Collins ready to crush the oil companies
By Richard Harman (author)
Energy Minister Judith Collins get-tough approach to fuel pricing may already be getting results.
Collins told POLITIK last night that over the last three weeks some companies had reduced their margins by 10c a litre.
She said that if that were carried through for the whole year, it would result in $300 million staying in the pockets of Kiwi motorists.
That reduction comes as a report, commissioned by Collins, has revealed that margins in New Zealand at over 20c a litre are the highest in the OECD.
Now the Minister is saying that unless the fuel companies reduce their margins permanently and allow more competition her ultimate response might be to use the about-to-be-granted powers that the Commerce Commission will have to investigate the petrol market and if necessary impose a solution.
That solution could go as far as price regulation such as is already imposed by the Commission on the electricity lines companies and gas industry.
The Minister was responding to a Ministry of Business Innovation and Employment study of the fuel market that she had ordered.
The report found that average retail gross margins had significantly increased from 2013-2017.
“On a cents per litre basis, average retail gross margins have increased from approximately 13.0 cents per litre in the financial year (FY) 2013 to 21.3 cents per litre in FY2017,” she reported in a Cabinet paper based on the study.
However the AA warned on 21 June that the recent price drop was “another unexpected price reduction and atypical behaviour by the fuel companies which only reinforces the AA’s view that they want margins to look a lot lower than what the pending government study will report on, perhaps to undermine the credibility of the data in that report?”
Collins says that when she started the study, she suggested the companies might like to look at the issue themselves.
“Clearly they didn’t until the last three weeks.”.
The companies have been putting up a tough fight.
Collins told POLITIK that only two of the four investigated by MBIE had provided all the information requested.
"When we started the study all four of the companies said they would provide us with everything that we needed and two of them did, and two of them provided us with most of what we needed but not everything," she said
The study addressed three questions:
- Are retail fuel prices reasonable?
- What factors could explain regional differences in those prices?
- Is there evidence of cross-subsidisation between products and markets?
But the authors say that because of the failure of the companies to supply all the requested data “we have only reached tentative conclusions on each of these questions.”
However, the study did find that retail margins in Wellington and the South Island had increased at a faster rate than margins in the rest of the North Island.
Ironically one of the reasons identified for the high margins was the creation of Z Energy which though it bills itself as a New Zealand company actually ended up imitating the pricing strategy of its overseas-owned competitors..
“Shell's strategy when it owned the business before 2010 (when it became Z) was to be slow to follow any price increases by its competitors, and quick to lower prices if crude oil prices fell,” the study says.
“Z Energy has abandoned that strategy, and on the information available to us it appears that no other major has adopted it.”
The report says that the addition of forecourt and food services has made it easier to charge higher prices.
A deliberate strategy of the fuel industry majors to offer increasingly differentiated product offerings (e.g. better quality forecourts).
Collins says she has had a company tell her that their prices had gone up because they supplied coffee.
“I said, well, why do you sell coffee.
“They said because their customers wanted it.
“I said, well your customers are paying for it but if you can’t make money off coffee what are you doing being in business.”
The report also singles out the way most of the companies in the industry are vertically integrated controlling everything from the moment the crude oil arrives at the refinery until the vehicles leave the service stations.
It says that vertical integration also means the companies control access to the refinery which is a barrier to entry to new firms like Gull.
“The refinery is run with tight capacity which is fully committed to the majors,” it says.
“ In addition, the refinery produces a bundle of products which can deter entry to firms only wanting to sell part of the bundle.
“These requirements represent possible barriers to entry which reduce the ability of entrants to respond to rising margins and limit their increase.
“We have had only a limited ability to inquire into the specifics of the refinery’s ownership and contracting arrangements, and so this conclusion is also tentative.”
The report also deals with the arrangements at port and other depots where the companies “borrow and loan” oil between each other.
It says this means that each knows exactly what the other’s market share is.
Collins has an array of weapons at hand.
These could include looking at the vertical integration; establishing a wholesale market and ultimately the heavy hand of Commerce Commission regulation.
But first, she is waiting for a response from the companies to the study.
“What they will have to realise is that New Zealanders are not fools.
"So I'm waiting for the responses from the four companies, and we will see what they come back with.
“But it’s pretty clear to me that more competition brings down prices.”
That response will be with the Minister by the election, but any action to address it will be left to who-ever is Minister after the election.