Chapter 6 - Petrol Prices in Country Areas
Introduction
6.1
Inquiry after inquiry has found that consumers living outside of
metropolitan areas pay more for petrol, sometimes significantly so. During a
time of rising prices the differentials can be especially marked. Although it
is widely acknowledged that higher freight costs incurred in longer transportation
distances add to country petrol prices, this is not the only expense
contributing to higher prices in many regional, rural and remote locations.
6.2
As discussed in Chapter 3 – The Petrol Price Rollercoaster, the retail
price of petrol reflects the wholesale price plus a number of other factors,
including freightage and distribution costs, but the price is also influenced
by the relative absence of competitive pressures in many local markets, both at
the retail and wholesale level. Furthermore, a lower turnover rate of petrol at
retail sites often leads to higher prices at the bowser. These factors, as well
as a range of other influences which lead to country consumers[1]
paying more for petrol, are examined in this chapter.
Are country petrol prices really higher than city prices?
6.3
The Australian Automobile Association (AAA) described consumer sentiment
towards rising petrol prices, and in particular, the country and city price
differential:
...motorists find it difficult to understand why prices can vary
so much from place to place. This is particularly the case in rural and
regional areas, where prices are higher than in the capital cities...during the
past 18 months, there have been occasions when the differential has
increased dramatically in some locations.[2]
6.4
The Sustainable Transport Coalition WA submitted that whilst higher
petrol prices in country areas are justifiable to an extent, significant price
differentials are not:
It is obvious that those roadhouses which are isolated and have
to provide their own power generation and sustenance will have higher operating
costs than those in the towns, and this will be reflected in even higher retail
fuel prices at such roadhouses. However, some instances of petrol pricing in
(WA's) north west could bear scrutiny. It seems difficult to justify cases
where fuel is sold up to 32% higher per litre than Perth city prices.[3]
6.5
The higher cost of fuel in the country not only adds to the weekly costs
of transport borne by consumers, but residents also experience a general
increase in the cost of living and doing business when fuel prices are high.
Additionally, much of their travel is non‑discretionary, there are few if
any alternative transport modes, and the distances that people drive are often
greater than those of people living in metropolitan areas:
For Queensland’s Outback and remote business operators,
communities, and householders, fuel is an essential part of life. Fuel prices
impact on business and enterprise financial decisions and priorities, as well
as communities’ and householder’s quality of life and lifestyle.[4]
6.6
A number of personal submissions described the limited alternatives
available to country residents:
A lot of us do have to use our own car as there is no transport
in a lot of rural areas. [I] can't carpool as there is no one to carpool with.
I'm sure I'm not just speaking for myself here. How can people put up with it?[5]
It must be realised that we do not have services to our door
like urban dwellers, for example, even our garbage must be transported to 'collection
sites' for disposal. It is not economical to perform this task daily with one
bag of garbage, so it is collected until a trailer load can be transported,
likewise...water is essential...[and] must be transported from the public
bores...this demonstrate[s] that vehicles of a suitable power to weight ratio
must be utilised, [so] reducing petrol bills is extremely difficult.[6]
6.7
The Remote Area Planning and Development (RAPAD) Board reported that the
cost of living in a remote community like Boulia (located 1 719 km from
Brisbane, 305 km south of Mount Isa and 364 km west of Winton) was already
double the cost of living in a larger provincial centre like Toowoomba.[7]
6.8
Figure 6.1 illustrates that the average price of petrol in metropolitan Sydney
as compared to NSW country is consistently lower for the period July 2005 to
June 2006 and the extent of the differential can vary quite significantly.
