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(Cairns... Far North Queensland)


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Selwyn Johnston



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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 requires. 

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 bowser. 

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 extremely flexible. 

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 those interests. 

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.




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Written and Authorised by Selwyn Johnston, Cairns FNQ 4870