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The Facts on Petrol Costs

The Facts on Petrol Costs

Ron Anderson. OAM.
Founder of APCO - 21/9/2017

Petrol Costs

I joined the oil industry in 1962 and have spent my whole working life since the age of 30 in the oil industry. Petrol and diesel are refined from crude oil which must first be found then be taken from the ground, transported, refined, stored ,transported again and then sold from what is today a highly expensive retail facilty. The cost today to build a refinery would be in the billions. All the refineries in Australia are over 50 years old and are highly inefficient. For your information crude oil is sold by the barrel which contains 159 litres of crude and has the capacity to produce 76 litres of gasoline and 48 litres of diesel. The barrel of course produces dozens of other products that keep the world going and made the oil industry one of the richest in the world. I must admit that it is almost impossible to understand the whole process and for those interested just look up refining and products; you will be astounded. I will endeavour to try and give you in this article as simple an explanation of the facts as possible. I am sure some people will disagree with some of my comments and I never say I am always right but I am trying to be honest with all our customers.

Australia today only refines about 40% of our needs and the other 60% comes from overseas by ship. We are totally dependent on imports of both refined and crude. Our old refineries are only capable of refining up to 100,000 barrels a day. New refineries built today can refine up to one million barrels a day. As you can see our position is very precarious.

We understand that petrol is a grudge purchase but an every day necessity. When we commenced the business of service stations in 1980 our first principle was to commit to fair and competitive prices. We also adopted the rule that we would match the lowest price in the market area and this has never changed.

The Price Cycle

In the early nineties with the entry of Coles and Woolworths into the market, competition became very intense with the discount docket as the independents [such as Apco] and Major oil companies such as Mobil and Caltex dropped their prices sometimes 3 or 4 times a day. This mean’t that prices fell below cost very rapidly. Over the next few years 90% of our independents disappeared and in the early 2000’s both Mobil and Shell vacated the retail market licencing their brands to Seven Eleven and Coles. This massive loss in competition slowed the discounting and started to increase the cycle to 3 or 4 weeks. In my opinion the discount docket was built into the margin in those years. This was mainly in the Capital cities and larger country towns such as Geelong.

As a result this means that our prices will vary from region to region. In metropolitan areas we operate under a price cycle. But in other areas we tend to remain at a fairly steady middle of the road price. In metro areas the cycle by its nature causes excessive highs and extreme lows in the price. If as a customer you were to average out your price over the cycle it would vary very little to the regional city where the price remains steady. Naturally this is why people generally get upset when a cycle ends and prices suddenly rise to say $1.37.9 high and our price is at say $1.21.9 in a regional city. Fair to also say the regional customer does not get to buy at the low cycle price which could be at say $1.08.9; but they do have the advantage at a fair middle range price all the time. Naturally should they be in a metro area they would take advantage should it be at the low end of the cycle.

First let me say that we would much prefer the steady price but trying to stay low in cycle areas results in loss of profit on fuel and sometimes in the past, negative results for the company. So we have learnt to live with it. Sometimes we see prices can go so low that they are below cost and that is not rare. Under our accounting system we endeavour to maintain our average price at a fair level.

We need to make a fair profit to continue and are now as a company also responsible directly and indirectly for over 600 employees. This is an industry that is one of the most competitive in the world and in the past has seen many majors exit the market because of poor returns. Can I say to those who think we can sell at low prices all the time we would not stay in business very long. Apco does its best to keep prices at fair levels and if we were to exit the market, prices would be much higher in many areas and that is why we are an independent and will remain so. We control our own destiny.

OK. Having said that we do not get it right all the time. But we play a big part in keeping your cost of living lower. Can I also state the obvious with a refinery in Geelong it is much cheaper to deliver at our base than it is to say Mildura or Bairnsdale. I am sure that all customers realize that moving product by road is not cheap and can be as high as 4cpl.at the furthest points.

What affects the price at the refinery gate

Apco obtains its supply from 2 major refineries under contract. Under todays system we receive a daily price . It’s a complicated system that is mostly affected by 2 factors.

1. The value of the dollar.
2. The value of a barrel of crude.

While not completely accurate if the dollar moves by one cent it seems to affect the price by approximately the same. Rarely does this have any immediate effect on the board price and the changes are much slower in reaching the market. If however there are consistent falls over a few days depending on our profit margin it is passed on. Naturally should our boards be below a certain level we endeavour to retain the margin.

Apco at this stage does not import. I still remember a particular company purchasing and importing 50 million litres of fuel and by the time it reached Australia the price of the barrel dropped significantly and they were left with product they had to sell at a loss. They lost millions of dollars on that load and did not import again. There are constant changes to supply that endeavour to control and sometimes increase the cost of the barrel and in my opinion often politically motivated. World refineries can also get caught in the same way. To adjust they do not immediately pass on the fall in price. As you can see Apco does not have much control over our buying price. In my opinion we are treated very fairly by our suppliers but as you can see the system is highly complicated. Critics most often see only one side of the problem and the industry is accused of ripping off the public. Strangely Oil Companies have never had a spokesperson to speak on their behalf and basicly remain silent. I like you often think the same and wonder why they do not.

Excise and GST

Not everyone takes into account the effect of both these taxes. Today excise on a litre of fuel is 40.2 cpl. So today at the average price of fuel at say $1.25 cpl you would be paying over 52cpl in tax when GST is taken into account. So in effect you are only paying 73 cpl for your fuel. Many people pay in excess of $3.00 for a bottle of water and do not complain. Also important to realize that changes to the price of the barrel and the value of the dollar only affect the fuel price and gst not the excise which is constant. Remember also that if fuel reaches lows of say about a dollar the government of the day still receives the 40.2 cpl in excise and as the GST is still @ 10% they would still receive in excess of 50cpl. Over the past few months we have seen prices as low as $1.00 per litre due to intense competition in some areas. Frankly under those conditions no one can survive for very long. Prices do not stay at these levels for very long and are usually caused by new competition. I might add here that the losers are the retailers such as APCO as they are not supported by the wholesalers and refineries. We have to ride out these situations. Clearly however we are being double taxed and sooner or later something will have to be done.

I recall speaking with John Howard just before the 2004 elections and asking him why he did not remove the excise on petrol as he had originally promised when the GST was introduced. Clearly he did not get the 15% GST that he wanted and had to compromise. He told me at that time a reduction of 1cpl in excise would cost the Government $280 million. At the volumes today it would be in the vicinity of $400 million. At this rate gasoline would raise in excess of 25 billion dollars a year.

I am often asked ‘how do you survive on selling fuel’. As all our customers are aware we have endeavoured to create the best convenience stores in Australia. We believe that people still want good service and value and we strive to provide this at all times particularly on fresh food and beverages. This is how we can continue to remain competitive. If we give you what you want you will keep coming back. We always welcome your feedback.

I hope the above gives the people who give us so much loyalty a better idea of the complex nature of our industry. We are endeavouring to give you a one stop shopping experience and providing the best we can with a friendly and happy service. If anyone has any questions we are always willing to provide an answer.

NOTE. The price examples in this article are relevant only as of the 26/9/17. Excise today is related to inflation and adjusted quarterly