Submitted: Friday, Apr 11, 2008 at 11:05

Fuel Prices – What’s a fair view?

Much is said about the role of governments in containing the price of fuel and this view often permeates throughout the ‘fuel price’ threads on Exploroz. A recent thread (#56477) is an example. But is it a fair view?

I believe governments do care about fuel prices, but exactly how are they supposed to stop market forces pushing the price of oil higher?

Sure they control the tax element and we can argue that the fuel taxes levied add to the cost of fuel, but by and large that is static because it isn’t levied on the price it is levied on the quantity and it doesn’t change with the price of fuel contrary to popular belief. Besides it is a tax, take it away from fuel and the government will either need to curtail spending or raise taxes elsewhere. Overall we won’t be better off we’ll just be transferring the tax liability elsewhere.

Oil price shocks have occurred before and under governments of all persuasions and their inaction is often seen as a ‘don’t care attitude’ but the central question remains, just what do they do to stop market forces bidding up the price of oil?

There is plenty of legislation in place to enable the authorities to ‘pounce’ on oil companies and refiners if there is a belief they are acting contrary to the law, however the lack of prosecution confirms, despite what many choose to believe, that they are acting within the law. Rapid price changes are often seen as collusion and contrary to the interests of the consumer. But are they? (more on this later). And while we are on the oil companies, sure their profits vary over time with some considering they are excessive, but do an analysis over a longer time period and you’ll find that average profits are not extraordinary versus the capital investment they make. I’m sure those with excess funds to invest ensure they get the best return on their investment. I guess oil companies are much the same.

The best and possibly the only thing that consumers of petroleum products can do to insulate themselves from elevated prices is to take advantage of the price discounting cycle and to buy at the low points in the cycle. Sometimes this won’t be possible, such as peak periods when the discounts are removed, at Easter for example, but over the course of time, say a year, you will at least achieve savings versus the average cost. And this is how fuel purchases should be viewed – what is the average price I pay over a year? I’ll acknowledge at this point that discounting is usually contained to the major populated areas in Australia and is limited in rural areas.

The cry goes out as to why we get ripped off by fuel companies putting up prices at peak periods such as Easter? But why single the oil companies out? Ever tried to book an airline ticket just before Easter or get a plumber out on Easter Sunday? And by the way your local restaurant has whacked a whopping 15% on the bill for your privilege of eating at their establishment when you should be at home eating Easter eggs. Fuel companies are not the only people that will adjust pricing or remove discounts at periods of peak demand or inconvenience. If you have ever tried booking a slot in a Broome caravan park during the annual grey nomad migration you’ll now precisely what I am talking about; supply and demand at work. Textbook economics tells us what to expect in these situations; the price goes up until supply and demand return to some sort of equilibrium.

Let’s not forget that fuel is a highly commoditised product, almost like liquid gold and its value will change rapidly in response to market conditions, whether they are supply or demand shocks, changes in the value of oil or the Australian dollar, perhaps factors affecting the refining process. In part, this is one of the reasons we see trending price changes. The fact that it is a highly commoditised product is a plus for the consumer because at the end of the day the product supplied does not vary between suppliers and the consumer is almost indifferent to where his supply comes from. The oil companies are well aware of this and this is why they engage in price discounting.

Those that continually argue that the government should stop the abrupt price changes in the price of fuel need to consider exactly what they are arguing for. The abrupt changes in the price of fuel occurs when pricing support to retailers of fuel is either given or removed and is part of a discounting cycle. Importantly, it means fuel is being discounted versus the terminal gate price. The upshot is that on certain days in certain areas you will have the opportunity to purchase fuel at a discounted price. Once the discount is removed the price will rise, rapidly in a lot of cases as the retailer does not want to make a loss on fuel sales.

Those that argue for the abrupt price changes to stop are effectively arguing that they want to pay a higher price for fuel everyday. Think about it, how can we be better off without a discounting cycle? Are we advocating we want to pay the full price every time the gauge is pushing empty?

The fact that the price of fuel continues to become more expensive is another issue altogether. It is linked to something we have little or no control over and we can argue the toss on whether it should be 10 cents higher or lower on any given day, but to what avail if the price of oil is trending higher.

Focus on the things you have control over, take advantage of the price discounting cycle and you’ll at least be on your way to getting some relief versus the average price of fuel.

The Landy

Tags: Fuel, News & Current Affairs
Views: 548

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