(Cairns... Far North Queensland)
FUEL PRICES... A National Disgrace
There is probably no
more contentious subject in Australia right now than the retail pricing of
petrol and diesel. International oil prices are posted daily, in fact, more
frequently than that and the motorist can follow the international price and
compare that with the price they are being charged at the bowser.
In this conversion
there is always a currency conversion issue, the value of the Australian dollar,
which tends to make the direct comparisons more difficult. However putting this
to one side the average motorist is more than a little suspicious that the oil
companies are ripping him off.
This suspicion is in
no way allayed by the most recent yearly profit result of the multinational oil
company Exxon Mobil of $A50.9 billion, the largest profit ever by an American
company. At the same time the European company Royal Dutch Shell’s profit to
date for the year had an “unexpected rise” and its annual profit
announcement comes later.
The claim is made
that this profit by Exxon Mobil has been greatly enhanced by the tax and
concession policies adopted by the Bush Administration. Be this as it may,
it’s still a colossal profit.
Normally when we
work out the cost of a product we take into consideration the cost of all those
factors that go into the production, distribution and retailing of the product
and we come up with a figure for which the product can be marketed. Fairly
clearly the less competition the less care we need to take in pricing correctly
all of the input factors. With oil classically we would take a base price for
the well-head product, and work from there with the additional inputs of
transportation, storage, refining, subsequent storage and retailing.
But world oil is
pricing is not calculated in this way but rather there are several
“benchmark” prices and depending on which part of the world you live, so
your fuel price is calculated from your appropriate benchmark price. In
Australia the benchmark price for us is the price of TAPIS centred on Singapore.
In other parts of the world your fuel could be based on the Dubai Oman benchmark
or perhaps Brent Crude, the OPEC Basket or West Texas Intermediate.
There appear to be
three major physical factors considered when fixing these benchmarks prices
these being the specific gravity of the crude, the sulphur content and the
location of both the origin and destination of the product. Generally the lower
the specific gravity and the lower the sulphur content the lower the refining
costs and the more expensive the oil. To be efficient oil refineries have to be
working close to capacity and all have to tailor their final product to reflect
their local market demands, for example the proportion of petrol, diesel,
kerosene and heavier products such as greases and tar products that their market
So the price anyone
pays for petrol or diesel is based on one of these benchmarks and influenced by
local demand. What we seem to have lost in all this is the actual cost of the
crude at the well head, the base product from which we would start to add on all
the other “on costs” to arrive at our classical costing together with an
overall justifiable total cost. Each oil field, can be costed and this cost
would not be dependent on world “demand” for oil which is the present major
factor in setting of the various indices and consequently the price at the
The world demand
price for oil is set mainly from the traded New York Metals Exchange where many
times the daily useable volume of oil is sold on a daily basis. It is a very
traded product and it would not be unreasonable to say that it has life of its
own, quite independent of oil.
If we consider the
traded [futures] market in oil this can be justified as an instrument of
guarantee to set price stability at certain levels. When these instruments are
used in an environment of variable prices and profits, as we have seen from the
Exxon Mobil figures, then the genuineness of the futures and derivatives markets
becomes a little less clear.
So the bottom line
of all this is that the price we pay for our petrol or diesel at the bowser is
claimed to have a direct relationship to the world price [whatever that is as
there are a few different markets] and the world price in turn would seem to
have little relationship to the real dollar cost of delivering a litre of fuel
to the local servo.
On top of this we
have to remember that the major oil companies are also the major explorers, the
major pumpers of oil and the major marketers of oil. To these companies the
actual cost of the oil is the development costs and possibly a royalty to the
country of origin. The level of vertical integration within the oil industry is
a concern and severely limits the ability of outsiders to accurately determine
what price they should be paying for the bowser product.
From the consumers
point of view this is unsatisfactory and definitely not transparent pricing and
this is where the consumer outrage, or perhaps frustration comes in. The present
pricing system is wide open to manipulation but in turn is so complicated that
it is difficult to easily explain potential opportunities for manipulation let
alone real ones.
There is however
another factor in the pricing of oil, particularly in countries like Australia
as Australia pumps a lot of its own oil. In fact Australia doesn’t appear in
the top 14 list of oil importing countries. The concept was introduced after the
oil peak of the 1970’s and is called parity pricing. What this means is that
irrespective of what the local oil costs to pump it goes into the wholesale and
retail system at world parity price, a figure that we have already shown is
The reason for this
parity pricing system was originally to encourage local exploration. Just how
effective it is for this purpose no one seems to have defined but given the
“competition based” mindset of the Government and its free trader philosophy
this imposed subsidy does stand out as an anomaly.
So the best that
consumers can do is to look at the companies profits and say “wow, they’re
monopoly figures”. But it’s not a consumer’s responsibility to try to
assess a reasonable figure from what is generally accepted to be a corrupted
world oil market. In theory at least he has a Government that is supposed to be
working in his interests and the bowser price of his fuel is definitely one of
Problem for consumers now is that it looks more like his Government is working for the oil companies rather than them and maybe deep down this is what causes the angst as much as the actual fuel price.
RETURN TO: INDEPENDENT VIEW
Written and Authorised by Selwyn Johnston, Cairns FNQ 4870