It has become standard for tough questions to be asked of oil companies when the price of petrol rises or falls dramatically. The usual allegation is that petrol retailers are quick to raise prices when international oil prices point that way but tardy to lower them when they dip. On cue this week, Consumer NZ and the Automobile Association suggested that the amount we pay at the pump should be lower still. Predictably, also, the retailers rejected this and maintained that motorists were benefiting from a highly competitive market.
The problem for the retailers is that some of their practices have done little to enhance their credibility. Most of the time, for example, they have been matching prices, seemingly mocking claims of competition. The popular backlash against this has sparked several inquiries over the past decade, including one by consultants Hale & Twomey for the previous Government and one done as recently as 2013 by the Institute of Economic Research. Both found no evidence of opportunistic gouging, and concluded that petrol companies passed on oil price decreases to consumers just as quickly as they passed on increases.
Those outcomes may be hard for many motorists to stomach. They are set in their view that consumers are of no or little concern to multinational oil companies. But, in reality, this is a market in which there is limited scope for exploitation - or even competition in terms of varying prices at the pump. Companies face similar costs as world prices go up and down, and need to make similar margins. Because their product is identical, they, in a manner typical of oligopolies, compete largely for market share through competitions, free offers and advertising.
Generally, the companies' behaviour is based on assumptions about how their rivals will act. Thus a company that drops its price, hoping it will steal a march on its rivals, will usually soon move back into line if they do not follow suit. Profitability and market share demand as much. It is quite unusual, therefore, to see the amount of competition in prices in the present market. An informal Herald survey of 10 service stations around Auckland City found prices varying by up to 17c a litre. That represents a substantial and welcome difference. Motorists would have far more cause for complaint if matching prices were the order of the day.
There is also some comfort in the transparency of the market. Much of this is a consequence of Hale & Twomey's recommendations. The Ministry of Business, Innovation and Employment, for example, does weekly monitoring of importer margins, the amount available to retailers to cover transport, distribution and retailing costs, as well as their own profit margin. If anything, the manner in which this has crept up over the past year should be the focus of both attention and criticism. But consumers should be equally aware that the low price of oil globally should also have a knock-on effect on other products as businesses spend less on transport. With the international price slumping to a five-and-a-half-year low, not only petrol retailers should be facing hard questions.
