In recent months the price of Crude Oil has plummeted far below the lowest levels in the past five years. Brent Crude Oil at the time of writing this post sits at US$57.55 per barrel with WTI Crude Oil at a lower US$50.48. January 2010 saw the last drop in prices to a value of circa $70 per barrel.
Here we are with the lowest prices for oil since 1974-75, so why are we the customers still waiting for an equivalent price to drop at our local pumps? The reason is quite simple actually, it’s all based on the competition. The competition all play to the following rules of economics, known as Rockets and Feathers.
It was just over a year ago that Costco began selling petrol, but for most customers that is irrelevant. If you have a Costco near you then it makes a big difference, however. Lets look at the area of Casula in the south-west of Sydney for example, where last March motorists could have saved anywhere between 3 to 8 cents per litre by filling up at Costco compared to another competitor just outside the Liverpool area. During this same period you could save up to 20 cents per litre compared to filling up on the north shore.
Few people are going to drive around trying to save $5 or $10 on a tank of petrol. The time and effort required will eliminate the majority of any savings made. However, the really interesting part is Costco’s pricing and its affects on local competition. You would save money buying petrol at Costco, but you would also save more money buying petrol from Woolworths in Prestons for example compared to Woolworths in Seven Hills.
The reason for lower prices is based on Costco’s presence. Their discount petrol drives down the prices of competition within the local area, hence the reason Preston Woolworths' fuel is cheaper than Seven Hills. The ‘Costco Phenomenon’ is also currently taking affect in Canberra. The Woolworths/Caltex station opposite the new Costco outlet will increase and decrease its fuel prices by as much as 30 cent per litre depending on Costco’s opening hours. The Australian Competition and Consumer Commission has argued for years that petrol prices are affected within their local markets, stating ‘cheap prices in one suburb may have little affect, if any, impact on the other side of major cities.’ Their latest petrol report can give a much clearer insight into the macro and micro market prices, but the general gist is that the increased global supply is not going to suddenly disappear. The expectation therefore being that prices will remain low for the remainder of 2015.
It’s when we start talking about prices on a micro level that things get interesting. The ACCC’s charts show that consumers in rural areas such as Kalgoorlie, Tamworth, and Toowoomba have not received the same price drops as other stations within the major metropolitan cities. In July 2014 for example, Townsville motorists paid roughly 2 cents more per litre compared to their metro equivalents. Fast-forward to December and the gap grew to 20 cents difference per litre. This wasn’t an isolated scenario, in July residents of Alice Springs paid circa 26 cents more per litre compared to city pumps, however come December the price difference grew to 44 cents.
Regional prices will always be higher due to greater transportation distances and lower volumes at the pump compared to city stations, which push the prices up. This market activity is a known economic phenomenon called ‘Rockets and Feathers’.
Rural drivers suffer the slowest falling prices due to a lack of competition within the area. Compare this to cities and there are too many aggressive competitors to lose business to, if the price stays high for too long. When oil prices rise, petrol prices increase rapidly or ‘rocket’. But, when prices fall, retailers respond like a ‘feather’ dropping prices incrementally. The results are still the same, but the consumer loses from every angle, always paying more. It may be some consolation to know that this is not specifically an Australian phenomenon, but happens all over the world for a range of different products.
The ACCC will soon be investigating the different levels of competition in these areas to understand what can be done, but the most beneficial thing in my opinion is to educate the public. Providing consumers with tools to find the cheapest petrol prices will drive more volume to cheaper stations and result in more expensive competitors to reduce their prices to attract more customers. But, sharing information unfortunately can also encourage retailers to keep prices higher due to them all price matching each other. The ACCC is currently in Federal court arguing this very point.
A controlled environment where both retailers and customers receive the price information at the same time is being carried out in Perth’s Fuelwatch scheme. This scheme consists of two parts, a restriction on retailers varying petrol prices during the day and a system that alerts customers of cheaper fuel prices. According to recent independent surveys, people who subscribed to the fuelwatch scheme in Perth saved between $2 and $20 per week, amounting to roughly $1,050 a year.