Fuel companies have been put on notice to drop prices after an inquiry concluded prices may not be reasonable - and Kiwis suffer the highest pre-tax fuel price in the OECD.

The report found higher prices in the South Island and Wellington aren't explained by higher costs in those areas - and efforts to analyse the issue were hindered after Mobil and Gull said they weren't able to provide data.

On a cents per litre basis, average retail gross margins have increased from about 13 cents per litre in 2013 to 21.3 cents per litre in 2017. Fuel margins are the cost difference in what fuel is imported and sold for, after discounts, transfer price, storage and handling and logistics costs.

Minister of Revenue, Minister of Energy and Resources Judith Collins asked for the report and today said it was "pretty clear" New Zealanders were paying too much for petrol.

Advertisement

"And every cent of petrol price across the board is a $30m wealth transfer from people who buy petrol to those who sell it.

"People in the South Island have long complained that they believe they're subsidising people in the North, and people in Wellington have got similar prices. It certainly looks like there's a lack of competition."

Asked if Kiwis were being ripped off at the petrol pump, Collins said it was clear too much was being paid. She suggested a link between a drop in margins in the weeks ahead of today's release of the report.

"There has been around a 10 cent drop in the margins over the last three weeks. That is welcome. I suggest to the companies that they look further to those margins. They might like to bring them down a bit more."

Asked why it had taken so long to find out about the potential problem, Collins said she had taken it on quickly after becoming Minister, after being alerted by Labour MP Stuart Nash.

Collins said she had instructed officials to assess the recommendations of the report and report back by November - and pointed to possible action by the Commerce Commission.

"The Market Studies powers announced recently by the Minister of Commerce and Consumer Affairs will give the Government the option to direct the Commerce Commission to undertake a further competition-specific fuel market study, backed by the ability to require comparable data across companies. There is currently no legal mechanism to do this."

Labour leader Andrew Little said the inquiry's findings raised serious questions, and motorists in Wellington and the South Island should be particularly concerned.

"The time for the Commerce Commission to do its job is now. There is no need for Judith Collins to wait until November...if she wants to show leadership, she should be doing it now."

Commerce Commission could act

The report was written by Grant Thornton and the NZ Institute of Economic Research and Cognitus Economic Insight and presented to the Ministry of Business, Innovation and Employment (Mbie).

The study found the New Zealand fuel market "has features which may not be consistent with a workably competitive market".

Retail fuel margins have increased significantly over the past five years, while fuel margins for commercial road and aviation users have been flat or falling.

Higher fuel prices in the South Island and Wellington - the gross margin difference between the South Island and Wellington and the rest of the North Island was 9.8 cents a litre - aren't explained by higher costs in those areas.

The inquiry team looked at the annual margins of Z Energy, BP, Mobil and Gull - and the returns on capital for the fuel companies at different stages of the supply chain. That was compared with other countries.

The report found that as of the last quarter of last year, New Zealand's pre-tax fuel price is the highest in the OECD.

Its analysis suggests there may be cross-subsidisation between the regions and business units. Retail gross margins in the South Island and Wellington have increased at a faster rate than margins in the rest of the North Island.

The report calls for further analysis before deciding what, if any, regulatory intervention is warranted.

What now?

Its recommendations include the removal of Z Energy's main port price - a national reference retail price - from its website, the creation of a registry for the borrow and loan system that limits each fuel company's visibility of others' market shares, and for consideration to be given to the creation of a liquid wholesale market for retail fuels.

The borrow and loan system allows the companies to use each other's terminal assets around the country, without the companies having to buy this product form each other.

Z Energy's publication of its main port price could serve as a retail pricing signal and dampen competition, the report concluded, and the borrow and loan arrangement could support coordination among firms.

Why are we paying too much?

The report identified three possible reasons for growing fuel margins:

• Less competition in the market, including after Z Energy's acquisition of Shell in 2010.

• A move towards offering increasingly different products (like better quality forecourts), and therefore having a price difference.

• A rise in independent retailers, with possible inefficiencies in how they set prices.

The report also identified features of the fuel market that may allow margins to rise more of for longer than they should:

• The same companies owning operations at refining, wholesaling and retailing.

• Refinery being run close to capacity, meaning its output is committed to the big companies making it harder for new entrants. Even if there was more capacity, any company wanting to sign up would need to commit to a full bundle of products - such as jet fuel and not just petrol and diesel.

• Independent suppliers struggle to reliably access fuels.