Fuel Market Financial Performance Study 2017

In our report back to the Minister of Energy and Resources we agreed with the findings of the 2017 Fuel Market Financial Performance Study that further examination of the sector is warranted.

Report back to Minister

Our report to the Minister included the following annexes:

  • Previous fuel sector studies
  • Methods for calculating pre-tax premium petrol prices in the OECD
  • Submission from BP Oil New Zealand Limited
  • Submission from Gull New Zealand Limited
  • Submission from Mobil Oil New Zealand Limited
  • Submission from Z Energy
  • Hale & Twomey report: Supplementary Information on Shared Data
  • Hale & Twomey report: Supplementary Information on Wholesale Markets

Report-back on the findings and recommendations of the Fuel Market Financial Performance Study [PDF, 10 MB] 

In our report, we agreed with the authors of the Fuel Market Financial Performance Study that further examination of the sector was warranted. We also agreed with the authors that a market study led by the Commerce Commission, alongside supporting information gathering powers, would be the most appropriate vehicle to undertake this examination.

Next steps

The Government has signalled its intention to give the Commerce Commission appropriate powers to conduct market studies where there is concern that markets might not be working well.

Meanwhile, we will continue our monitoring function of the market. We will also undertake further examination of potential regulatory interventions.

The Fuel Market Financial Performance Study

In 2017, we undertook a Fuel Market Financial Performance Study. A group of external consultants comprising NZIER, Grant Thornton and Cognitus Economic Insight undertook the study on our behalf.

The study was prompted by:

  • concern that a trend of steadily rising importer petrol and diesel margins since 2008 might indicate that retail customers in New Zealand were not paying reasonable prices for petrol and diesel
  • the emergence of significant retail fuel price variations between regions in New Zealand.

The study’s primary conclusion was that “we cannot definitely say that fuel prices in New Zealand are reasonable, and we have reason to believe that they might not be.”

See the final report and other information below.

What the study found

The study found there are outcomes in the market that may not be consistent with a workably competitive market:

  • Gross retail margins (defined after discounts, transfer price, and storage, and handling and logistics costs) have increased significantly in the last five years, which is generally reflected in the data we publish.
  • Retail gross margins in the South Island and Wellington have increased at a faster rate than margins in the rest of the North Island. This could mean fuel prices in the North Island are subsidised by prices across the rest of the country (but the report is not definitive).
  • Capital expenditure, such as port upgrades, could have potentially explained the increase in fuel margins, but the study found the capital expenditure that has occurred does not explain the difference in fuel margins. Also, if capital expenditure was focused in the South Island, this could potentially have explained differences in North and South Island prices. However, this hasn’t been seen either.
  • In comparison, gross margins for fuel not sold to the public, eg, in aviation or to commercial road users like trucking, have been flat or are declining.
  • There are parts of the market that we need to look at more closely to make sure the market is as competitive as it can be.

Explaining the different margins

We calculate importer margins (also called gross distribution margins). These are the difference between the retail price and the ‘landed cost’ – which is the cost of getting fuel to New Zealand.

The margins in the report take into account other expense items that will differ from one fuel supplier to another, such as domestic storage, handling and logistics costs. These expense items have deliberately been excluded from our importer margin monitoring to provide a consistent basis across all fuel suppliers.

The external advisors assessed the difference between these importer margins and the margins that were calculated from the data supplied by the fuel companies.

The report confirms that our method for calculating our weekly monitoring of importer margins is robust. The advisors found that the 2 sets of margins showed similar trends.

Read about our approach to margin calculation and monitoring. 

Report recommendations

The study report made a number of recommendations for further action. The main recommendation is that government carries out further inquiry into:

  • aspects of the market that might be helping margins rise, but that couldn’t be looked at here (eg, contracts for independent firms to access terminals around the country)
  • the reasonableness of prices, using data that companies should be able to provide on a consistent basis (ie, price and volume data).

The report also recommends certain changes to the market that should be considered. These are:

  • the removal of Z Energy’s Main Port Price (MPP), a national reference retail price, from its website
  • the creation of a registry for the borrow and loan system that limits each participant’s visibility of other participants’ market shares
  • giving consideration to the creation of a liquid wholesale market for retail fuels.

The report also cautions against some interventions that are sometimes used by governments in other countries to regulate this industry, but that might not actually benefit consumers eg, the report notes that making prices more visible to consumers can actually lead to higher prices.