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Sydney Petrol Prices
Posted by Big Gav on July 14, 2008 - 9:09am in The Oil Drum: Australia/New Zealand
Soaring petrol prices have led to all sorts of calls for action to help reduce prices. The Opposition called for a 5 cents per litre reduction in the excise on petrol, which currently stands at 38.1 cents per litre. One Victorian Liberal MP, Chris Pearce, went further and called for a 10 cent reduction in petrol excise. The Rudd Government initially claimed that there was nothing more that they could do, but then buckled to the pressure and has proposed the introduction of a national FuelWatch scheme aimed at promoting price transparency at the bowser. The Minister for Competition Policy & Consumer Affairs, Chris Bowen, has indicated that this scheme is expected to save around 2 cents per litre. So, what is going on with petrol prices and what are the merits of these proposals?
As a starting point, it is useful to have a look at the breakdown of the price at the pump. The retail price of petrol is basically equal to
Price of Crude Oil + Refining Margin + Excise + Retailer Margin + GST
This is a bit of an oversimplification and bundles together the cost of refining and profit under “refining margin” and the retailer’s costs (such as transport) and profit under “retailer margin”. Given all the media attention, it is hard to miss the fact that the price of crude oil has been sky-rocketinging and simple regression analysis confirms that this is the primary driver of petrol price rises. Refining and retailer margins have been far more stable, opportunistic service station proprietors are not really the root cause of the problem.
The chart below shows a comparison of Sydney average monthly petrol prices with prices from the regression model (for the statistically-minded, the R2 is 96%). The slope of the regression confirms the commonly quoted rule of thumb that a US $1 increase in the price of a barrel of crude oil will result in an increase of 1 cent per litre at the pump (more precisely the model says 0.87 cents, but that’s close enough to 1 cent: it is a crude model after all…no apologies for the pun).
Regression Model of Sydney Petrol Prices (unleaded)*
The average price of unleaded petrol in Sydney in May was 150.8 cents per litre. Yesterday our local service station was charging 163 cents per litre, so prices are already up more than ten cents in a month. Based on Friday’s crude oil price, the model is suggesting that there is another 10 cents to go on top of that. Last week comments from Libya about restricting oil supply helped push the price up crude oil up by US $5 per barrel (up 5 cents at the pump). A week earlier, moves by China to decrease fuel subsidies triggered a US $4 price fall (down 4 cents at the pump). So the realpolitik of oil is triggering larger moves in petrol prices on a daily basis than either the anticipated 2 cent saving of FuelWatch or even the 4 cent GST reduction proposed by the Opposition. These ideas start to look like a drop in the ocean, and expensive drops as that!
According to the most recent Federal budget, Government income from excise on petrol is forecast to be almost $7 billion per year, so cutting petrol excise by 5 cents could cost around $900 million per year in tax revenue for the Commonwealth. Chris Pearce’s more extravagant proposal would cost the Commonwealth more that $1.5 billion a year in excise revenue! If diesel is included, the figures would be doubled. That is a lot of tax dollars to spend on savings at the pump which could be blown away by a casual remark to the world press by Libya, China or Saudi Arabia.
By contrast, FuelWatch almost seems like a bargain as it is expected to cost taxpayers a mere $20 million. But is that really $20 million well-spent? Complying with the scheme will cost petrol retailers money and, as their margins are already fairly slim, that is a cost that will certainly end up being passed on to drivers. So I am not convinced that the touted savings will materialise, but even if they do, will anyone notice? If oil prices keep rising, so will petrol prices and by much more than 2 cents. If it turns out that we are in the middle of a speculative bubble, oil and petrol prices will collapse at some point and everyone will forget we ever had a problem (for a while at least).
Either way, the best thing that I can find to say about the FuelWatch scheme is that it is the cheapest of the pointless initiatives that our politicians have come up with. If there is $20 million dollars of budget surplus up for grabs, surely there are better ways to spend it!
* Data Sources: Sydney Petrol Prices from the Australian Automobile Association, Brent crude oil prices and A$/US$ exchange rates from Bloomberg.
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Sean, Can you please explain the graphic a bit more. (sorry not a statistician). The blue line runs out well before the grey line for the really steep run up in crude prices over the last two months. Does that mean that petrol prices are lagging somewhat adn there is a really big rise like 15 or 20c building to happen soon?
@Termoil: the lag simply reflects the fact that I have more up-to-date data on wholesale crude oil prices than on Sydney retail prices.
