Cover story: Petrol at what price?

"If Australian refineries close, they will be gone forever."

Driving through Melbourne’s eastern suburbs on his way to work, Victorian lawyer Peter Mannion glances at his fuel gauge. Getting a bit low, he thinks. Soon he swings his European hatchback into the forecourt of a Caltex service station.

It’s Tuesday, a good day to fill up, when the weekly price cycle is typically at its lowest ebb. At the register inside the Star Mart Peter pays $70 for his 51.8 litres of Caltex Unleaded, an average of $1.35 a litre. Looking at the receipt, he shakes his head, reflecting that the same tankful cost him $10 less just a year ago.

Like most of the million other motorists buying fuel on any day of the week, Peter is unsure exactly what the $70 actually pays for. Of that sum, $26 goes to the federal government in tax, $36 pays for the crude oil from which the fuel is refined, $4 is for refining, $2 is for wholesale gross margins and $2 goes to the Caltex service station to cover costs and leave a slim profit. And while he is not happy about being charged $70, it may be a bargain. Not only is it substantially less than what he’d pay in most other industrialised countries, it could be a lot less than what he’ll pay in ten years’ time.

Inconvenient truths

The trend in petrol prices will almost certainly be upwards. This is not good news, but Caltex believes it’s a prospect that should be acknowledged by motorists, regulators and governments.

The pressure on price is likely to come from higher crude oil costs as demand increases ahead of supply, global refining capacity shortages, higher fuel quality standards and the introduction of carbon costs by government to help address climate change.

As dozens of inquiries and reports have shown, including the most recent ACCC enquiry into petrol prices, Australian petrol prices are not the result of collusion or “price gouging”. The market operates in a way that delivers prices as low as they can feasibly go. Petrol prices are the fourth lowest of developed countries.

While commentators and regulators focus on retail prices, the underlying reason for public concern is that the cost of crude oil has been skyrocketing. Ten years ago it was $US10 a barrel, recently it was over $US100. Singapore refinery product prices were higher still.

No one knows for sure where crude oil or refined product prices will be in future, but the way seems to be up. There is general agreement that to meet increasing demand conventional oil production will be supplemented by unconventional fuels like biofuels and gas to liquid fuel within the next 10 to 20 years, forcing up oil prices. Carbon pricing to help reduce greenhouse gas emissions will also increase fuel prices with government plans to start in 2010.

It’s not just about consumers

As the ACCC report released in December demonstrates, our key competition regulator is focused on the impact of fuel prices on consumers. Caltex has no problems with this narrow role of the ACCC, yet it should be acknowledged that the ACCC’s report is just one perspective on a complex, highly competitive industry. Factors like the environment, security of supply and the viability of the refining industry need to be considered.

Retaining a substantial oil refining capacity is essential to Australia’s future security. As Australia is a small economy spread over a vast area, petroleum refining and marketing will differ from large scale operations in North America or Europe but the industry will remain highly competitive.

These perspectives have shaped Caltex’s responses to the ACCC’s report as Caltex Managing Director and CEO Des King discusses in the next story.

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