FACTS ABOUT PETROL PRICES AND THE AUSTRALIAN FUEL MARKET
Crude oil, petrol and diesel are different products and are bought and sold in their own markets.
Each market is typically regionally-based and there are linkages and transactions between regional markets to balance global supply and demand.
Prices in regional markets reflect the supply and demand balance in each market and the physical characteristics and quality of each commodity.
Prices in regional markets can be volatile and can move in different directions from each other.
This is why focusing on relevant markets and longer term price trends is more important than daily or week-to-week price movements.
Australia’s regional market for petroleum products is the Asia-Pacific market.
Key crude oil pricing benchmarks for the Asia-Pacific market including Australia are Tapis, Dated Brent and Dubai – not West Texas Intermediate (the US crude benchmark) widely reported in the media.
The Singapore price of unleaded petrol (MOPS95 Petrol) is the key petrol pricing benchmark for Australia.
If Australia’s petrol prices were below Singapore prices, Australian fuel suppliers would have no commercial incentive to import to Australia (because sales of that fuel would be at a loss here). In addition, Australian refiners would have an incentive to export production.
‘Refiner margins’ margins' are the differences between product prices and crude oil prices, both of which are set by the market, not by oil companies (eg. Singapore petrol ‘refiner margin’ = MOPS95 Petrol price minus the relevant crude oil).
Australian Wholesale Prices
Australian wholesale prices for petrol and diesel (including spot Terminal Gate Prices or TGPs) are closely linked to the Singapore prices of petrol and diesel - not to crude oil prices.
Recent movements in Singapore petrol prices and Australian TGPs are shown in Figure 1.
The Singapore price of petrol plus shipping costs and Australian taxes represents almost the entire wholesale price of petrol - typically around 95% (as shown in the chart below).
The remaining 5% of TGPs is accounted for by insurance, a quality premium for Australian fuel standards, local wharfage and terminal costs, and a wholesale marketing margin (where competitively possible).
FIGURE 1: Comparison of Singapore Petrol Price (MOPS95 Petrol) with Australian ULP TGP
NOTE: MOPS95 Petrol prices and Shipping rates are provided by S&P Global, Platts.
Generally, there is a short time lag of 1-2 weeks between changes in Singapore prices and changes in Australian wholesale prices.
Daily TGP data are published by all wholesale suppliers. AIP’s website presents average TGP data - see www.aip.com.au/pricing/tgp.htm and the website extract in Figure 2.
FIGURE 2: Average Terminal Gate Prices: Unleaded Petrol (cents per litre)
Retail or Pump Prices
Once fuel leaves the terminal gate (where TGPs apply), retail prices vary across metropolitan and regional areas, reflecting local area factors and competition.
The TGP is typically around 95% of retail prices (as also shown in Figure 3 below).
Apart from TGP, the retail or pump price in Australia also reflects all the costs of getting the fuel from the refinery/terminal to the bowser.
FIGURE 3: Comparison of Australian ULP TGP with ULP Pump Price
Retail prices in many metropolitan areas typically follow a discounting cycle (the saw tooth pattern shown in the chart above).
Consumers clearly benefit by buying heavily discounted petrol at the low point in the cycle.
The major oil companies directly own and operate only a limited number of service stations across Australia (around 10%) and these are largely in metropolitan areas.
City Versus Country Prices
Retail fuel prices are more stable in regional areas because of a general absence of price discounting.
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 licence).
Prices & Competition
While the price of fuel has increased on the back of strong Asian and domestic demand, Australian customers continue to enjoy low petrol prices by international standards.
When comparing Australian petrol prices to other countries, allowance must be made for different government taxes and tax rates on petrol and for any subsidies and road user charges (eg. in New Zealand) that don’t apply here.
Australia has low relative fuel prices because the Australian petroleum market is fundamentally competitive.
This is a view shared by many government/ACCC reviews of the petroleum market and by many informed commentators and analysts, including the International Energy Agency.
All the way along the crude oil and products supply chains there are several large and numerous smaller market participants constantly driving market competition.
Profits of Major Oil Companies
The profits made by fuel suppliers are volatile (due to the nature of the market) and are typically a very small proportion of the final or retail price.
There have been investments of over $3 billion by the industry since 2004 in the cleaner fuels program to help enhance fuel supply reliability.
Over the past decade, the major oil companies have invested over $10 billion in Australia, compared with industry net profits over the same period of around $8.8 billion.
FIGURE 4 – Petrol Prices & Taxes in OECD Countries (September Quarter 2016)
Source: Australian Petroleum Statistics, Bureau of Resource & Energy Economics