The grey line takes daily Brent Crude prices (expresses in Australian dollars) and plugs it into the regression model, while the blue line shows monthly average prices at the pump in Sydney. I obtained the pump data from the Australian Automobile Association (AAA) and, checking again today, the most recent data they have is for May. If anyone knows a better source for retail prices, please let me know!
The average price in Sydney for May was 150.8 cents/litre and, if the pattern implied by the model persists, it is certainly pointing to increases from there: it predicts an average price of 168.3 cents/litre for June and, based on prices so far this month, an average of 174.6 cents/litre for July. Of course, there are certainly factors that the model does not capture and in April and May the pump prices were lower than the model price. Nevertheless, we can be very sure that while crude prices continue to rise, we'll be paying more to fill our tanks!
In another post I calculated the cost of carbon for petrol. It's interesting to note that if an emissions trading scheme were to apply to petrol, prices can be expected to rise by around 5 to 7 cents/litre. Compare this to the effect of rising crude oil prices: from January to May this year averaged Sydney petrol prices rose by 10 cents/litre!
Sean (don't be thrown by the cryptic smc2911 handle!)
The AAA data for June has now been published and I've posted a quick update to the chart.
I don't ask why petrol is so expensive, I ask why it's so cheap. It's a fairly simple and well-established practice in business that when the raw materials price goes up, the finished product price goes up, too.
In 1998 crude oil was A$15/bbl and petrol A$0.75/lt, or A$0.35/lt absent taxes.
Now in 2008 crude oil is A$150/bbl and petrol A$$1.60/lt, or A$1.05/lt absent taxes.
The raw material has gone up by a factor of 10, but the processed product up only by a factor of 3 (again, absent taxes - with taxes, it's only up by 2; taxes are now a smaller portion of the total cost). By all rights petrol should be A$3.50/lt absent taxes, or about A$4.20/lt with them.
As to the taxes being reduced, or FuelWatch making some difference, 5 or 2 cents here or there is simply lost in the noise of the weekly petrol price retailing cycle, where the price varies by as much as 15c/lt.
I would increase the fuel tax, calling it a "carbon tax", and invest the money from that into renewables and public transport. Making driving harder, and give other options: stick and carrot.
Hi Kiashu,
I think the $A was only $US0.50 in 1998, versus $US0.97 now,so oil prices then would have been more like $A30 a barrel. Also petrol is imported from SE Asia a low prices due to diesel demand from China, but this is a much smaller factor than the X2 change in $A/$US exchange rates in last 10 years.
I think petrol tax will be increased if the Garnaut Report model is adopted, but even if not, petrol is still taxed more than any other carbon source is likely to be taxed.
A long way to go.
Based on UK / Europe experience your fuel prices can be pushed much much higher, no problem.
e.g.
July UK pump price (typical)
Unleaded GBP 1.20/l (A$ 2.36/l)
Diesel GBP 1.30/l (A$ 2.67/l)
So diesel at GBP 1.30/l got the lorry drivers out protesting again.
Result, none that I know of.
So prices will continue to rise.
[Similar prices in Europe also led to lorry driver protests, unfortunately somewhat more deadly than those in UK. Difference between your average Brit and a European I guess.]
As for the UK car driver, if they need to travel they will stump up the price as, unless they live in the big city, they have no alternatives.
What will it take for them to riot? Not price, not rationing.
Maybe unfair allocation or people cheating on rationing would do it.
So you could heap tax on your fuel - but would the politicos spend it wisely? Unfortunately NO!
I am not knocking your article Sean but all this hooh hah from both Government and opposition on fuel prices is just such a load of hot air and the MSM play up to it.
We have a PM in The Mandarin KRuddbot who goes all shock and horror at a few pictures of naked girls in the arty farty scene but seems to be quite relaxed about playing silly buggers with Garnaut and carbon trading/capture.
One of the interesting questions is,does anybody in the government/opposition understand the reality of the nation's problems,both now and in the future?
If they do understand then they are just pissing in our collective pockets - to what end?
Maybe they just don't have the courage to be honest with the people.
Judging by the debates recorded at OpenAustralia.org, they seem pretty clueless.
A search of the Hansard for the term "peak oil" brings up only four mentions in the last few years.
Lindsay Tanner (ALP, Melbourne) who in 2006 mentioned what he called "Huppert's peak", and said,
Mark Coulton (National Party, Parkes) in March 2008 talked about how he wanted more roads in his electorate, and spoke in favour of rail, but seems to think natural gas and ethanol can fill the gap (apart from a brief mention of solar), saying
Kelvin Thompson, (ALP, Wills) in May 2008 mentioned peak oil, saying,
but went on simply to bash the Liberal-National coalition, implying that "market manipulation" was the only reason for price volatility, and the Iraq war the only reason for the general crude oil price rise (leaving unexplained the price rise before March 2003) and whinging that the coalition weren't praising the ALP enough on FuelWatch.
