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Regulation of petrol prices doesn’t work – expert

A visiting competition expert says regulating petrol prices does not work, and that international attention is now turning to the role refineries play in the industry.

Justus Haucap, who holds the chair of competition theory and policy at the University of Dusseldorf in Germany, told a seminar in Wellington of an economic laboratory experiment he was involved with to shed light on the issue.

The experiment tested the Austrian, Luxembourg and Western Australian regulation regimes.

In Austria, the price of petrol can only be increased in the morning but cuts are always possible. In Luxembourg, margins are regulated, and in Western Australia only one price change is allowed per day.

"The Austrian and Luxembourg pricing rules actually tend to increase the profit of the operating companies," he said.

The Western Australian regime did not do any harm but also didn't provide any benefit.

"We got an uneasy feeling about implementing the Austrian rule in the German market after this result, even though it is only experimental evidence," he said.

He said care had to be taken in making policy conclusions from economic laboratory experiments.

But the broad policy conclusion was that pricing rules would not solve the problem of competition in petrol price-setting.

The German cartel authority had now turned its attention to the wholesale market which supplied petrol stations. There were "quite funny stories" that suggested the use of market power, including by refineries, he said.


Comments and questions

Increasing taxes on fuel does not work either. Those increased costs flow through the whole economy increasing the price of everything. In a country with stagnant low wage economy this effect on people who are already struggling is devastating.

I spent 26 years in the oil industry, internationally and in NZ, and none of the theoretical pricing rules ever worked. Despite all the myths about a lack of competition at the pump, the reality is that the oil industry is as competitive as any other retail industry, and doesn't need any artificial pricing rules imposed by politicians who generally haven't got a clue about how business works.