Z paves the way for a deal on petrol pricing but one big blockage remains

Friday, 20 September 2019

Worried about rising petrol prices? Here are six easy ways to reduce the cost.

ANALYSIS: Suspicions that motorists are being 'fleeced' at the pump were put into perspective last week when a drone strike on Saudi Arabia and rising Middle-East tensions threatened to light a fire under oil prices.

New Zealand regulators and politicians have already spent a couple of years kicking around concerns that Kiwis are paying too much for fuel.

But on Tuesday, Z and BP bumped up prices by 6 cents as a result of a drone and missile attack on Saudia Arabian oil facilities that lasted all of about nine minutes.

The decline in the New Zealand dollar over the past few months will have had about the same impact on the price of petrol.

* Jacinda Ardern says New Zealanders are being ripped off over petrol

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

Z Energy chief executive Mike Bennetts has fiercely defended its profits but has his work cut out convincing drivers and regulators market tweeks aren't needed.

But just because petrol prices bob around on an ocean whose tides and waves are way beyond the country's control, doesn't mean there is no point in regulators keeping a hand on the tiller.

The Commerce Commission reported in a draft market study into the $10 billion retail fuel industry in August that fuel companies appeared to have earned 'excess returns' for most of the past 10 years.

It said gross margins on petrol, only part of which will be profit, had risen to 34c a litre, compared to an admittedly historically-low figure below 20c a litre for most of the period between 2000 and 2010.

Z Energy chief executive Mike Bennetts on Monday questioned the commission's analysis and defended Z's profits.

But he will have a tough job convincing consumers all is well in the industry when they can see the same companies charging much more for petrol in some parts of the country than others.

Automobile Association policy manager Mark Stockdale says it is not uncommon for the majors to drop their price by 20c in towns and suburbs where they face independent competition.

Most of the independents are running their service stations on the smell of an oily rag by developing cheap sites on the outskirts of towns and relying on self-service.

But when Z, BP and Mobil are able to match their prices where they choose with their own full-service sites, motorists are suspicious.

Last week, Bennetts acknowledged a fact that the Automobile Association had long suspected.

'There are times when I think the market does sell below cost in certain locations,' Bennetts said.

Last weekend's attacks on Saudi Arabian oil facilities took place over about nine minutes, according to reports.

'Z never leads prices to that level … however, if someone does choose to price at that level we have two choices; we either lose a whole lot of business, or come close to matching up.'

Selling goods below cost isn't necessarily a problem, except when its intent is to drive competitors out of a market with a view to increasing prices in the future.

Then, it is known as 'predatory pricing' and could be a breach of the Commerce Act.

But it is almost unheard of for action to be taken against predatory pricing because it involves judging companies' motivation, which is always very difficult to prove.

Bennetts agrees selling below cost doesn't contribute to a healthy, competitive environment 'as weird as that sounds'.

Encouragingly, he indicates Z could support the commission guarding against predatory pricing more actively by checking whether individual service stations were selling below cost and taking action when necessary.

The Saudi attacks are just the latest event in a period of rising tension in the Middle-East that also saw an oil tanker in the Gulf of Oman set ablaze in June.

'I think there is merit in that when it is part of giving consumers confidence that markets are working well and that profits are reasonable,' he said.

It might seem odd for the competition watchdog to attempt to tackle high fuel prices by being more rigorous about policing fuel majors when they sold petrol cheaply.

Odd, but helpful perhaps if that is what's required to ensure independents flourish and grow.

Waitomo opened its first central Wellington petrol station on Hutt Rd on Tuesday.

Z has volunteered other useful suggestions to the commission to better ensure the fuel market is fair.

One is that fuel companies should either agree or be forced by regulators to show the price of all their fuels on their roadside boards, including high-octane fuels which Stockdale is concerned they over-price.

Bennetts acknowledges greater pricing transparency through roadside boards and smartphone apps such as Gaspy is a double-edged sword.

It helps consumers shop around but it can also make it easier for fuel companies to legally coordinate their prices.

But given the petrol companies don't seem to have too much difficulty doing that anyway, the offer of greater transparency is a gift horse the commission might as well take.

Bennetts also says Z would not be against the commission clarifying what is acceptable when it comes to fuel companies talking about their future pricing, or 'price signalling'.

'I think that would be a valuable thing because there is an understandable three-way tension between keeping your investors suitably informed, abiding by good competitive practices, and not telling your competitors too much,' he says.

A four-day conference on regulating the fuel market will kick off in Wellington on Tuesday.

Unfortunately, promoting a more competitive retail market is only one part of the picture.

It might not achieve much if the majors could bulk out their profits by selling imported fuel to their own retail chains and independents at an inflated price, shifting their profits from retailing to wholesaling.

Importing fuel involves investing in fuel terminals, and so far Z, BP, Mobil and Gull are the only petrol companies that have been able to justify the expense.

The commission has floated the idea of requiring the majors to open up that club by inviting independents to participate in the 'borrow and loan' system under which the majors already share terminal facilities with one another.

But the majors may have a point when they say further expanding those arrangements could be unfair and would be complex.

In any case, the smaller independents aren't giving off the signal that they are ready to compete at that level.

Z has suggested as an alternative that the majors should offer fuel at an advertised 'terminal gate price', creating a spot-market for wholesale fuel – something that has been on Gull's wish list.

But there appear to be no guarantees the terminal gate price would be as competitive as the commission would want.

The next step will be for the watchdog to hold a four-day conference with oil companies and others, starting in Wellington on Tuesday.

Unless it can thresh out a convincing approach to the wholesale market, the welcome progress on other issues could count for little and the oil majors could remain in the driving seat.