Figure 6.1––Average monthly
retail prices (Sydney and NSW country)[8]
6.9
Mr Jim Turnour noted that communities in Far North Queensland are
particularly dependent on the tourism industry and rising petrol prices have
reduced the number of domestic tourists travelling to Cairns, Douglas Shire, Cape
York and the Torres Strait:
Our communities are therefore experiencing hardships in a number
of ways as a result of spiralling petrol prices.[9]
6.10
The RAPAD Board commented that the latest statistics from Tourism Queensland
showed an eight per cent fall in tourism to Queensland's outback and that
anecdotally, higher fuel prices have been a major factor influencing the
decisions of potential holiday makers to the outback.[10]
The self-drive tourism market is especially threatened by rising petrol prices:
It is cheaper to fly to Bali from Melbourne return than to tow a
caravan from Melbourne to Winton and return as part of a holiday. A Melbourne
to Bali return airfare including prepaid airfare taxes, 7 nights'
accommodation, plus free full breakfast daily is currently being promoted at
$744. The indicative fuel cost of towing a caravan from Melbourne to Winton and
return is $1270.[11]
6.11
However, Caltex disputed the claim that a large price difference exists
between country and city petrol prices, stating that in the first half of 2006 there
was 'only a small difference on average between the average prices of petrol in
regional and metropolitan areas when freight is excluded, apart from WA',
accounting for an average difference of 2.2 cents per litre (cpl), not
including freight and excluding the WA market. This was argued to be similar to
the historical average.[12]
What factors contribute to the price of petrol in country areas?
6.12
The margins set by retailers are dependent on factors such as the average
volume of sales, the ability to retail goods and services other than petrol,
and the level of competition in the area. A retailer must have sufficient
margins to make a profit and keep the business viable. Country service stations
typically sell less than half the fuel of a metropolitan service station and
unlike metropolitan service stations, those in country areas tend to rely
primarily on their petrol sales to maintain the business, so they require
higher profit margins.
6.13
When questioned about the impact of the volume of sales on petrol
prices, Dr John Tilley from the Australian Institute
of Petroleum (AIP) told the Committee that there are many other factors which also
add to petrol prices in regional, rural and remote locations:
Senator JOYCE—In a local market then if I
were to go to Kalgoorlie where there is a massive amount of diesel used, I
would expect a cheaper price for diesel, wouldn’t I?
Dr Tilley—What you would expect in Kalgoorlie
is the underlying price level to reflect the wholesale price of diesel, plus
the local area factors and competition. How much does it cost to freight diesel
to Kalgoorlie? Is it double-handled along the way? Is it stored in depots so
the distribution and handling costs are higher? What is the nature of the
market in Kalgoorlie? How many service stations are located in that market?
What is the nature of competition between those service stations? What is the
average customer base for each of those sites? Do they have the opportunity to
move large volumes of diesel over time?[13]
6.14
The experience of operating a fuel retail outlet in a remote location
was described by Mr Michael Carr:
It does cost more to service the
country. I spent five years on the Nullarbor, running service stations there,
and we do hear a lot of complaints about the price of fuel in the country, but
there are a lot of extra costs such as freight, power and water.[14]
6.15
The key influences driving the country and metropolitan price
differential, such as freight, transport and distribution costs, local market
competition and the lack of price cycles in country markets, are canvassed
below.
Freight, transport and distribution
costs
6.16
The further away a fuel retailer is from a refinery terminal, freight
and transport charges will be higher, whilst the retailer may also have to pay
a distributor for fuel acquisitions, thereby creating an additional expense.
Caltex Australia estimated that freight is typically 1.5 to 3.0 cpl greater for
country deliveries as compared to deliveries in metropolitan locations. Whilst
freight and transport costs are perhaps the most widely publicised cause of
higher country petrol prices, as pointed out by Mr Turnour, the difference in
petrol prices cannot be explained by distance alone:
Cairns regularly experiences fuel prices greater than those in Innisfail
and Atherton. Both of these are smaller centres approximately 100 km from Cairns.
