Yes, It Really Is A Rip Off

EDITORIAL TUESDAY 29.07.08. With the price of petrol continuing to sting motorists it has become a common cry that the oil companies are ripping us off. The rapid rise in the price over the past year has unbalanced the family budget, and along with rising housing and living costs has had a significant impact. When we are spending $100 or so to fill up the same car that cost half as much only a few years ago it’s easy to feel that something just isn’t right. But are the oil companies actually gouging us?

Although the high price of oil appears to be driven by a number of factors, at least one of them is speculation on the international market. There’s no doubt that oil producers will benefit from higher prices, but what about the other links in the chain? Refineries, distributors, wholesalers, and retailers all have a part to play. Naturally as the price of oil goes up we can expect the price of petrol to also go up.

The trouble is that the oil industry has a high degree of vertical integration. That is the same company drills the oil, refines it, wholesales the petrol, and in some cases retails it. This delivers market control to what the A.C.C.C. commissioner Graeme Samuel has called a “comfortable oligopoly”, which is really a polite way of saying “monopoly by committee”. Because the oil companies make their profits right along the chain, they can afford to keep retail margins thin, which disadvantages independent outlets.

But even if we accept the idea that rising oil prices cause petrol prices to rise, you would then expect petrol prices to fall when oil prices drop. But they don’t.

Research by economics professor Frank Zumbo of the University of New South Wales shows quite clearly that when oil prices rise the flow on to petrol is almost immediate. However, when oil prices fall, as they have over the last few weeks, there is a significant delay before petrol prices follow suit. Since its peak in June, oil has fallen by around US$25 per barrel. Petrol in Sydney has fallen, but not as far or as quickly as it should have.

Since June, oil has fallen 16%, wholesale petrol has fallen 8%, retail petrol has fallen 3.2%.

Yes, it really is a rip off.