Article: Property Investment

Another Day. Another Inquiry. With Frank NewmanAnother Day. Another Inquiry. With Frank Newman

Last week the Prime Minister talked tough about petrol prices. She quite earnestly said, “I am hugely concerned at the level of price that consumers are currently paying at the pump for fuel” and that motorists were being “fleeced” at the pump.

The bottom line is that the Government intends to rush through changes to the Commerce Act to allow the competition watchdog to investigate the margins on fuel. The findings will be reported back to the government next year and the PM has assured motorists that she will “prioritise a response to it”.

I don’t disagree that motorists are being “fleeced”, but it’s not by service stations. The PM’s tough talk comes just days after central government imposed a new excise tax adding another 4 cents onto the price of petrol.

The Automobile Association estimates that around 50 percent of the pump price is tax. The other half pays for the product and the retail margin. In other words, $50 of a $100 fill at the service station goes to central government to pay for roads, ACC, and the emissions trading scheme to combat global warming. In addition, Aucklanders have to pay an extra 10 cents a litre as a Regional Fuel tax.

In calling for the inquiry, the Government is conveniently turning a blind eye and deaf ear to the tax of fuel and instead focussing its rhetoric on petrol retailers - implying they are greedy because they have a profit motive. The presumption is that retailers are, in the words of the PM, “fleecing” motorists to make excess profits. The retailer’s margin pays transport, staff costs, overheads and the retailer’s profit which is a reward for their effort and risk, and a return on their capital.

It’s not obvious why a formal investigation is required and why the PM would have any doubt about the margin retailers are making. Petrol pricing is very transparent. The Ministry of Business, Innovation and Employment carries out weekly monitoring of prices and margins, and publishes the results on its website. That data shows the average retail margin has increased from 24 cents a litre in 2014 to 30 cents today. That increase is hardly surprising given costs like wages are on the rise.

It is pretty clear why petrol prices are at a record high.

* Government taxes on petrol are at an all-time high, and are increasing.

* The kiwi dollar is falling, so it costs more to buy crude oil which trades in US dollars. In the last 12 months the kiwi dollar has fallen from 72 cents to 65 cents against the US$, and

* Crude oil prices have been rising. In the last 12 months it has increased from US$54 to US$81 a barrel. (There are 159 litres in a barrel.)

In 2007 the Australian Competition & Consumer Commission carried out a detailed inquiry into the petrol market in Australia. They found the Australian market is fundamentally competitive, although they had concerns about a lack of competition in some regions. That investigation was reviewed by the NZ Commerce Commission in 2008. They came to the view that a NZ inquiry would produce the same conclusions.

It’s stating the obvious to say competition is good for consumers. Gull has had a major impact in bringing competition into the sector and reducing retail prices, by about 10 cents a litre in the regions where it operates. Gull imports refined fuel which it bulk stores in Mount Maunganui. From there it distributes it to its outlets via road. Distance limits the viability of its reach, which is why it does not operate in Wellington and the South Island.

If the government wanted to increase retail competition here are a couple of things it could do:

* Promote independent ownership of bulk fuel storage facilities, thereby enabling retailers to source fuel more widely. As a result, Gull and others would be able to source bulk supply closer to the retail market and compete in more locations.

* Require service stations to live-stream pricing and allow comparative pump price sites like Gaspy to tap into the feeds.

In my view, the PM’s inquiry is simply a political tactic to deflect the blame for high petrol prices from the government to retailers.  The 10 cents or so that could be gained from increasing competition will not only be limited to the regions that are not already highly competitive, but is insignificant when compared to the existing taxes on fuel - and the new ones they are proposing.

Proposed new government charges include increasing the motor vehicle ACC levy by 2.2 cents per litre, and two more 4 cents a litre excise tax increases – one in 2019 and the other in 2020. Further increases in the ETS levy are also likely as part of the Government’s zero carbon policy.

So, what will the inquiry into petrol prices achieve? The same as the other enquiries:  Nothing. The inquiry is primarily a political distraction from the finger being pointed at the main contributor to rising petrol prices - the government itself.

Frank Newman is the principal of Newman Property Consultancy. He is the author of numerous books on investment matters. For questions or comment about this article contact .(JavaScript must be enabled to view this email address)

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