Money, Dec 05, AU Edition

PETRONOMICS
Who’s getting rich off high gas prices? Hint: think ballot boxes, not bowsers
Let me take you back in time, to a land that existed long, long, ago. A time when life was vastly different, an era when we were more mobile, a time when petrol was around 85 cents a litre. I am, of course, talking about January 2005. They say that a year is an eternity in politics. Well, the same can be said for petrol prices. I recently heard an explanation from an “industry expert” about how the price of petrol is determined each day, indeed, each hour. It makes subjects like the structure of DNA and thermonuclear physics seem like kindergarten stuff.
Not surprisingly, the only person to lose out in all of this is the motorist. In my honestly held opinion, there are snouts in proverbial troughs everywhere when it comes to making a quid out of petrol. It is also a fact of life that we all depend on our cars for almost everything. Maybe, just maybe, cutting back on petrol, and not using the ol’ chariot as much as we used to, is not such a bad thing. Do we really need to drive to the local shops when they are only a 5 minute walk anyway? Dropping children off at school can be a bit like a demolition derby, but with more emotion… so walking to school is maybe not such a bad thing.
In July 1969, when man landed on the moon, the number one hit was a cheerful little number called, “In the Year 2525”, by Zager and Evans. Some of the lyrics of this song include, “Your arms are hanging limp at your sides. Your legs got nothing to do. Some machine, doing that for you”. Perhaps they were predicting the way we would be going if we didn’t stop using our cars for the most mundane tasks. Call me an eternal optimist but there has to be an upside in this whole price of petrol predicament. Conversely, maybe the more haunting lyrics from Messieurs Zager and Evans are, “I’m kinda wondering if man’s gonna be alive. He’s taken everything this old earth can give. And he ain’t put back nothing…” So let’s have a look how we can drive through to the other side of this petrol pricing tunnel: there is a light but we just need to look for it. And, no, it is not a train heading toward us.

Who gets what?
Let’s look at a litre of standard unleaded petrol – say it costs $1.20 per litre. Where does your hard-earned go? Well, the refiner gets about 60 cents (this is called the “Terminal Gate Price”), and the government gets their bit (in fact its a large bite; around 41 cents goes to consolidated revenue, but only the government could get away with having a tax on top of a tax, because we have to pay GST on top of all these figures, so that makes another 11cents). Are you starting to see a bit of a trend here? We are paying $1.20 and approximately 52 cents of it is going to…drum roll…the government! The wholesaler gets about 5 cents out of all of this and by the time the poor ol’ servo gets a cut they only wind up with about 3 cents a litre.
You don’t have to be a mathematical genius to see that there is a 100% mark up on the refinery price, so the next time you are muttering under your breath about the petrol station owner, remember that the actual outlet itself is not getting that much from the petrol. (This is why they’re always flogging Mars Bars and chewing gum and groceries and magazines). They make more money on a few chocolate bars than they do on your petrol.
Let’s make these numbers dance a bit so that they are more meaningful: if we assume that the average car has about a 60 litre tank then a full tank would cost $72. The government gets $31, the refinery $36 and the servo gets $2. If you fill up once a week, that means that over the course of a year you are paying around $3,800 in total for petrol – including $1,650 extra in tax. Can you take that off your next income tax return? I don’t think so… and once again the total that the petrol station retailer gets for your patronage is about $100.
Hopefully it is now a bit clearer about where the money goes but we still haven’t looked at how the Terminal Gate Price is determined. Why have we seen such a big increase in the last 12 months and especially the last 3-4 months? This is where it is a real minefield and requires some unravelling of the facts.
How do they decide on a price?
The key point is that Australian refineries compete with Asia for petroleum products. Both oil and finished products (such as petrol and diesel) can be purchased at competitive prices from a number of locations in the region. Prices of fuel types such as diesel or petrol in this regional market are driven by supply and demand of each individual fuel type, resulting in fluctuations of the prices relative to each other. Australian refineries not only compete with imports of finished product in Australia but also export product to the regional market.
