Why are we paying so much for our petrol?

By FIONA ROTHERHAM

New Zealand has become more dependent on imported oil as prices skyrocket. We examine the factors driving that increase.


Crude oil prices this week rose to their highest levels since reaching US$32.90 a barrel in November 1990, on the eve of Operation Desert Storm in the Gulf War.

September contracts for North Sea Brent crude on the International Petroleum Exchange in London, Europe's largest energy market, rose above US$32 amid concerns by traders that the world's largest producer, Saudi Arabia, has curbed output.

Petrol prices have been going up since the middle of last year when the Organisation of Petroleum Exporting Countries (Opec) put the squeeze on international supplies.

This reversed a world glut that had sent crude prices to a 10-year low in December 1998.

Production levels are expected to be increased at next month's Opec summit, but not dramatically as the producers safeguard their interests.

New Zealand has become more dependent on imported oil.

The latest figures show our self-sufficiency in oil has declined to 36 per cent in the year to last March, compared with 44 per cent the previous year.

Crude oil imports rose 25 per cent on the previous year, while domestic production of crude oil and related products fell 18 per cent.

What influences the price motorists pay for fuel?

The two biggest drivers are the cost of crude oil and the exchange rate.

Crude oil accounts for about 26 per cent of the total cost of fuel.

Challenge's Bob Constantine says that since March 1999 the exchange rate has softened 17 per cent while crude prices have risen 150 per cent.

A further 4c or so in GST costs has not been recovered, he says.

The weaker Kiwi dollar makes it more expensive to buy the same amount of crude or petrol.

A shift of US1c in the exchange rate equals a NZ1c a litre change to 91 octane fuel prices.

Where does New Zealand's oil come from?

About 60 per cent of petrol sold in New Zealand is refined at the Marsden Point refinery and on-sold by the big four retailers: BP, Shell, Mobil and Caltex.

The rest is imported in other crude or refined form from several countries.

The cost of refined fuel products can affect prices at the pump more than the crude oil price.

How are the prices set that our suppliers pay?

There are three main international benchmarks quoted for crude oil prices - Brent sourced from the North Sea, West Texas Intermediate from the United States and Dubai from the Middle East.

Prices for other crudes are benchmarked against these depending on quality.

The Brent, WTI and regional crudes are currently over the US$30 a barrel mark.

The industry here usually benchmarks against the Dubai and about 50 per cent of crude is sourced from the Middle East.

Dubai crude peaked at US$28.41 in March, settled back to US$20.58 in April and this week went up to US$26.81.

Oil produced in Taranaki and refined at Marsden Point is priced according to what the world is prepared to pay, usually benchmarked against Tapis crude, which comes from Indonesia.

The price for refined product is also set on an international market basis rather than at each refinery.

For this region, prices are set through the Platts broking house in Singapore, and are based on a mean of the high and low price recorded that day.

Refined product is sourced from a variety of countries, predominantly our closer neighbours, such as Australia, to save on freight costs.

What is forcing oil prices up?

The simple law of supply and demand.

There is increased demand from the recovering Asian economies and also from the United States, the world's biggest oil consumer, following concern over skimpy oil stockpiles.

Although there is usually a regional excess of refinery capacity, several unplanned shutdowns at Marsden Point in recent weeks are affecting supply and the price.

Refined product prices are rising at a faster rate than crude oil prices because there has been a lift in refinery margins.

When do oil companies pay for what they order?

The price is based on an average set within a range of several days around the time of loading the product for delivery.

Payment is in US dollars and usually due 30 days after loading.

Oil companies usually order about three months before delivery without knowing what they will be required to pay.

Do oil companies have forward currency protection?

Some do and some don't. Most oil companies have a natural hedge on price fluctuations through being both a producer and retailer.

Some say it is riskier to hedge volatile prices than to ride the market.

How quickly are crude oil price increases reflected at the retail pump?

The key issue here is replacement cost.

Oil companies charge what it would cost them to replace the fuel rather than what they paid for it.

In the past, the oil companies have been prepared to absorb costs for up to six weeks until a definite up or down trend emerged.

In today's competitive environment, tightened margins mean they are much quicker to pass on price changes.

This can happen within days or a couple of weeks depending on the competitive situation.

They may absorb costs for as long as their competitor does.

The oil companies claim they drop prices as fast as raising them.

Pump prices vary around the country and are usually lower in areas where the new market entrants, Gull and Challenge, operate.

And as Deputy Prime Minister Jim Anderton wants to know, why do oil companies follow each other's price increases so quickly?

It is illegal for the companies to collude and discuss petrol pricing with their competitors.

However, they match each other's prices because they all face similar cost pressures when world oil prices go up.

All petrol sold in New Zealand has to meet specifications set by regulation and is therefore virtually identical.

The Ministry of Economic Development said in a March briefing paper: "It follows there is very limited scope for variation in retail prices."

Five years ago there was no vigorous competition, but that has improved significantly with the entry of the two independents.

How much are the oil companies making?

The ministry has said retail petrol price increases do not appear to be greatly out of line with international price movements of crude oil and refined product.

Prices had jumped 35c a litre since March last year until this week's latest rises.

Importer margins are the difference between the New Zealand retail and import petrol price. These margins have been falling since 1996, giving consumers a better deal.

According to the ministry, the importer's margin is currently about 14c a litre.

Out of that comes domestic distribution and retailing costs, and wholesalers' and retailers' marketing margins.

BP says it makes about 1c for each litre of petrol sold here.