Don't be surprised if petrol study ends in a deal, not regulation

Tuesday, 20 August 2019

Wellington motorists react to the finding of a draft market study into the country's petrol prices in August.

ANALYSIS: Prime Minister Jacinda Ardern has reacted furiously to a draft report that confirms the fuel market is not sufficiently competitive, but what most motorists probably want to know is how much prices could come down, and when.

In the absence any solid information, there is some evidence that the answer to the first question might be no more than 10 cents on average nationally, but it would depend on what types of fuel people buy and where.

The answer to the second question hinges on whether the Government needs to pass new laws to improve competition in the industry or whether – as the Commerce Commission is quite clearly hoping – Z Energy, BP and Mobil 'voluntarily' agree on a deal to make it easier for 'independents' to compete in the market.

Legislation would likely mean that any action to improve competition in the $10 billion fuel market would be at least a couple of years away.

**READ MORE

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But if the oil majors agree to new rules proposed by the Commerce Commission that make it easier for independent retailers to buy fuel from them on more competitive terms, then changes could flow through to the pumps much sooner.

Is a deal possible to stave off petrol regulation?

The incentive for Z, BP and Mobil to reach a deal is that the impact of legislation, when it came, could be worse than a voluntary deal.

So there is likely to be a trade-off between 'speed' and 'impact' – smaller cuts to petrol prices sooner through voluntary changes, or potentially larger cuts later as a result of a law change.

Ardern and the Commerce Commission failed to coordinate a view on whether motorists were being 'fleeced' at the pumps.

Facing the media on Tuesday morning, Ardern was adamant they were.

But Commerce Commission chairman Anna Rawlings declined the invitation to apply that label at a media conference hours earlier when she presented the 424-page draft report.

Even so, the watchdog did conclude the fuel market was not as competitive as it could be and that the core problem was the lack of an 'active wholesale' market for fuel which meant the major importers Z Energy, BP and Mobil had too much control over the market.

Essentially, independent retailers can't shop around between the three importers easily enough to get competitive pricing for fuel, which means that the price they can charge at the pumps is not acting as a sufficient constraint on the prices that Z, BP and Mobil can charge at their petrol stations.

The commission is not considering imposing controls on the prices petrol companies can charge at the pumps, but its view is that if independent retailers can buy petrol on more competitive terms, that should flow through to lower prices for everyone.

No-one, including associate commissioner John Small or the AA, was prepared to guess on Tuesday morning what the dollar impact of creating a better wholesale market for fuel could be on the retail price of fuel.

The ball now appears to be in the court of the petrol majors to strike a deal over wholesale petrol competition.

But the commission's report does note that the average gross margin on a litre of 91 octane fuel during the second half of last year was 34 cents in New Zealand, while it was 24 cents in Australia, so that probably provides some sort of clue.

At this stage, the commission doesn't appear to be ruling anything much in or out in terms of exactly what changes could be made to the wholesale market.

The report even says the Government could 'impose line of business restrictions' that would require the majors to 'sell ownership of distribution or retail activities', but there is no indication that sort of extreme measure is up for serious debate.

Probably the simplest (though some will argue not the fairest) way to create a competitive wholesale market for fuel would be to require Z, BP, Mobil and bit-player Gull to sell imported fuel to their own retail chains and to independent petrol companies at the same price, which would be advertised at their fuel terminals.

Rawlings says the commission could recommend terminal-gate pricing in its final report in December.

It may be that proves to be the 'stick' that the regulator needs to turn to herd the oil majors towards a voluntary deal at a conference next month at which the draft report will be discussed.

But it is looking more likely that any regulations actually recommended by the commission would be more sophisticated and nuanced.

So, expect a short silence from the oil majors, followed by a long technical debate about New Zealand's fuel terminal infrastructure and the financial incentives required for investors to keep it in shape.

The commission is also now seeking comment on a few additional measures that could improve the lot of consumers, such as requiring petrol retailers to display pricing for 95 and 98 octane fuel on their roadside price boards, alongside that of commonly-advertised 91 octane fuel.

But that too is an option 'that could be implemented by industry' instead of 'regulated mandated price disclosure', it notes hopefully.

The watchdog says it has also considered recommending that retailers be required to provide real-time pricing to price-comparison apps such as Gaspy – the snag here being that could actually make it easier for them to 'coordinate' their prices.

Overall, what seems to shine through is the commission's preference to 'do a deal' if possible.

AA adviser Mark Stockdale is not unsympathetic to that, but expresses some frustration the commission's report didn't provide more information on what it thought a fair price for fuel might be.

'We don't know how much more we are paying than we would be if the market was more competitive. This is what Kiwis want to know.'

Could it be 10c?

'You could compare to Australia but we need to understand the break-down of the margin, and if there are factors in New Zealand that explain the higher margin,' Stockdale says.

'Certainly though, this is confirming the view that prices are too high in New Zealand and the market isn't competitive.'

If the commission was to negotiate a deal that it thought might bring about a reduction in the average price of fuel that was in the single digits in cents, that might well be pretty unobservable to motorists amid the usual ups and downs in pricing that result from oil price movements and currency fluctuations.

But that wouldn't mean those gains weren't real. So cue the weeks of arm-wrestling.