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Is FuelWatch the best we can do?

By Bernie Masters - posted Thursday, 19 June 2008

Why are our politicians restricting the debate on fuel prices to side issues such as FuelWatch and reduced fuel taxes? Surely the huge resources of government can be better directed to finding other ways of reducing the pain felt by motorists? Effective solutions exist but they require strong governments willing to make difficult decisions.

At the global level, Australia can do nothing about the price of crude oil. The international market and the laws of supply and demand mean we’re price takers, not price setters. Our hands are tied at this level.

Nationally, we’ve adopted a price structure based on the price of fuel coming out of Singapore’s refineries. We could change our policy and allow local refineries to sell below these benchmark prices, but then the incentive to explore for oil and gas in Australia would be reduced. As well, the nation’s existing oil refiners wouldn’t invest money in new or upgraded facilities when they can make greater profits in other countries? No, our hands are tied at this level as well.


But market forces and competition in Australia are restricted. With WA having just one oil refinery, there’s no internal competition. Transport costs make it unviable to ship large volumes of refined petroleum products into the state to try and compete with our existing refinery.

To encourage competition, the state could provide incentives to build another refinery. But this is unrealistic: the cost would be billions of dollars and we’d still have to ship crude oil in at world parity prices, so the gains would be minimal.

A more realistic action is to investigate the profitability of the existing refinery at Kwinana and see if BP is ripping off fuel users in WA. As owner of the state’s only refinery, BP doesn’t disclose the profits it makes at individual refineries. Globally, the company made US$20.8 billion profit after tax in 2007 and its annual report barely mentions Australia, let alone the money made from its individual operations. Maybe it’s time for the state government to undertake a confidential analysis of BP’s operations in WA. If company profits are found to be unreasonably high, tax and other mechanisms exist to reduce the load on fuel users in this state.

Remember: BP’s Kwinana refinery is the largest in Australia. It’s mostly an old plant, having been built in the 1950s, so depreciation and similar charges against operating costs would be small in comparison with the total cost of the asset. WA should be enjoying lower fuel prices than the rest of Australia simply because the Kwinana refinery should be delivering economies of scale - the bigger the plant, the smaller the overheads per unit of production. It’d be nice to have BP explain why their terminal gate price for fuel isn’t the cheapest in the country.

Can FuelWatch be made to work better? There’s no doubt that it provides a useful service to those consumers prepared to visit the website and find out where the cheapest fuel is each day. But the law requiring prices to remain fixed for a 24-hour period is anti-competitive. Competition’s ability to bring prices down is lost when you can’t lower your price once you’ve seen what your competitor is charging.

The state government should make a simple change to FuelWatch so that the posted prices are the maximum. An individual service station operator should be able to lower the stated price to gain a competitive advantage. Kevin Rudd should insist upon this change if the scheme is to go national.


Making the posted price a maximum, capable of being lowered within the 24-hour period, will make life tough for smaller, independent operators who probably won’t be able to compete with the big fuel providers. But they stopped buying fuel from Singapore years ago, instead buying from BP’s Kwinana refinery. So the public need to decide whether they really want lower fuel prices and a system that is truly competitive, even if some small operators get hurt in the process. Sadly, in our modern cut-throat business culture, you often can’t have both.

Finally, the Rudd Government can take a simple step to address the issue of why country fuel prices are often so much higher than in the city: amend the Trade Practices Act to outlaw discriminatory pricing. Shortly after the Howard government was elected in 1996, a review of this Act received submissions from big business that the existing laws against discriminatory pricing - where a supplier can sell the same product at different prices to different customers - were pointless as no one had ever been prosecuted under the existing provisions. In 1998, the relevant clauses were removed and very quickly we saw different prices being charged to different customers, even if the size of orders were the same.

Today, a large fuel retailer in country WA is usually forced to pay much more per litre for their wholesale fuel than a similar sized retailer in Perth. How often do you hear a small or rural business complaining that it’s forced to pay a wholesale price that’s higher than the retail price for the same item in Perth or at a national supermarket chain such as Coles or Woolworths?

Mr Rudd, if you want to make some serious changes to fuel prices, stop tinkering around the edges and amend the Trade Practices Act. And Mr Carpenter, you can bring genuine competition into fuel prices in this state by allowing the daily fuel price advised to FuelWatch to be a maximum price.

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First published in the West Australian on June 6, 2008.

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About the Author

Bernie Masters was the Liberal MP for Vasse from 1996 to 2005 and the shadow minister for science and the environment from 2001 to 2004.

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