NZ petrol market 'may not' be competitive

The study's primary conclusion is that "we cannot definitely say that fuel prices in New Zealand are reasonable."

New Zealand's fuel market "may not be consistent with a workably competitive market" with retail margins increasing over the past five years while more expensive petrol in the South Island and Wellington aren't explained by higher costs in those areas, a government-commissioned study has found.

The report by three independent economic consultancies for the Ministry of Business, Innovation and Employment (MBIE) couldn't definitively say whether fuel prices are reasonable or not, as the major companies involved in the study - Z Energy, BP, Mobil, Caltex and Gull - did not provide comparable financial data and some did not provide sufficient information within the timeframes for the study's authors to report.

The study's primary conclusion is that "we cannot definitely say that fuel prices in New Zealand are reasonable, and we have reason to believe that they might not be", the authors said. "There are features of the current market structure and conduct that are of concern."

"We can indeed identify features of the New Zealand fuel industry possibly giving cause for concern that consumers are not as well served as they could be," the report says. "We can identify certain measures which might address at least some of these concerns, but with the information and time available it has not been possible to be more definitive, nor could we assess whether the benefits of all of those measures exceed their costs."

Energy and Resources Minister Judith Collins said the study "takes us a significant step forward in our understanding" and she has instructed her officials to assess the recommendations and report back to her by November.

"Furthermore, 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," Collins said.

The study did find that retail gross margins on fuel have increased significantly over the period under review, between 2013 and 2017, and retail gross margins in Wellington and the South Island have increased at a faster rate than margins in the North Island, excluding Wellington. Fuel companies make the highest margins in Wellington, at around 31 cents per litre, with South Island margins about 30 cents per litre and North Island margins about 21 cents per litre.

Adding to that, retail gross margins have increased over the period while gross margins for other users, such as aviation and commercial customers, have been flat or are declining. The report's authors could not find "significant capital expenditure made by the majors over the period under review which would possibly explain such an increase in gross margins", it said.

The rising fuel margins could be down to the conscious decision by Z Energy to change pricing strategy after it acquired Shell in 2010. Shell's strategy was to quickly lower prices if crude oil prices fell and be slow to increase prices when competitors did, but Z abandoned that strategy and no other major company has adopted it, the report said.

"It is possible that Shell's strategy caused margins at the beginning of our study period to have been unduly suppressed, and that some of the observed margin increase since then was simply a recovery from that position."

Drilling for the sources
Vertical integration of the major companies may also have created incentives for the majors to restrict rivals' access to key infrastructure assets such as oil refineries and fuel terminals, the report says, but more work needs to be done to determine whether vertical integration has lost its beneficial effects and has instead been harmful to consumers.

Independent fuel companies also have limited access to fuel, as New Zealand lacks liquid regional wholesale markets through which independent suppliers can reliably access fuels, the report said. Independents must make supply deals with the majors, which hampers their ability to compete head-to-head and allows large companies to keep pushing margins up.

Z Energy publishing its reference retail price (MPP) could dampen competition by serving as a retail pricing signal, the report said, noting that the Commerce Commission, in its decision clearing Z's acquisition of Chevron's Caltex chain of petrol stations last year, said that the publication of the MPP may be an indicator of price coordination. The major companies also share terminal facilities and through that share information allowing them to monitor each other's market shares, which may also help price coordination.

The report suggested three solutions. Firstly, Z removes the MPP from its website; secondly, a registry which would prevent major companies from seeing their competitors' market shares; and thirdly, the possible creation of a liquid wholesale market.

"These changes could all be achieved by voluntary industry actions, and thus we recommend that officials discuss them with industry, in light of the findings in this report," it said.

In a statement released to the NZX, Z Energy said it had removed its main port fuel price (MPP) from its website this morning and was "digesting the detail of the report". The company has offered to provide MBIE with more data including daily pricing data, and that the industry was "more competitive than it has ever been in the past."

The MBIE report said there was some suggestion that the major companies subsidise the cost of fuel in competitive places in the North Island through fatter margins in Wellington and the South Island, but there was a lack of available information to determine that conclusively.

"Given the lack of data available to us to address this question, further data and investigations are required," it said. "We simply note that attempting to make up for lost margin in one market by increasing prices in another makes economic sense if firms are simultaneously coordinating on less intensive competition."


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