Thursday, 7 August 2008

The NZ petrol market

This report from Newstalk ZB tells us that the NZ petrol market "fundamentally competitive". The news report says
An independent review of petrol pricing has found the New Zealand market is fundamentally competitive.

It says price fluctuations have been driven by increases in taxes and the price of crude oil, while retail prices are not as fast to rise and as slow to fall as consumers have feared. It says the New Zealand market is more transparent than the Australian market, because buy-sell contracts are not used and New Zealand does not have the same price cycles.
The report also says
UBS senior economist Robin Clement says the New Zealand dollar cost of crude oil is roughly where it was at the start of June. He says the price was just below $2.00 so there is scope for another cut. Mr Clement says the effects of declines in the global oil price seem to flowing through to New Zealand quite quickly.
This does raise a couple of issue with me. First, what are we to make of the kinds of comments at the website:
Oil companies led by BP - New Zealand's largest - have given motorists a hard time since the New Year. They've raised prices at the pump as soon as crude oil prices rise and then failed to pass on savings from falling prices and the high New Zealand exchange rate.
Does Consumer NZ really know so little about the NZ petrol market? Or do they know something the "independent review" doesn't? What is the basis for their comments?

And, second, if these finding are correct what does it say about the nature of the New Zealand petrol market? Given the research I commented on earlier which suggests there is an asymmetry in price adjustments, for the US at least, Why don't we see such an asymmetry here? This research argues that their is a consumer search asymmetry. When retail petrol prices are rising, consumers search harder for the best price; when prices are falling, consumers ease up on search. This “reference price” consumer search model assumes consumers’ expectations of prices are based on prices observed during previous purchases. The model predicts that consumers search less when prices are falling. This reduced search results in higher profit margins and a slower price response to cost changes than when margins are low and prices are increasing. Do New Zealand consumers just search more than those in the US?

Below is a graph from the MED website which shows the make up of the retail price of regular unleaded petrol. The graph breaks the retail price down into taxes and levies, importer cost, and importer margin.

The importer cost is based on the Singapore benchmark petrol price plus an estimated quality premium and an assessment of the importation costs of freight, insurance, losses, and wharfage. The importer margin is calculated by the Ministry as the retail price less taxes and levies, and less the importer cost. That is, it is the margin available to the importer to cover domestic transportation, distribution and retailing costs, as well as wholesalers' and retailers' marketing margins. The importer margin is lagged by one week, i.e. it is assumed that retail prices this week are based on the importer costs of last week.


Anonymous said...

Comment from Consumer NZ.

Our statement on price increases must be looked at in the context of the whole article. We stand by the statement, which is supported by the graph published with the article.

The article was written in April 2008 in support of a campaign by ourselves and the AA to have better monitoring of petrol prices in this country.

The Hale and Twomey report is the result of that campaign and has resulted in Minister Dalzell instructing the Ministry of Economic Development to improve their monitoring.

Consumer NZ is satisfied with all other conclusions of the Hale and Twomey report, and notes that since the oil industry has come under increased scrutiny, oil price decreases have been followed more rapidly by petrol price decreases.

Hamish Wilson

Paul Walker said...

Just looking at the graph in the message I don't see much reason to think it shows nay problems with the market. The importer margin section doesn't look to be changing much and isn't getting larger over time and the total prices looks to track the importer cost pretty well.