The arguments that service stations need to charge more because of higher
transport costs or smaller volume of sales do not hold up in these
circumstances. A lack of competition in the Cairns market is enabling service
station owners to price gouge local consumers.[15]
6.17
In terms of the WA petroleum market, the Royal Automobile Club of
Western Australia (RACWA) stated that whilst it is difficult to generalise
about costs, it is estimated that in many cases transport costs are only a
minor influence affecting the price of petrol.[16]
6.18
The costs of acquiring wholesale fuel from a source other than directly
from the refinery terminal, such as from a regionally-located storage depot or
from a distributor servicing the country area region, can also add further
expense to retail petrol prices. Where a retailer is able to source petrol
directly from a refinery terminal, then the wholesale price the retailer will
pay is generally lower. Purchases from a distributor (via a storage depot),
however, results in higher handling costs incurred by the fuel retailer and
additional expenses will be reflected in the retail price. BP submitted that
its direct retail activities in regional Australia are 'almost non-existent'
because the company sells petrol to distributors who then on-sell the BP
product to retailers.[17]
Competition in local markets
6.19
Caltex Australia summed up the key reason for the price differential as
competition:
In almost all cases, these differences are the result of local
competitive factors, including site volumes and site density, the presence of
discounters including supermarkets and the impact of new entrants seeking to
establish volume.[18]
6.20
The Committee found that while many people recognised that competition
in the local market has an impact on prices, concern remains as to why country
petrol prices do not fall at the same rate as those in metropolitan centres
following international price drops:
There is certainly a lack of competition and, in any particular
fuel retail outlet, volumes are much lower in these remote parts than they are
in the heavily populated parts of the country. So we recognise it is necessary
for the retailer to have a higher cents per litre mark-up on his product in
order to cover his overhead costs. But the bit that hurts is that price drops
at the retail level seem to be far quicker in the cities than they are out
here.[19]
6.21
Councillor Stanley Collins from the RAPAD Board described the impact of
reduced competition on country petrol prices:
I do not think that the claims have ever come from this region
that we are cross-subsidising or subsidising city consumers or that fuel
companies are jacking the price up out here to put a lower than cost price in
the cities. But they find it very easy because of the lack of competition just
to take an undue time to drop their prices here. Their margins are pretty good
out in these areas because of that.[20]
6.22
There is generally a time lag of around one to two weeks between changes
in these prices and price changes at petrol bowsers due to the averaging
formula used by refiners in Australia and the frequency of changes to terminal
gate prices. This lag is generally longer in country areas because petrol
stocks are replenished less often by wholesalers and retailers, due to the
generally lower volume of sales. This accounts for why a change to the
international price of petrol or crude oil tends to be reflected more rapidly
in metropolitan areas, as compared to that in country areas.
6.23
Locations which have a small population and perhaps little traffic
through the town are also likely to have fewer service stations and therefore
less competition, and higher margins may be needed to ensure the business is
financially viable and sustainable into the future. Fuel retailers located in
country areas that are close to or on major highways will tend to generate
higher volumes of sales of both petrol and other consumer goods, so these sites
may be in a position to offer a lower price for petrol. Alternatively, if they
are the only fuel retailer in the location or one of very few retailers, then
the retailer may be in a position to charge higher prices because of a lack of
local competition in the market.
6.24
Furthermore, greater competition in the wholesale market generally means
fuel retailers are able to secure supply at a lower price and so the relative absence
of competitive pressures not only in the retail market, but also in the
wholesale market in country areas means retailers have a reduced ability to offer
lower prices to consumers.
Lack of price cycles
6.25
Reduced competitive pressures in the market of country locations
generally results in regular price cycles being uncommon and consequently, country
prices are more stable than in metropolitan areas. Whilst some country areas do
have regular cycles, these tend to be located in areas close to metropolitan
cities. Figure 6.2 illustrates the level of price movements in Tamworth, New
South Wales as an example of the extent of price movements in a regional hub.
Figure
6.2––Average daily retail prices for Tamworth (April–June 2006)[21]
6.26
This compares starkly with average daily retail prices over the same
period for Sydney, as shown in Figure 6.3.
Figure 6.3––Average daily
retail prices for Sydney (April–June 2006)[22]
6.27
Although a marked difference in petrol prices is apparent between cities
and country areas, the Committee received evidence that in some regional locations
the differential is declining. For example, the difference in prices between
Bunbury and Perth has declined. In January 2004, consumers paid on average
eight cpl more than in Perth, whilst in September 2006 the differential had
dropped to just under 5 cpl on average.
