Why fuel prices remain stubbornly high, according to an economist

The AM Show 01/11/2019

Z Energy's plummeting profit shouldn't be taken as a sign the fuel industry is fixed, a leading economist has warned.

The company on Thursday announced a 74 percent drop in net profit in the year to September, from $139 million the year before to just $28 million.

Chief executive Mike Bennetts blamed growing competition in the retail market and the weakening NZ dollar. 

It comes just a couple of months after the Commerce Commission released its draft report into the industry, which found petrol companies "are earning returns on investment that are higher than what we would consider a reasonable return to be".

But competition at the pump wasn't to blame - the Commerce Commission instead pointing the finger at the wholesale market.

Christina Leung, principal economist at the New Zealand Institute of Economic Research, said their own research backed this finding.

"At the retail level there is actually a healthy level of competition amongst fuel retailers," she told The AM Show on Friday. "Because there are more fuel retailers, that's putting pressure on the margins at the retail end."

Bennetts said there were 20 new sites opening every year, keeping prices in check and showing it's a "highly competitive industry". 

But Leung says while there's competition at the retail end, behind the scenes the wholesale market is dominated by three big players. 

"There's also this whole other area called the wholesale market - that's where the fuel retailers get their fuel from. When we want to answer the question about whether customers are getting value for money, we need to consider this wholesale market as well. It's there we find three areas where there is room for improvement."

Christina Leung. Photo credit: The AM Show

The three major players - Z Energy, BP and Mobil - she says are able to restrict supply to smaller outfits, making it harder for them to stay competitive.

"It just goes to show there's not the supply there for retailers. It's not an easy market for them to access, and that in turn restricts the competitiveness."

The Commerce Commission's draft report went into more detail.

"Z Energy, BP and Mobil currently have a series of infrastructure sharing arrangements that date back to before the fuel market was deregulated in 1988. This includes allocated use of the Marsden oil refinery, a fuel pipeline to Auckland and a coastal shipping operation, with supporting logistics, which transports refined fuel to a network of storage terminals at regional ports," chair Anna Rawlings said in August.

"The majors' joint network gives them a significant advantage over any other potential rival importers, as their costs to deliver fuel are lower. They also have long-term supply relationships with their resellers, most of whom have only ever had the same supplier, which has made it very difficult for competitors to enter or compete more vigorously in the market."

Leung says the smaller retailers get their fuel from the majors at "contracted prices" in processes that aren't always transparent.

"Yes, there's healthy competition at the retail level once they can access that fuel, but if you move back a step and look at the wholesale market and where they're getting their fuel from, that's where there's room for improvement in terms of competition."

Leung said rather than keeping prices down by opening new fuel stations - as Z Energy says is happening - we should look at using the existing infrastructure more efficiently, particularly as electric vehicles replace those powered by fossil fuels. 

This aligns with the Commerce Commission's view that smaller retailers should be enabled to use the majors' infrastructure. 

The AM Show / Newshub reporter Dan Satherley