were also unjustifiable variations in price:
We also have different fuel prices between the South Island and Wellington versus the rest of the North Island. While there may be a slightly higher cost of transportation in the South Island, it is no way near equivalent to the difference in fuel prices now. Prior to the 2015, fuel prices were reasonably similar across the country, but by 2017, average gross margins in the South Island and Wellington had grown to almost 10c versus the rest of the North Island.
That analysis, and the remorseless unpicking of the market failings by the Commerce Commission only serve to make a mockery of the inept claim by National Party leader Simon Bridges’ that the government has been the “fleecer in chief” in this situation. Plainly, central and local government are not the villains here. Excise taxes and regional fuel levies are playing an insignificant role in the price hikes – 6.8 cents in a 39 cent per litre price rise – during the year to October 2018. Not for the first time, Bridges is resorting to cheap, anti-taxation sentiment because National is unwilling/unable to produce a policy response to this glaring structural failing in the market economy.
What would an effective response look like? Well, the cosy stranglehold that exists at wholesale level has to be broken, such that resellers of all sorts and sizes can gain access to the fuel on terms that are not being dictated by the trio that currently controls the market. Regulators may also need fresh powers – from Parliament – to burrow down into the contractual relationships between wholesalers and resellers, and expose any extortionate terms, conditions, pricing and margins to the disinfectant of daylight. To use an analogy, the wholesaling Godfathers of the fuel industry cannot be left to make offers to resellers that they cannot refuse.
Pump Up The Action
Beyond the headline issues, the Commerce Commission report contains fascinating details about the operations of the fuel industry. Of the fuel purchased at service stations, unmanned sites and truck stops, petrol and diesel now comprise almost exactly equal 50/50 shares of the market. Most household vehicles use 91 octane but premium petrol now makes up almost 23% of total petrol consumption. For many motorists, premium may not be a good deal.
Here’s why. Households’ light vehicles tend to consume petrol – not diesel – and it usually means regular, 91 octane petrol. However, premium petrol (ie 95, or 98 octane) makes up a significant 23 percent share (and growing) of total petrol consumption. This pricier petrol delivers a higher profit margin. Just how much of that margin is justified is hard for motorists to assess and compare, because petrol stations routinely do not display the price of premium petrol, which motorists discover only after they’ve pulled up to the pump to refill.
Ever so delicately, the Commerce Commission (at p.243) expresses its unease with this lack of transparency about the price (and alleged benefits) of premium petrol:
The price of premium petrol is typically not advertised on roadside price boards, making it difficult for consumers to compare prices; and some consumers may be purchasing premium petrol unnecessarily, due to a lack of understanding about whether it is needed for their car. The prices of regular 91 petrol and diesel are generally displayed on roadside price boards. However, the price of premium petrol is generally not. This means consumers can only determine the price of premium fuel at the pump, making it difficult for consumers to compare prices. For this reason, in New South Wales and Queensland it is mandated that the price of all fuels sold should be displayed on roadside boards. Introducing a similar requirement in New Zealand would add transparency to pricing of premium grades of fuel and facilitate consumer choice. Given that over 20% of all petrol sold is premium petrol, the potential benefits from improved transparency could be significant.
You bet. The lack of transparency in the pricing of premium petrol is clearly a sore point for the Commerce Commission. At page 225, it initially relies on submissions to make a point about the large profit margins involved:
For example, AA submitted [the] undiscounted retail price for 95 octane is typically 9 cents per litre (cpl) higher than 91 octane (with 98 octane priced 8cpl higher again). Yet 10 years ago the differential between 91 and 95 was just 5cpl. Further, data from Hale & Twomey on landed fuel costs shows 95 octane generally costs about 4cpl more. In a review of 11 retail sites from five brands carried out by Consumer NZ in Wellington on 27 January 2017, premium 95 (sold at nine locations) was 7 to 11 cents per litre more than regular 91. Premium 98 petrol was 17 cents per litre more than regular 91 at the one retail site offering it.
Even worse:
A fuel firm told us that the cost difference between retailing regular petrol and premium 95 is only a few cents per litre. We have done our own analysis of the price of premium and regular petrol over time. We have compared the average retail price of premium and regular petrol against the cost of importing those fuels. The chart below… shows that the gap between the margin that fuel firms achieve on premium and regular has steadily risen over time and is now around 10 to 11 cents.
Ulp. Yet premium petrol is one of the problems. Discounting is another soire point. Loyalty schemes and discounting, the Commerce Commission strongly believes, are no real substitute for the benefits that genuine competition would deliver. In fact, these schemes function as a way of making it more difficult for punters to compare retail petrol prices. At para 7.27.3 the report indicates that the petrol companies finance their discount schemes (a) out of the margins being creamed further up the profit chain and (b) from ripping off wealthier motorists who are not quite so sensitive to a few cents per litre variation in the price at the pump:
…internal documents from some fuel firms indicate that the growth in margins has been used to fund discounting. An internal document from a major considered alternatives to its loyalty programme. The options included “Do nothing and focus efforts on price board”. However, this was rejected on the basis that it was: “high risk with high likelihood of driving a deterioration in margin.” This suggests a profit rationale for preferring to compete on discounts, rather than on board prices.