The Terminal Gate Price includes the import parity price plus tax (again), and a very small margin which covers some administration and marketing costs. It appears we are getting closer to the crux of all of this. We know what the terminal gate price is but what is the import parity price?
The import parity price is essentially the cost of importing, including freight and wharfage, finished product (as opposed to crude oil) to Australia. The import parity price is not regulated but instead determined by market forces. It now appears that the base price of the petrol we buy is directly linked to the importation of product. But in what way?
An international pricing benchmark is required for efficient operation of the petroleum products market in Australia and Asia. Singapore is a major refining centre and prices there are the best available reflection of prices in our region. For this reason, the Australian market uses Singapore prices as a benchmark, with actual prices negotiated relative to this benchmark. Changes in Singapore petrol prices or exchange rates typically take one to two weeks to flow through into either increases or decreases in pump prices. These changes are often masked by weekly cycles in pump prices in major capital cities.
What a revelation! It appears that the refineries pay for their imported product based on a calculation using the Singapore petrol price. This in turn is directly linked to the fluctuating cost of a barrel of crude. This changes daily and is determined by international supply and demand forces in the Middle East and the USA. This is globalisation in action. The next time you are in a country town like Wheelyabarraback or somewhere near the Black Stump, then realise that the petrol you are putting into your car is costing you what it costs because of what is happening in Singapore and Arabia… and don’t forget the government taxes!
But why do they all go up at once?
A common question is that all petrol stations seem to put up their prices at the same time. This, in fact, is not collusion but rather the result of marketing forces. You see what happens is, as we have just discovered the price that refiners pay for their product is determined by international supply and demand, and what the Singapore price is…but there is still a lot of room to move for thee refineries. There is a time lag between when prices are agreed and when they are paid. There are also corporate marketing strategies that result in temporarily decreasing the margin for the oil company. In other words, instead of a refinery making a 20% margin on their terminal gate price they make a 10% margin but they sell a larger volume.
Now this is why we see petrol cheaper on certain days, usually Tuesdays and Wednesdays. It is marketing ploy to make us buy then rather than wait. And if one company moves in price the rest will follow to remain competitive. After a couple of days of not maximising profits (remember, they are still making a profit but it is just lower) then there is financial pressure on the oil companies to increase their prices again, hence higher prices toward the weekends. I suppose it is basic commerce really: there are two groups of factors which lead to higher petrol prices – higher costs, and different competitive environments. (And of course, taxes.)
So what do we do?
The aim, of course, is to minimise your petrol bill, and you can do this with push and pull strategies.
1. Firstly, think carefully each time you use the car. Do you really need to fire up the beast to go two blocks to pickup some milk?
2. Do you really need that milk in the first place or can it wait?
3. Can you use public transport? At least on a bus or a train you can relax, maybe read or do some work, and save money.
4. Cadge a ride with someone else. Car pooling works well overseas.
5. Think … and act about your driving style. Drag-track starts might get you away from the lights quicker but you just get to next set of lights before everyone else, and it costs a bundle in petrol. Also there is no need to rev a car’s engine when you first turn on the ignition, unless you have a car built before 1960.
6. Plan when you buy your petrol. If you hear on the news that crude oil prices are going up then that means every part of Australia will be affected. Try and beat the oil companies to a price rise.
7. Watch for pricing cycles. If petrol is usually cheaper on Tuesday, well, buy on Tuesday.
8. Use coupons from supermarkets and other retailers to get a reduction in the pump price. Remember the old truism; look after the pennies and the pounds will look after themselves.
In case all of this fails…buy a horse. This used to work before, they are cheap to buy, and upkeep is more efficient than a car. Unfortunately, the price of cereal and hay is going up. Why? Because of petrol costs. Oh well, maybe it is better to just stay at home: at least we can’t be taxed there…unless we do something.