Hairy Eye on Fuel Prices

So let’s pick apart the ACCC’s rationale and see what we think.  After all, we’re paying for this fuel, not the ACCC.

Now, in attempting this noble venture, we do run into some challenges.  The ACCC (as reported on the AIP website) lists the kind of things that have to be covered by the markup, but doesn’t put actual figures against them.  They do give us an overall expectation that city markups will amount to between 3 per cent and 5 per cent of pump prices.  To be generous, we’ll take the 5 per cent figure, which means the markup should on average total about 6.7 cents.  They also tell us that the profit margin should be precisely either 1.3, 1.35 or 2 cents per litre.  Again to be generous and forgiving, we’ll go with 2 cents.  For the purpose of our analysis, we’ll just assume all the other costs are equal.  It won’t change the outcome significantly.

So check out the left-hand city markups column, starting at the bottom and using the legend to see what the various colours represent.  We do find we have to pop a light-green extra “Unexplained markup” on top to make their 6.7 cents match the actual 7.7-cent markup we see in Sydney.  But hey, Sydney’s problem, not ours, eh?

Now shift to the middle column – the column that shows what the ACCC thinks is a fair price for around here.  Their starting point is the city price, so you’ll see I’ve simply carried over the complete left-hand column, including the unexplained markup.  The ACCC then adds two more components – an allowance for transport over and above the Sydney transport allowance (in purple), and their assumption that regional servos have to charge 4c/l more to allow for selling only half the amount of fuel (in orange).  That bumps their expectation of local markups up to 13.6 cents per litre.

But now, let’s clear our minds of their approach, and do our own estimate (the right-hand column).  Firstly, starting at the bottom, you’ll see I’ve ditched the allowance for transport to Sydney.  If our fuel isn’t going there, why should I include that?  And you’ll see I’ve reduced all the other “fixed costs” by 25 per cent.  marketing costs – do our servos even do any marketing?  Ad-

ministration costs, wages, rent, utilities (electricity, water, etc) – do we really think our mostly little old local servos cost anything like big Sydney servos to build, buy and run?  I’m probably being far too generous at cutting them by only 25 per cent.

To provide a little extra incentive, I’ve allowed them to keep the mysterious unexplained markup.  And I’ve factored in an allowance for transport to here, based on the ACCC’s vague estimates.

But I haven’t factored in the ACCC’s extra profit for regional operators allowance, because I can’t see it’s warranted.  The costs it’s supposed to meet have already been factored in and covered.  So I come out just over the Sydney price.  If you wanted to offset their alleged loss from selling only half as much fuel, then add 2 cents per litre extra, not four.  Where did they get four? About now, you’re probably thinking is the Hairy Eye modelling even credible?  I think so.  Rationalise it like this.  Yes, the fuel has to come a bit further, but the fuel transport business is remarkably efficient.  And our roads are generally free-flowing, unlike Sydney’s long thin parking lots.  And we’ve allowed more than double to get it here. And sure, our servos don’t move as much fuel, but they don’t incur the kind of capital and running costs a big Sydney servo incurs.  

The comparison is not all one-sided, as we’ve been groomed to believe, but swings and roundabouts.  We’ve been gouged on both!

And here’s the beautiful thing.  If anyone wants to prove me wrong, all they need to do is present the audited figures….

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Hairy Eye on Fuel Prices April 15.