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Paying through the nozzle

Last updated 09:01 26/05/2013
Mark Stockdale AA
MOTORISTS' CHAMPION: AA's Mark Stockdale monitors fuel prices. He says New Zealand's industry is one of the most transparent in the world.

Mark Stockdale

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Motorists are set to be stung another 9 cents a litre on petrol over the next three years as the Government ramps up its tax take. The hike comes amid the already volatile prices we pay at the pump. Jo Moir and Tom Hunt report.

Petrol prices, much like the weather, are the height of watercooler small talk. But because Kiwis have so little control over petrol tax - and very little choice to shop around for a better price - most roll in and out of the petrol station paying the price before them, with little regard to how it got to be so high.

That price increases again in July, when motorists get hit with the first of three annual increases of 3 cents a litre after Parliament passed an amendment last week to increase excise.

New Zealand's fluctuating petrol prices are made up of different variables, some of which are fixed, such as the Government's excise and GST.

What shifts daily is the price fuel companies pay for petrol, and the exchange rate. Those factors affect the companies' profit margins, altering the price at the pump.

The price of oil is only one part of the equation, says Mark Stockdale of the Automobile Association's Petrolwatch, which monitors all these movements.

Oil is affected by supply and geopolitical issues such as war or other troubles in the Middle East. Although they can affect the price of petrol, they are not crucial.

"When prices went up last week it was because of the exchange rate, whereby the Kiwi dollar decreased by 3 cents and the commodity price for refined fuel went up."

The commodity price for fuel changes daily and is averaged over a week. If the difference is significant, the fuel companies will pass it on at the pump.

"If, after a week, the imported cost of fuel has changed by 4 cents a litre it's likely they will increase their prices."

If you break down a litre of petrol, just 42 per cent of the cost is the price fuel companies pay to buy it.

Refined fuel is priced in US dollars, but is paid for in local currency, so exchange-rate movements are forever shifting the cost.

Another 42 per cent of the price per litre is taxes, which include excise, GST and ACC levies. Fuel prices increased from July 2010 to comply with Emissions Trading Scheme (ETS) obligations. The increase reflects the cost of greenhouse gas emissions on all fossil fuels and is paid to the Government.

A further 2 per cent is shipping costs, and the remaining 14 per cent is the importer's margin. This is the income the fuel companies use to pay overheads and costs.

Excise is rising from July for the next three years and an amendment to the Customs and Excise legislation in 2008 means all of the excise revenue now goes towards the National Land Transport fund, which pays for the maintenance and building of new roads, education and road safety, and public transport.

The tax is purely on petrol, making diesel cheaper for users who are instead billed road-user charges.

Governments worldwide add hefty taxes to petrol. One study, in December 2012, found that New Zealand had the fifth lowest petrol prices among 27 OECD nations.

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Mexico, at $1 a litre for premium unleaded petrol, was the cheapest while Norway was the most expensive at more than $3.

The fuel industry in New Zealand - as in most countries - has a pricing system that works on replacement costs. This means that, even though the fuel in service stations' tanks was bought a month ago, they base prices on today's cost.

Z Energy spokesman Jonathan Hill describes the supply chain from the oil refinery to the petrol pump as taking up to 50 days.

"But whatever the price is doing on the other side of the world on any given day affects the pump price we pay."

Mr Stockdale says this is true across the world, and all fuel companies operate this way. "Because it's a competitive New Zealand market, fuel companies' margins are lower than they have been in previous decades, but they all have similar cost structures.

"They're all employing staff at similar wage rates with similar overheads, so it's unsurprising they're all pricing the same."

The fuel retail industry is said to be one of this country's most transparent. The price retailers are paying to import fuel, their transport costs, tax and extent of their gross margins are recorded and monitored.

The industry is heavily regulated and, compared to a sector such as supermarkets - where the cost of buying in thousands of goods goes largely under the radar - its pricing is fairly open.

"That transparency is quite unique in the world," Mr Stockdale says. It's significantly different to the Australian market, which can experience 20 price movements in one day.

"We believe New Zealand is unique in that all of the excise paid is reinvested to benefit road- users.

"In Australia only one-third of tax goes to roads and, in many countries, motorists are used as cash cows with money collected from petrol going directly to fund other non-roading activities."

