If the petrol is the same across the country, how can prices vary so much?

Friday, 3 March 2017

Petrol prices vary dramatically within a short distance. We took a drive to try to understand why.

OPINION: Petrol stations in two cities, selling a very similar product, at very different prices.

In late February, Gull's station on Te Ngae Road in Rotorua was selling a litre of regular petrol for $1.727. Just down the road the Mobil station is charging a cent a litre more.

But the Z Energy station on Customhouse Quay in Wellington, just a minute's walk from Parliament, is charging $2.069. It is the exact same price as the BP and Caltex stations beside the Basin Reserve, on the other side of the central business district.

The cost of filling up varies wildly within short distances in NZ.

Whatever the marketing campaigns try to tell us, the product being sold is essentially the same. Here a dash of engine cleaner, there a dash of biofuel.

SO WHY THE DIFFERENCE?

Real estate is more expensive in Wellington than in most parts of the country, with the ground rent on some sites said to be up to $2 million a year.

But that simply begs another question. Why is the price of petrol almost always exactly the same in Wellington as in Timaru. And Dunedin. And Christchurch.

For a large part of the country, the price of forecourt real estate makes zero difference to the motorist.

Z Energy was created after local investors Infratil and the NZ Super Fund bought the downstream assets of Shell in 2010, later rebranding the stations.

As much as the petrol companies might fudge the issue, the main reason for New Zealand's large regional price disparity seems relatively simple.

For decades, across New Zealand, the major petrol companies coordinated pricing. When one cuts prices, the others follow within hours.

The big players in the fuel market generally have very similar prices to each other, often varying by only a cent or two per litre.

There is no reason to believe the companies are colluding, but when the price of your main product is displayed on a large board on the street front, word gets around quickly.

But as Gull - which launched in 1998 and grew slowly for a decade - becomes a force to be reckoned with across the upper North Island (it now has close to 90 stations), two-tier pricing has emerged.

Gull has opened up their petrol station in New Plymouth. What impact will it have on local competitors?

There is now one price in areas where the major petrol companies have the market largely or completely to themselves, and one where they face disruption from a discounter which imports its own fuel.

It is not as if all stations in the upper North Island are cheaper than the 'national price', but in a large and growing area, most are.

Where Gull once created headlines with petrol prices only a few cents below its larger rivals, the price gap to stations in Wellington is now frequently over 30c a litre.

At Auckland Airport, the Z Energy station - the last stop for tourists needing to fuel up their hire cars before drop-off - is usually the same price as in Wellington. But a short drive towards the city centre the price of fuel drops 15c-20c a litre.

THE GAP IS GROWING

Gull is having a major impact on prices at the pump in the North Island, and the company is still expanding.

As recently as five years ago the situation was unremarkable. Gull was only a couple of cents cheaper than its rivals' national price. When Gull delayed putting up prices by a day or two, and the gap to its larger rivals hit 6c, the price difference created headlines.

But now the gap has ballooned, and the situation appears as if it is being paid for by motorists elsewhere.

According to official figures, petrol margins (the difference between what it costs to get petrol to port and the price paid by motorists) for the country as a whole have continued to rise.

Z Energy, the largest company in the industry, claims its profit margins are flat on a year ago, and the figures do not account for the degree of discounting which is going on.

This discounting comes from a growing range of schemes which means most motorists no longer pay the price advertised on the price board.

Energy Minister Judith Collins has vowed to 'get to the bottom' of rising petrol margins. She has pointed to official figures which showed that margins increased in 2016 'when there seems little justification for it'. The inquiry is also expected to look into the growing disparities in prices from one region to another.

For years supermarkets have handed out discounts to customers, sometimes of 50c a litre for purchases of $200 or more.

More recently AA's Smartfuel scheme began offering at least 6c discount at BP and Caltex, simply for handing over a card, while Z recently modified its Fly Buys offering to allow it to offer a variable cents per litre discount.

But even Z Energy is correct about margins being flat over the last year, over any longer time scale, returns are growing.

This, tied with the two-tier pricing, could come back to haunt the petrol giants.

The industry appears to have created a major cross-subsidisation, where bumper returns in some regions are covering lean times in others.

To put it in very simple terms: it looks like the major companies, Z Energy (including Caltex), BP and Mobil, may be ripping off Wellington and the South Island, because they can.

The situation is being thinly disguised by the suggestion that they are bleeding money in areas where they can't extract higher prices, because of competition.

Some motorists might smirk that Wellington, with its nation-leading salaries and tens of thousands of public sector jobs, is paying more than they are.

But jacking up prices in the South Island is a little different, politically at least.

Enter Energy Minister Judith Collins, who has vowed to 'get to the bottom' of rising margins, with an inquiry which will look at profits across the industry, as well as margins at a regional level.

HOW BIG IS THE GAP?

On the face of it, Wellington is 20 per cent more expensive than Rotorua. But the fact that around half of the price of petrol is tax means the true scale of the gap is masked.

Strip out the tax, excise and levies, which the petrol companies are powerless to influence, and the gap is more like 40 per cent.

In many areas, the price disparity is quite illogical.

Wellington is just a short hop from Seaview in Lower Hutt, home to one of New Zealand's largest fuel import terminals.

A little over an hour by car up the road in Levin, at the unmanned Gull station, petrol is 30c a litre cheaper, with its nearby rivals charging only a few cents more locally.

But if the price of petrol is indeed linked to what it costs fuel companies to supply it, Levin's petrol should cost more than Wellington.

That Levin station is a 432 kilometre drive from where its petrol comes from (Gull has a single fuel terminal - at Mount Maunganui). When the central plateau is closed in winter, the journey via Napier is more than 500km.

Precisely what it costs to transport fuel is known only to the industry, but whatever it is, it surely costs more for Gull to get petrol to Levin, than it does for BP, Mobil and Z Energy to get it from Lower Hutt to Wellington.

The Levin station also appears to prove Gull stations are not selling fuel as a 'loss leader' - the act of selling one product at or below what it costs, in a bid to lure customers in to buy other higher margin goods.

Fill up at Gull's unmanned stations, and you cannot buy a drink or a pie even if you wanted to. If selling petrol at that price is not profitable, the site is not profitable.

Astonishingly, the big players often end up undercutting Gull on price, because the discount schemes they offer (Smartfuel, Fly Buys and supermarket dockets) are the same no matter what the price board does.

WHAT MIGHT THE INQUIRY FIND?

While it seems Collins' probe is politically motivated, it is hard to imagine that the National Government would even contemplate regulating the industry, whatever the inquiry finds.

Financial markets appear to be largely dismissive.

In a note to clients released on March 1, Andrew Harvey-Green, an analyst at stock broker Forsyth Barr, said the terms of reference showed the inquiry was 'ambitious' with the complexities meaning it could run into difficulties and be delayed.

'We continue to believe that the risks to [Z Energy, the only petrol company listed on the NZX] from the inquiry are low.'

But the market may underestimate what might happen if an official inquiry asserts that petrol companies are extracting extraordinary profits, in even part of the country.

Petrol companies are hardly darlings in the eyes of the public, who already believe they're being ripped off.

If there was some sort of semi-official validation of this view, the pressure could get pretty intense.

The forecourt attendants would be the ones who would face the backlash, but the pressure would eventually reach the headquarters.

And remember, only one of the national chains has to give in to the pressure, and reduce margins.

Just as we have seen for decades, when one drops the 'national' price, within minutes, the others follow.

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