Interestingly, the Commission’s comments on discounting in the fuel industry seem to have obvious relevance to how other industries – e.g. such as supermarkets and airlines - operate similar loyalty schemes. Routinely, a duopoly or oligopoly will use discounting to lock in poorer customers while paying for that concession from the profits being reaped from other customers who (for various reasons) are unwilling to endure the card-carrying rigmarole that loyalty programmes entail.
In practice, these discounts and loyalty cards also usefully disguise (and protect) the margins being reaped via the board price, and they inhibit the incentive /ability for motorists to shop around and do price comparisons:
It requires more commitment of effort for consumers to participate in a discount or loyalty programme than to utilise an across the board low price. As a result, those who are less price sensitive pay more than they might if there was no loyalty or discount programme and all consumers paid the same board price. We currently expect that discounting is likely to become even more targeted in future. Retailers are increasingly looking to use data and information obtained from discount and loyalty programme participants to make personalised offers to consumers based on behavioural insights rather than offering across the board discounts to programme participants. We have viewed documents from a range of fuel firms identifying potential opportunities to build customer loyalty by using customer data to develop more targeted offerings and engaging with consumers on a more individualised basis.
In sum, this looks like the future face of retailing. Illusory gains will not be paid out of corporate generosity, but will be delivered– in an intrusive, demeaning fashion – to ‘loyal’ motorists who are being subsidised by another group of (ripped off) motorists, while attention is handily diverted away from focussing on the wholesaler/supplier margins. Again, here’s how the report (para 7:36.2) genteelly points to this underlying problem:
The Motor Trade Association (MTA) submitted: the growing significance of fuel/loyalty/discount cards, which can cloud actual prices, and which afford discounts to end-user customers but only at the expense of already modest retailer margins, shifting the focus away from wholesaler/supplier margins, and obfuscating actual prices (given that discounts around fuel may be traded for other discounts or offset against other product prices/products).
Basically then… the fuel industry functions as an oligopoly that has inbuilt incentives to suppress the operations of a free market. That’s part of a wider problem. Somehow, New Zealand has spent 30 years genuflecting to the free market ideology, and its corporate chieftains and political leaders still continue to worship at its shrine. In reality in this small country though, a duopoly or oligopoly commonly rules the roost, while doing all it can to prevent the operation of a truly competitive market. After 30 years of this bogus competition – in banking, in telecommunications, in energy etc – we have only begun to grasp just how essential government regulation is to defend competition from the market forces that are, in practice, actively opposed to it. Again, here’s how (at para 7.77) the nice people at the Commerce Commission put it:
We recognise… that in a market where there are few firms, they may have a greater economic incentive to reduce rivalry and to seek to raise prices above competitive levels. Firms in concentrated oligopoly markets will rationally take account of their rivals’ behaviour and likely reactions when setting prices or making other decisions about their product and service offerings. Where firms engage in “accommodating” behaviour or “tacit coordination” this can result in higher than competitive prices being charged. When this occurs, prices above competitive levels can generate higher than normal industry profits, to the detriment of consumers and efficiency…
You bet. But do our politicians really desire to challenge that process, and equip the regulators with what they need – ie, powerful cartel busting, anti-trust tools - to change this situation to any significant degree?
Alan Jones, Again
The discovery of another violent and misogynist rant against Jacinda Ardern from Aussie commentator Alan Jones will – no doubt – trigger another pantomime of tut-tutting from his employers at Macquarie Media, and ( if we’re lucky) another token apology from Jones for going OTT, in the heat of the moment etc etc.
The Crikey website points out that the threat to terminate Jones employment (for urging Scott Morrison to “shove a sock down Ardern’s throat”) came from Macquarie Media chairman Russell Tate – who is unlikely to survive the currently-in-train takeover of Macquarie by Nine Entertainment, whose heavy hitters have been notably absent from the condemnation of Jones. Now that Jones has added a “give her a few backhanders” message to his vile tirades against Ardern, that omission seems even more significant. As Crikey says:
[The Tate termination threat] statement was issued on Saturday but is not on the Macquarie Media website. And, importantly, there were a couple of names and one company missing from his threat: Nine Entertainment, its CEO Hugh Marks, and Nine chair and Liberal Party elder Peter Costello. Why were their absences from the comments important? As every report has pointed out, Nine is trying to mop up the minorities in Macquarie Media in a $113 million takeover launched earlier this month… Hugh Marks worked hard to make sure Alan Jones was re-signed finally to two more years in the 2GB breakfast shift — it was vital to the success of the takeover. In that deal, Marks had the support of the Nine board. If Jones had not re-signed, Jones might have gone elsewhere, slashing the value of the Nine stake in Macquarie by sending the shares plunging. It was a high stakes set of negotiations.
Russell Tate himself may become surplus to requirements once that take-over is completed:
…none of those reports pointed out that when the bid is done there will soon be no need for a chair for Macquarie and a board; once the takeover is done, Jones can once again offend with impunity because his masters will be Hugh Marks and Peter Costello and the Nine board.
In other words, the condemnation of Jones was the usual dance routine when it comes to managing the fallout from one of his on-air atrocities – a distancing carried out for the benefit of advertisers and the public, but one that doesn’t seriously put at risk the market value that Jones represents to Nine.

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