6.28
The entrance of a major new competitor to the Bunbury market appears to
have produced lower prices. Mr John Bain described the positive affect of increased
competition in this country market:
Coles Express has really put a cat amongst the pigeons. There
were two of them. Caltex and Woolworths on two sites were the only two that put
a cat amongst the pigeons. Now there are six.[23]
6.29
The differential between Busselton and Perth, and Kalgoorlie and Perth has
also declined. This phenomenon can also be observed in data provided to the Committee
from the RAPAD Board which compares average petrol prices in Brisbane and
Longreach between June 1998 and June 2006.[24]
This was supported in evidence submitted by the RACWA (included at Figure 6.4),
which illustrates the declining price differential between Bunbury and Perth.
Figure 6.4––Bunbury and Perth
price differential[25]
6.30
However, in other regional areas such as Albany and Geraldton the price differential
has remained steady whilst the differential between Port Hedland and Perth is
increasing:
The point we are making here is that it is difficult to
generalise about the trends in regional prices. There are local, geographical
and economic factors that tend to be pushing things one way or the other.[26]
Do petrol taxes impose a greater burden on country consumers?
6.31
As discussed in Chapter 5 – Petrol, Excise and GST, higher petrol prices
attract higher amounts of GST. Several submissions argued that GST on fuel in
regional, rural and remote communities should be abolished or lowered.[27]
The RAPAD Board submitted that outback residents are paying an additional 1 cpl
or more GST on their fuel purchases.[28]
Mr Turnour argued that this is discriminatory towards non-metropolitan
consumers:
It is completely unfair for communities in the Torres Strait to
be paying 7 cents per litre in GST more than those in places like Brisbane
and up to 15 cents more GST per litre in the outer islands.[29]
6.32
Mr Robert Parry proposed that the GST on fuel is removed in tandem with
an increase of 7 cpl to both fuel excise and the Fuel Tax Credits, and the
additional 7 cents collected in excise revenue could be distributed among
the State and Territory Governments at an agreed ratio.[30]
Mr Parry's submission also suggested a number of reforms to simplify the
collection of excise revenue.
6.33
Lower excise rates for fuel purchases in non-metropolitan areas were
also proposed:
The fuel excise system does not reward Outback and remote
business operators, communities and householders. It is discriminative,
increasing the cost of transported items through the compounding effect of the
fuel excise...
...The higher fuel price provides the opportunity for the
Australian Government to revert to the fuel excise system that existed prior to
1959. This would mean the removal of fuel excise as a means of raising general
revenue but hypothecated towards those areas from which it is collected –
expenditure on roads, rail, air transport.[31]
6.34
However, the Committee notes that those who are eligible for Fuel Tax
Credits would not benefit from such a measure because they are already
effectively paying reduced or nil excises on fuel. Mr Michael Potter from the
Australian Chamber of Commerce and Industry (ACCI) told the Committee that
reforms to the petrol taxation structure to assist country consumers would be
difficult to implement:
You could argue that fuel taxes should be lower in the regions.
That is probably too hard to implement, though. The Government had the Fuels
Sales Grant Scheme designed to keep down the price of fuel in rural and
regional areas, but most analysis showed that it was not hugely successful at
keeping down fuel prices in rural and regional areas.[32]
So what can be done to reduce country petrol prices?
6.35
Given that competition has been shown to make the most significant
contribution to lowering petrol prices in country areas, it is clear that consumers
derive benefit from a market which promotes healthy competition between
retailers and wholesalers and the emergence of more competitors into the
market. The example of Coles Express entering the Bunbury market in Western
Australia substantiates this point.
6.36
However, the Committee questions what can be done to help country
consumers, unless new competitors enter the market. The Committee agrees that
the most effective means of promoting competition in regional, rural and remote
areas is to ensure the market is free from unnecessary regulation or controls
which may restrict market growth.
