The petrol market – are they rigging the prices or not?

OPINION: The behaviour of the petrol market in New Zealand seems to be a perennial issue of concern for a variety of reasons – whether it is unreasonably high prices in areas of high sales where you would have thought prices would be lower, to uncannily similar prices which seem to be giving all the suppliers the same, fat and unjustifiable margins. Inevitably this calls for an inquiry to be held. Almost inevitably, this finds nothing reprehensible going on although it does help explain some of the peculiarities of the local market.

I don’t think this cycle of concern, inquiry and no action needed as a result will ever stop. But it is a useful distraction for some politicians and does keep the companies “on their toes” as it were.

The basic concern that those complaining have is that of collusion – these guys are colluding on setting the prices to suit their mutual convenience, so the complaint goes. In fact, the companies avoid collusion like the plague because it is unnecessary and puts reputations at risk for absolutely no good reason. The petrol industry is actually very conservative and will always try to play by the rules, whatever the rules may be.

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So what is going on and is it peculiar to New Zealand?

The behaviour is very conventional (not peculiar to New Zealand) but the resulting prices are sometimes rather unusual for particular reasons.

On the question of collusion, I think there is a general misunderstanding of how much information on the market is freely available and companies don’t need to collude to access that.  In fact, freely available, up to date information is the life blood of well-functioning markets in any product and petrol is a classic example.

There is the question of margins, i.e. how much profit the companies make on each litre sold. This can at times creep up, and margins are pretty slow to come down when that is the proper response, e.g. a fall in international oil prices. That’s not too surprising because margins mean profits and I think it is the case that prices are quick to rise but slower to fall, but it is rare for the margins to become blatantly unreasonable.  And when you look at the numbers it is surprising how small the margin is as a proportion of the whole. The hungriest participant is the Government which takes out a massive chunk as petrol tax.

The simple public view on margins is that they should be constant and not interfere with the signals given by international oil prices. But it does take time for the organisations to respond – particularly the big companies with a big bureaucracy – and this can lead to margins which are temporarily slightly out of sync with oil prices. And local conditions do play a part, for example, if there is only one petrol station serving largish area prices can be higher because the cost of filling up elsewhere is too high.

The best perspective is given by looking at the movement in margins over time rather than at any instant in time.

In the larger city markets, it is no surprise to find pricing to be similar everywhere but that is just the effect of competition. Occasionally one of the companies will break the pattern to see if there is an advantage but the others are usually quick to respond. The companies are very quick to protect market share.

One of the factors that does impact on prices is the cost of distribution and that can produce some unusual looking price effects. This particularly applies to smaller towns that happen to be close to a distribution centre. They can sometimes see surprisingly low prices.

Another factor is the presence or not of local operators like Gull. Their prices are often sharper than those of the big companies and that can drag prices in general down a bit.

One of the big differences from the petrol scene of my youth is the change in the provision of service. When I was young filling the car with petrol at the local station was a major event with what seemed like a swarm of attendants filling the tank, checking the oil, washing the windscreen and so on. I guess in those days service was a differentiating factor that influenced people on where they would fill up. These days people just want petrol at reasonable prices – but it is interesting to see companies like “Z” beginning to bring back service as a part of the package.

I guess the final question is – is it worth shopping around for the cheapest deal? There is no definitive answer to that as prices vary so much at different times, but in general, you have to be keen to use up petrol driving around to find the cheapest deal for petrol. For most people, I think convenience and habit are the key factors. I know I generally fill up at the same station each week because it is conveniently located and has the grade of petrol my car uses.

 

By Bas Walker

This is another of Bas Walker’s posts on GrownUps.  Please look out for his articles, containing his Beachside Ponderings.

Keen to look into saving money at the pump? Read this review by the Oily Rag Community of Gasby a Kiwi app which uses GPS to give you the cheapest petrol station to your location.