The New Zealand fuel market is broken down into five national retailers - the four big players, BP, Caltex, Mobil and Z, plus Gull, which operates only in the North Island and runs a slightly different business model.

"Gull is much smaller and a leaner company with less infrastructure, with only one terminal for storage," Mr Stockdale says.

"They have over 50 stations but they're largely located in the main centres and, as a result of leaner operations, they're always able to price fuel lower. This leads to the go effect.

"If Gull lowers prices in one suburb, competitors in that suburb will lower their prices, so it drags everyone else down and encourages competition."

Other mechanisms used to compete are loyalty programmes, supermarket dockets and AA smart fuel.

Competition today is quite different to that of 40 years ago. In the 1970s there were more than 4000 petrol stations; by the 1990s there were about 2500, and today there are roughly 1200.

In the late 1990s and early 2000s, petrol prices fell to all-time lows due to heavy price competition. "They were cutting costs so they could cut prices as a way to attract more customers," Mr Stockdale says. "This meant cutting expenditure and not reinvesting in infrastructure."

Today, the cost-cutting has resulted in a halving of the number of petrol stations, even though more fuel is sold than 20 years ago, the population is bigger, and there are more commercial vehicles on the road.

"The overheads per litre back then were very high," Mr Stockdale says.

"In order to compete, they sold off the marginal stations that didn't have high turnover.

"The industry got to the point where it couldn't cut costs any more and they started raising concerns about whether there was enough storage at ports, keeping in mind they're storing more fuel.

"It was a case of underground tanks needing to be replaced."

The cost of replacing such a tank is between $500,000 and $700,000.

Storage terminals have been closed or converted to diesel in Timaru and New Plymouth, which means a large chunk of the country relies on getting regular deliveries by truck or ship.

"The South Island in particular needs more confidence they can store," Mr Stockdale says.

WITH Z entering the market as the "new" Shell, the scope of the industry is changing again. "Shell was multi-national and always kept prices down and were the first to cut prices as a way of attracting customers. Z came along and bought their assets and basically said that model isn't sustainable."

Rather than leasing the Shell brand, the decision was made two years ago to rebrand as Z at a cost of $35 million.

Mr Hill says: "The brand has responded well to the feedback we received, people love the service offered and we're seeing really good growth in the coffee and convenience food side of things.

"Petrol is a very low-margin business and that's why it's difficult in the provinces for a small family to run a service station.

"The cost of replacing a fuel tank alone just makes it a challenging proposition for small businesses."

There's been some recovery over the last few years, with margins trending up. But over the past decade or more, margins have been reasonably flat.

"Fuel companies have made savings by closing services stations and, from the minute Z was rebranded, there's been concern about the level of profitability," Mr Hill says.

"We've seen a lack of investment in the system and to change that we need margins to support it."

A lack of investment in replacing or building new storage tanks to meet demands means trucking costs have skyrocketed. Diesel storage tanks are cheaper to maintain and consequently many have been converted from petrol.

"Over the last 20 years the available storage compared to demand for fuel has seen a real gap," Mr Hill says. "This is being met by trucking, and the industry has been struggling to sustain that."

Proof a business model based on price cuts and closures isn't sustainable is the overwhelming net losses recorded in 2009 by three of the four big fuel companies, Mr Stockdale says.

"Even though prices were relatively high and there were near record prices in 2008 for oil, which saw people paying nearly $2.20 a litre, they still had losses."

It's a picture that highlights how the current model is not working.

"At that point Shell got out of the market, Mobil tried to sell but couldn't, and Chevron sold all its Caltex stations to independents. Basically mums and dads.

"Cutting margins to the bone and not reinvesting works short- term, but it's not a business strategy for the long term."

SINCE Z came into the market, pricing has changed, service has returned to service stations and there's more emphasis on loyalty programmes, and margins have risen.

"Margins are now higher than they have been in the last decade but not as high as they were 20 years ago."

Z would argue that margins need to be higher still if the retailers are to invest in desperately needed infrastructure that was ignored for so long.

"But for the AA, it's about watching when margins increase and whether they fairly reflect the increase in costs for companies," Mr Stockdale says.

Gull New Zealand general manager Dave Bodger says the company is brutal about keeping costs as low as possible to help keep pump prices down.

The company's "functional" Takapuna, Auckland office has nice views but it is notably not on the top floor.

