The Australian fuel market

Key messages

Prices and taxes

In 2006 and 2007 Australia had among the lowest petrol and diesel prices in the OECD both before and after tax. Retail fuel prices are highly competitive and apply to almost half of the fuel sold in Australia. The remainder of fuel sales are to commercial, industrial and agricultural consumers and most of this volume is subject to vigorous competition under regular commercial tenders. The impact of fuel taxes on individual consumers varies with the application of government measures such as the Energy Grants (Cleaner Fuels) Scheme.

On 1 July 2006 a new fuel tax credits system was introduced to substantially reduce the excise burden on business and households. Under the new system, all off-road business use of all fuels will become excise free over time and all fuel used in heavy vehicles received excise relief from 1 July 2006. The combination of high levels of efficiency in domestic refining and relatively favourable taxation treatment of diesel and petrol users gives the Australian economy a significant competitive advantage in the use of fuel compared with most OECD countries.

The components of the average retail petrol price highlight the proportion of the price received by fuel producers and fuel retailers. In 2007, the tax component (GST and excise) of the final price of petrol averaged about 39 per cent or 49 cents per litre.

Payments to the Australian Government in 2006 from fuel excise, GST on fuels and income tax payments by AIP member companies was $15.8 billion. Fuel excise provided over 6 per cent of Australian Government taxation revenue in 2006.

The supermarkets and independents control more than half of the retail petrol market.

Relative price changes

Since 1980, the increase in petrol prices paid by consumers has been less than the increase in the CPI and less than price increases for other significant household consumables, when taxes are excluded.

Fuel price transparency

Pricing of crude oil and petroleum products — both internationally and domestically — is highly transparent along the entire supply chain. Crude oil and petroleum products are sold internationally and domestically through a variety of term contract arrangements and in spot transactions. They are also traded on futures markets like NYMEX. These mechanisms play an important role in providing pricing information to markets.

International price transparency is underpinned by price benchmarks or 'markers' for crude oil and petroleum products of a similar quality, which are convenient indicators of what is happening with prices in specific markets. The main marker crudes are: West Texas Intermediate (WTI–USA); Brent (Europe and Africa); Dubai and Oman (Middle East); and Tapis and Dubai (Asia–Pacific). Information on changes in the prices of these crudes is extensively reported on a daily basis.

For Australia, the crude oil marker is the Asia–Pacific benchmark called Tapis Crude Oil and the petrol marker is the Singapore price of Petrol (MOPS95 Petrol).

Wholesale price transparency in the petroleum market is assisted by the publication of Terminal Gate Prices (TGP) for petrol and diesel by all AIP members. TGP is the price at which any person with the necessary safety clearances can purchase fuel from fuel supply terminals by the tanker load.

Retail price transparency is assisted by highly visible price boards at each service station so that customers can readily observe price changes.

Overall market and price transparency in Australia is assisted by data published by AIP and member companies. This includes a range of AIP factual material on petrol and diesel prices in Australia; extensive retail and wholesale market data across major Australian cities and towns on AIP's website and on AIP member company websites; and AIP's Weekly Petrol Prices Report   www.aip.com.au/pricing/weeklyreport.htm

Facts about fuel prices

The price of petrol in Australia is dependent on world market prices.

Crude oil, petrol and diesel are bought and sold in their own markets. Each market is regionally based and reflects the supply and demand balance in that market.

Australia's regional market is the Asia–Pacific market. Tapis crude oil is the key crude oil benchmark for the Asia–Pacific market and for Australia — not West Texas Intermediate (the US market benchmark) which is widely reported in the media.

Australian wholesale petrol and diesel prices are closely linked to Singapore prices.

To meet Australian demand, around 25 per cent of fuel is imported, mostly from Singapore. Australian wholesale prices for petrol and diesel (called Terminal Gate Prices or TGPs) are closely linked to the Singapore prices of petrol and diesel — not Tapis crude oil prices. The Singapore price of petrol (MOPS95 Petrol) is the key petrol pricing benchmark for Australia because this represents the competitive alternative for supply to Australia.

The market price for MOPS95 Petrol plus shipping costs and Australian taxes represents almost the entire wholesale price of petrol — around 95 per cent of TGPs. The remaining 5 per cent of TGPs reflect insurance, quality premiums for Australian fuel standards, local wharfage and terminal costs and small wholesale marketing margins (where competitively possible).

Retail (pump) prices can be volatile in some markets, reflecting intense local competition.

Once fuel leaves the terminal gate (where TGPs apply), retail or pump prices vary across metropolitan and regional areas, reflecting local area factors and competition.

TGPs are typically around 95 per cent of pump prices in Australia. Pump prices also reflect land transport costs, marketing and administration costs, and the costs of running service stations like wages, rent and utilities. The ability to cover these costs depends on local area competition.

Retail prices in metropolitan areas also tend to follow a discounting cycle which historically has ranged up to 12 cents from peak to heavily discounted trough. Consumers clearly benefit by purchasing heavily discounted petrol at the low point in the cycle.

Country pump prices are generally higher and more stable than metropolitan prices due to differing competitive and economic characteristics.

Prices are more stable in regional areas because there is a general absence of discounting. Prices can vary greatly between regional towns, reflecting differences in local competition, freight and handling differences, as well as different operating margins depending on fuel volumes and convenience store turnover.

Retail prices in regional areas are largely set by independent owner/operators (including those who sell fuel supplied by one of the major brands under license).

The Singapore wholesale price lag

Generally, there is a short time lag of 1–2 weeks between changes in Singapore prices and changes in Australian wholesale prices. Importantly, this time lag occurs whether prices are going up (when the lag slows price rises to consumers) or prices are going down (when the lag delays price falls).

The lag is a result of using a rolling average of Singapore prices as part of the wholesale pricing methodologies of companies — very similar to that used by the ACCC when wholesale prices were regulated by government. The pricing methodology is called import parity pricing (IPP). The use of rolling averages smooths day-to-day price volatility.

Price trends in 2007

These charts provide a snapshot of the volatile movements over 2007 in the key market indicators relevant to the price of petrol at the pump in Australia. There is a close relationship between international prices (MOPS95 Petrol) and domestic wholesale and retail prices.

The 'margin' shown in these charts is the difference between two market prices or benchmarks and is used to highlight trends within a specific market or market segment. It is a 'gross margin' and does not represent profits in the market nor take account of the range of relevant costs.