When the price of petrol jumps as dramatically as it has over the past week, it is reasonable that oil companies answer some hard questions. The more so because the increase at the pump comes at a time when the rising New Zealand dollar suggests precisely the opposite should be happening. And even more so because many industry practices have done little to enhance its credibility. Uniform pricing, for example, seems to make a mockery of normal competitive precepts - and to be a case of giant multinationals showing a complete lack of regard for consumers.
It is, in fact, competition issues that are, again, the most concerning aspect of the latest price rises. The oil companies seem, on the surface at least, to have a fair case for their action. On the benchmark Singapore market the price of a litre of refined fuel has increased 17 per cent since November. There seem to be two main causes - huge American demand because of low stocks and a biting winter, and the efforts of the Organisation of Petroleum Exporting Countries, which deals in United States dollars, to offset the greenback's slump. The rising New Zealand dollar has been able to shelter local consumers from those pressures to only a limited degree.
What, however, was far less convincing and far more irksome was the comment of one of the oil companies. Mobil's spokesman said the company had put up its price because other companies had increased their price. "The market moved and we responded to moves in the marketplace," said Peter Thornbury. "I think other companies had changed their prices and we moved to maintain competitive price." Mobil, it seems, equates uniformity with competition. It is an odd concept. When a rival hikes its price, that usually presents an opportunity for a company to win market share at its expense.
Oligopolies - markets dominated by a few large suppliers - operate differently, however. In the case of oil, companies face similar price pressures when world prices go up, must meet very specific regulations for petrol and, thus, have limited scope to vary their retail price. In typical oligopolies suppliers choose not to compete on price but seek custom through competitions, free offers and advertising. Their behaviour is governed by well-founded assumptions about how their rivals will behave. The upshot in the oil industry has led the International Energy Agency to voice a suspicion of tacit collusion.
Such a cosy relationship can be upset by the arrival of an independent rival determined to garner market share on the basis of cost. On such welcome occasions consumers benefit from price competition. New Zealand experienced this briefly when Challenge was born a few years back. Often it led prices down, effectively throwing down the gauntlet to the four big suppliers. They had little option but to follow. An important ingredient of a more competitive market was lost when Challenge was bought by Caltex.
One of the benefits of that competition was that prices tended to come down as quickly as they rose. Without the presence of an independent, there is a strong suspicion that oil companies increase prices at the speed of light but fumble in the dark when benchmark costs suggest a drop is due. In that way, they inflate their profit margins.
Ministry of Economic Development data suggest, however, that such was not the case for the duration of last year. The ministry keeps an eye on the relativity between the Singapore spot price and the New Zealand retail price, partly in response to a furore in 1999-2000 when petrol prices rose 13 times in eight months. Aggrieved consumers at that time made their feelings clear. In the absence of more competition, similar pressure on this occasion is the best way of ensuring that prices at the pump drop as rapidly as they have risen.
AdvertisementAdvertise with NZME.
Latest from New Zealand
Health sector and the NZDF in trouble, USA warns China | Focus Morning Bulletin April 27, 2024
The hospitals are being asked to save an unrealistic amount of money, there is a shortage of GP's and a third of NZDF's navy ships aren't being used due to staffing shortages.