Mr Bodger breaks down the cost of petrol like this: If Gull bought a barrel of refined petrol in Singapore on Thursday this week, it would have broken down to a cost of 88 cents a litre.

On back-of-a-napkin calculations, shipping to New Zealand would have increased the cost of that litre to 93c, port costs would take it to 93.5c. After storage in New Zealand, they would be looking at 95c.

Trucking costs vary but are roughly 2c a litre, taking the litre to 97c.

Then comes excise - the one that is about to rise by 3c, ACC levy, the petroleum fuels monitoring levy, and the local authorities petroleum tax which, combined, take the cost to $1.58. GST takes it to $1.81 - all before Gull makes a cent.

This week Gull's pump price was between $1.99.9 and $2.04.9, leaving roughly 20c a litre.

But the costs don't stop there, Mr Bodger says. Gas stations have to be built, operated, maintained, insured, and staffed out of that 20c margin. Credit card companies take 2c to 4c a litre.

Whatever is left is split between Gull and local operators. Then there are the people who drive off without paying.

Regardless Mr Bodger remains optimistic. "You sell some Moro bars, pies, and water."

There is also the fact that shouldn't be forgotten - Gull remains in business.

As does BP.

Spokesman Jonty Mills says things are tight for all the reasons mentioned - if a litre of petrol costs $2, $1.80 of that is made up by uncontrollable costs.

But, compared to a couple of years back, returns to companies are now better and they need to be. Put simply, investors will not build new gas stations or upgrade terminals if the money is not there.

NEW TAXES PREDICTED

 

BIOFUELS and environmentally friendly cars are already changing the face of the fuel market.

It won't be long before the Government will be forced to look at a tax on new fuels and cars, says New Zealand Automobile Association spokesman Mark Stockdale.

"Over time as cars become more efficient we're seeing excise tax go up, as happened with last week's announcement.

"The Government has to keep raising taxes as a result of more efficient fuels and hybrid cars on the market because it means there's less demand for fuel."

Any drop in demand brings a decrease in the excise pool that relies on a certain amount of money to sustain the transport fund.

"Because it's only road users that contribute to that fund, the only way to top it up is to increase tax," Mr Stockdale says.

Other countries are already looking at the possibility of road-user charges for new cars and fuels that enter the market.

"There's going to come a point that New Zealand needs to do that also."

Z Energy is already contributing to the growing environmentally friendly car industry with two-thirds of its corporate vehicles now hybrids.

Z spokesman Jonathan Hill says the company is in the process of switching over the last of its fleet.

"Petrol demand has been flat in New Zealand for a few years now," he says. "We're increasingly seeing people swap their petrol cars to diesel vehicles."

Z Energy is in a position to look at alternative fuels as the company does not operate under a parent company and is not an oil or gas producer.

"We're a transport energy company, rather than a fossil fuel company, so we have the freedom and opportunity to look at options."

PRICE HIKE FEARS

 

DRIVERS love nothing more than saving a buck at the service station.

It's a Kiwi behaviour that has led to supermarket chains offering petrol discounts to drive people through the door to shop, says Coriolis Research retail analyst Tim Morris.

"Supermarkets offer lots of different discounts. There's buy- one-get-one-free, buy-two-get-one free, 5 cents off, 50 per cent off and many others.

"They're always trying a new gimmick and they've got a big bag of tricks."

The supermarket chain pays the "vast majority" of the cost of a petrol discount docket, not that Z Energy spokesman Jonathan Hill would put a figure on what the deal costs the fuel company.

"I'm not going in to numbers but the petrol stations pay a small percentage."

If a supermarket hands over a 10-cent discount on petrol and the shopper has spent $200 to obtain it, then it's only a $5 saving at the petrol pump.

"So when you think about it like that, it's not that much of an expense for supermarkets," Mr Morris says.

In fact, a 30 per cent discount on a product would be a far better discount for consumers but it's the scare of petrol price hikes that have people thinking they've got a good deal.

"It's a bit of a psychology and people think petrol is ridiculously expensive and want to be getting any kind of discount they can on it."

Mr Morris says it's the suppliers that have the promotion allowance for discounts and they cover the cost of doing so.

"Roughly every $1 spent at a supermarket means about 5 per cent of that is profit."

- The Dominion Post

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