6.37
In terms of intervening in the market, a submitter called for prices
surveillance by the ACCC to be reinstated in country areas to enable formal
petrol pricing investigations and to issue six monthly reports on price
movements.[33]
This view was shared by the NRMA which asserted that:
NRMA believes that the marked price differentials that exist
between regional and metropolitan areas (and which have increased substantially
in some locations) are sufficient justification for greater scrutiny by the
ACCC of petrol pricing in rural and regional areas. The ACCC should be given
sufficient powers to investigate the extent to which regional price differences
in automotive fuels reflect increased costs of distribution and marketing as
opposed to opportunistic price behaviour.[34]
6.38
The ACCC continues to monitor the city-country retail price differential
and retail prices in approximately 110 country towns. If the differential were to
widen significantly, it would increase the scope of monitoring. Matters
relating to the extent of desirable government intervention in the market are further
explored in Chapter 7 – Petrol Market Regulation.
6.39
As an alternative to Australia's reliance on petroleum products, the
RAPAD Board submitted that ethanol has the capacity to lower the bowser price
of fuel.[35]
However, at the hearing Councillor Collins told the Committee that he had mixed
feelings about subsidising ethanol production:
Not only I but everyone living in this part of Australia would
be very keen to see cheaper, alternative energy developed. But if it consumes
grain in particular it certainly impacts fairly heavily against the cattle
feedlotting industry, and much of the cattle coming out of this area go into
that industry. So while we might see cheaper energy we would probably also see
dearer grain prices, which would impact against us in the long term.[36]
6.40
For further information about alternative fuels, readers are referred to
the Senate Rural and Regional Affairs and Transport Committee report on Australia's
future oil supply and alternative transport fuels, tabled in December 2006.
6.41
Boyce Chartered Accountants argued that fuel subsidies would help out
rural communities struggling with rising petrol prices.[37]
It is the view of the Committee that perhaps the most targeted method of
alleviating the burden of rising petrol prices on country consumers is for
State and Territory Governments to review the level of subsidies they provide,
particularly given that all GST revenue collected on petrol is paid to the state
and territory governments. Currently, some jurisdictions provide subsidy
schemes to reduce petrol prices at either the wholesale or the retail level.
6.42
Victoria is the only state providing a subsidy at the wholesale level
(0.429 cpl) whilst jurisdiction-wide retail subsidies are provided in Queensland
(8.354 cpl), Tasmania (1.956 cpl) and the Northern Territory (1.10 cpl). In New
South Wales and South Australia, subsidies are restricted to particular zones;
five zones within New South Wales receive subsidies ranging from 1.67 cpl to
8.35 cpl; and in South Australia subsidies range from 0.82 cpl to 3.33 cpl
within two zones in the state. The Western Australian and the Australian
Capital Territory Governments do not provide subsidies.
6.43
This report has highlighted that whilst perhaps a source of frustration
for some, consumers in metropolitan areas reap the benefits of competitive market
activities which lower the price of petrol or at least provide consumers with
an opportunity to purchase petrol at a better price, such as on days when
petrol prices are at the lowest point of a price cycle. These are opportunities
simply not afforded to many in country areas, particularly those living in
remote locations or very small communities.
6.44
The Committee notes that the extent of subsidies offered in some
jurisdictions is very low or, as in the case of Western Australia and the Australian
Capital Territory, subsidies are not offered. To provide targeted assistance
to consumers in country areas, the Committee encourages State and Territory
Governments to review their existing subsidy schemes to make sure that the
people experiencing the greatest hurt because of rising petrol prices, are the
ones receiving the most assistance through subsidy schemes.
Conclusion
6.45
Petrol prices in rural, regional and remote areas are on average, higher
than prices in metropolitan areas. People in metropolitan areas benefit from
market forces and increased competition, whilst these just do not exist in
markets servicing people living in many regional, rural and remote communities of
Australia and to whom fuel is very much a non-discretionary commodity.
6.46
Although higher fuel prices flow through to higher costs of living in country
areas, other costs such as rent and property prices can be lower which goes
some way to offsetting them. Nevertheless, the Committee acknowledges that
sustained high petrol prices are particularly painful to those in country areas.
Navigation: Previous Page | Contents | Next Page