Anthony Zappia (ALP, Makin) in June 2008 said,
and Zappia went on to quote a letter published in the Adelaide Adevertiser talking about peak oil at some length (for the Advertiser), and then drifted into the usual rubbishing of the other side.
In these four MPs' little rambles we can see a degree of progression: from awareness of the existence of the problem to offering solutions, however it's still not really an issue foremost in their minds - they're too concerned with day-to-day things like a couple of cents here or there on the price. Also, I think the current government, being in only seven months after more than a decade in Opposition, is still stuck in the Opposition mindset - just bashing the other guys and offering no real policies of their own.
Originally I was going to do a similar post on the search for "climate change" comments from MPs, but the results of that one, combined with finding that my local member's sole contribution to Parliamentary debate in 2008 thus far has been three interjections, has depressed me. So someone else will have to do the research.
great find kiashu.. thanks for the quotes.
i'd say lindsay tanner is up there with the people most aware of peak oil. but it's a lot tougher for him to talk about it in government than it was in opposition.
Yes Phil, frankness seems to be the first casualty...
ABC "Insiders", 1st June 2008
Actually, a fuller quote in context makes old Tanner seem to be as good or bad as he ever was.
[my emphasis]
Immediately after your selective quote to make him look bad, we get,
As always, a fuller reading gives a fuller understanding. Selective quoting gives a selective picture. It seems like Tanner hasn't declined in frankness.
Mind you, most of the rest of the discussion was the usual meaningless political ramblings, "We work hard, the other guys are lazy" but the journo encouraged that with "maybe you're working the public service too hard?" Sloppy stuff.
Kiashu
I am not sure how you conducted your search of the parliamentary debates in Hansard. It is of course quite possible to talk about the depletion of world oil supplies without actually mentioning the term “peak oil”, so a search using only that term may well have missed some useful contributions. Your list mentions only member of the House of Representative so I just did a very quick (and incomplete) search of the Senate Hansards from 1 January 2006 to the present using the search term “peak oil” and had no problem finding at least eight senators who spoke on this topic. There were more than thirty speeches which discussed peak oil (18 from Senator Milne alone) by senators representing the Liberals, Nationals, ALP, Greens and Democrats.
Of course, in February 2007 the Senate also produced an excellent report which discussed peak oil in some detail see (http://www.aph.gov.au/Senate/committee/rrat_ctte/completed_inquiries/200... ) and it has also just appointed another committee to look into fuel and energy see http://www.aph.gov.au/Senate/committee/fuelenergy_ctte/tor.htm. [and also http://anz.theoildrum.com/node/4272 ]
In the first line of my post I linked to OpenAustralia.org, which resources allows searches. I then gave a link which was my search for the words "peak oil". So if you are unsure, I suggest a more thorough reading of the passage you are unsure about.
Of course peak oil is more discussed in the Senate, we have the Greens there. But let's be honest, what matters is discussion in the House. Whoever commands a majority in the House is invited by the Governor General to form a government. It is in the House that the real decisions are made.
"Proposed laws appropriating revenue or moneys, or imposing taxation, shall not originate in the Senate. [...]
"The Senate may not amend proposed laws imposing taxation, or proposed laws appropriating revenue or moneys for the ordinary annual services of the Government.
"The Senate may not amend any proposed law so as to increase any proposed charge or burden on the people." (Constitution, Chap1 PtV sec53)
But they can send it back asking for an amendment. So the Senate cannot for example create a carbon tax, or raise one which is offered to them in a bill from the House.
So in terms of the big issues, only the government of the day can do anything about them. The House, by virtue of holding the government of the day, may act without the Senate, unless the Senate be entirely hostile (which happens every thirty years or so). But the Senate may not act without the House.
It's what's said and done in the House which really matters.
Your original post on this matter was in reply to Thirra’s asking whether “anybody in the government/opposition” understands the nation’s problems. I assumed, and I think most people would assume, that he meant all members of Parliament not just those in the lower house. Which is why I am surprised that you relied on the OpenAustralia.Org site which does not cover the Senate. Why not go directly to the horse’s mouth, the Australian Parliament website, where you could have searched for the contributions of all members of the Government and the Opposition and minor parties and independents? By choosing to look at only one house of Parliament you created the misleading impression that only four parliamentarians had spoken on peak oil.
Don't try to cover your sloppy reading by nitpicking pedantry and deliberate obtuseness. Let's focus on what's really being discussed here.
