Crude oil, petrol and diesel are different products and are bought and sold in their own markets. Each market is typically regionally-based and there are linkages and transactions between regional markets. Prices in regional markets reflect the supply and demand balance in each market and the physical characteristics and quality of each commodity. Prices in regional markets can be volatile and can move in different directions from each other. This can be due to the impact of factors and events unique to one market – such as supply and demand pressures in a region, hurricanes, wars and civil unrest. This is why focusing on relevant markets and longer term price trends is more important than daily or week-to-week price movements. Australia’s regional market for petroleum products is the Asia-Pacific market. Key crude oil pricing benchmarks for the Asia-Pacific market including Australia are Tapis, Dated Brent and Dubai – not West Texas Intermediate (the US market benchmark) widely reported in the media. The Singapore price of unleaded petrol (MOPS95 Petrol) is the key petrol pricing benchmark for Australia. To meet Australian fuel demand, around 15-20% of petrol is imported (mainly from Singapore). Singapore is the regional refining and distribution centre and among the world’s largest. If Australia’s petrol prices were below Singapore prices, Australian fuel suppliers would have no commercial incentive to import to Australia (because sales of that fuel would be at a loss here). In addition, Australian refiners would have an incentive to export production. ‘Refiner margins' are the differences between product prices and crude oil prices – both of which are set by the market, not by oil companies (e.g. a Singapore petrol ‘refiner margin’ = MOPS95 Petrol price minus the relevant crude oil price).
AUSTRALIAN WHOLESALE PRICES
Australian wholesale prices for petrol and diesel (including spot Terminal Gate Prices or TGPs) are closely linked to the Singapore prices of petrol and diesel – not to crude oil prices. This relationship has been in place for many years. According to public statements, Australian fuel wholesalers use a pricing methodology very similar to that used by the ACCC when wholesale prices were regulated by government. This pricing methodology is called import parity pricing or IPP and it is based on what it would cost to import fuel into Australia. Recent movements in Singapore petrol prices and Australian TGPs are shown in Figure 1. The Singapore price of petrol plus shipping costs and Australian taxes represents almost the entire wholesale price of petrol – typically around 95% (as shown in the chart below). Australian taxes include excise (38 cents per litre) and GST (10%). The remaining 5% of TGPs is accounted for by insurance, a quality premium for Australian fuel standards, local wharfage and terminal costs, and a wholesale marketing margin (where competitively possible).
FIGURE 1: Comparison of Singapore Petrol Price (MOPS95 Petrol) with Australian ULP TGP Cents per litre ($A) 170 150 130 110 90 70 50 30 01/02/11 01/05/11 01/08/11 MOPS95 Petrol
MOPS95 Petrol Plus Shipping & Taxes
National Average TGP ULP (Wholesale)
Note: MOPS95 Petrol prices and Shipping rates are provided by Platts (McGraw-Hill Inc).
Generally, there is a short time lag of 1-2 weeks between changes in Singapore prices and changes in Australian wholesale prices. The lag can be observed in Figure 1 above (i.e. see the slight delay in the peaks and troughs in the pink line (National ULP TGP) compared to the purple line (MOPS95 Petrol plus Shipping & Taxes). The lag is a result of using a rolling average of Singapore prices; the rolling average smooths price volatility from day-to-day. Importantly, this time lag occurs whether prices are going up (when the lag...