Thirra obviously does not think that of the couple of thousand or more federal, state and local elected representatives not one of them has any idea about fossil fuel depletion and climate change. He was obviously asking about people in a position to do something.
Thirra's literal question was whether anyone in Parliament at all knew what was going on, but at the heart of that was the question as to whether anyone in a position to do something about it knew what was going on.
And the answer is that some of them know about peak fossil fuels, but they obviously don't consider it a pressing issue; whereas they know well about climate change, consider it a pressing issue, and are doing counterproductive things about it.
Calm down - there's no reason to start flaming each other.
I think its fair to point to the Senators who have discussed peak oil, especially Senator milne who has mentioned it frequently.
You also (being pedantic) missed various state ministers of various levels of influence who are also following the issue - such as McNamara in Queensland and Alannah MacTiernan in WA (who managed to push through a new electrified rail line between Perth and Mandurah, for example).
Bob Hawke on Denton last night got pretty close to the truth when asked if he is optimistic for the worlds future. Large and growing population, food crisis and over a billion people in abject poverty and another two billion in just tolerbale poverty, were the areas he is most concerend with. Denton voiced the finite resources question which Hawke didn't respond to adequately but almost got the connections.
It was a good interview and you could see the man talking rather than the position. I think Hawke would understand Peak Oil pretty well if he had Gails presentation given to him by a reasonably competent person. Might be a very good door opener if wa to join the cause!
Thanks for those quotes,Kiashu.Revealing.
Labor 7 months in office and still in opposition think?For Kevin's sake,they had 11 years of looking at the Rodent from the opposition benches to figure out some decent policies.
Sometimes I wish Biff was still at the head of the rabble.Paranoid brawler that he was he at least had some ideas and the guts to put them out in the paddock to get hammered.
Bloody hell!Must be a measure of my frustration to even think of Biff as PM.We would have had incoming cruise missiles courtesy of Scrub by now.
I can see by the above I will have to go easy on the red.
Yes - thanks for the quotes Kiashu - that was very helpful.
I kind of liked Biff too - he was a knob sometimes, but he had a colourful turn of phrase and his heart seemed to be in the right place (when he wasn't drunk and cranky).
That "conga line of suckholes" quip was worth a spot in the Australian political pantheon :-)
Hi all,
I have put together a simple Australian pump price model based crudely (forgive me) on Tapis price per barrel. Unfortunately I cannot figure out how on earth to post a table or a jpg on TOD so you will have to take my word for it. If someone can please tell me how to post a graphic I will put up a screen shot, otherwise email me for an Excel version - mranawhata at iinet dot net dot au.
Cheers, Mark
To post an image, it needs to be hosted somewhere. For example, TOD Anz graphic above - right-click, "copy image location" then paste as text. We see,
http://www.theoildrum.com/images/TODANZ_logo_final.png
To post as an image, we need [img src="http://www.example.com/example.jpeg"], or in this case [img src="http://www.theoildrum.com/images/TODANZ_logo_final.png"]. Now replace the [] with <> and we see,
That's a bit wide for the comment box, so let's try instead
[img src="http://www.theoildrum.com/images/TODANZ_logo_final.png" width="540"]
again with the [] replaced with <> and we get,
I also find the "preview comment" button useful, just in case I left out a > or " or something like that.
Thanks Kiashu - that's explained clearly. I will try to construct a table next time but will leave images to be posted by Phil and Big Gav.
Cheers, Mark
It's great to see all the comments here! Thanks to everyone who took the time to read the post.
@Kiashu: While I agree that petrol prices should be higher due to the inclusion of some form of carbon cost, looking at relative price moves can be a bit of a trap (one I've fallen into myself!). While the price of crude oil has risen significantly, other price components of petrol (i.e. excise, retail margins) have been fairly stable. This makes a difference to relative price moves, as can be seen with an over-simplified hypothetical example: assume that price of petrol was $1 per litre and 50% of that was made up by crude oil costs and the remaining 50% was made up of tax, margins, etc. Now assume that oil prices increase by 9 times but the other factors are unchanged. Then the price of petrol would increase to $5 per litre ($4.5 plus $0.50), which is only an increase of 5 times not 9. Even with the higher price of crude oil today, excise and GST alone make up around 1/3 of the price of petrol, so you should not expect petrol prices to increase in the same proportion as crude oil.
@Anawhata I've posted an update to my original blog post which includes a chart using Tapis prices rather than Brent. Also, if you want to share your model and you need a place to host the chart, how about creating an account on tumblr. It's quick easy and free. Even easier (but not as pretty) is drop.io.