Saturday, 22 February 2014

Domestic Petrol Prices in Australia - Tapis Crude

A number of global events reshape oil pricing in Australia.

This research stub is where I will add material about oil pricing issues.

In 2017 a detailed survey of prices in regional, suburban and inner city petrol pricing processes was undertaken. Business process tracking was undertaken looking at key price point in the domestic oil extraction, raw material export, external taxation arrangements, importation, domestic resale arrangements and retail price decision making. The 2017 research is presently undergoing peer review prior to publication and submission to relevant authorities in a number of countries. If your organisation would like to comment on the pre-release version of this paper contact peterwquinton@gmail.com .





We all have a long term interest in oil pricing and its impact on the wider Australian economy.  Oil pricing influences the retail price of key economic inputs - petroleum, distillate, jet fuel, liquid petroleum gas and other products (such as tar).



Background

In 2012, the Reserve Bank of Australia published an analysis of world pricing of crude oil pricing mechanisms.  The analysis is comprehensive and worth reading.  A number of conclusions in the analysis are worth repeating.
  • Most crude oil is produced by state-owned enterprises.
  • Crude oil varies in composition from site to site.
  • Almost all crude oil is traded "over the counter" in transactions that are not observable.
  • There is no specific individual market price for most crude oils.
  • Crude oil trades tend to be priced according to one of a number of 'benchmark' oil prices - particularly 'Brent' (a key global benchmark based on North Sea oil) and 'West Texas Intermediate' (decreasing in importance).
  • 'Benchmark' oil prices are not transparent (Brent only accounts for 1% of world crude oil production).
  • 'Benchmark' prices are increasing based on trading activity on the futures market.
The analysis concluded:  "The complexity of the oil pricing arrangements makes it difficult to demonstrate convincingly that benchmark oil prices fully reflect physical supply and demand conditions rather than the actions of uninformed financial speculators."

There are significant price differences between the benchmarks, particularly those commonly reported by the Australian media - Tapis and West Texas Intermediate .  Some of these are explained by reference to inherent qualities of the crude oil underlying the benchmark price or seasonal volatility in the US market.  Some cannot be explained in this way.

The Australian Institute of Petroleum reports that: "Key crude oil pricing benchmarks for the Asia-Pacific market including Australia are Tapis, Dated Brent and Dubai – not West Texas Intermediate (the US crude benchmark) widely reported in the media."

The Australian Institute of Petroleum goes on to explain that: "The Singapore price of unleaded petrol (MOPS95 Petrol) is the key petrol pricing benchmark for Australia" because:
"To meet Australian petrol demand, around 20% of petrol is imported (mainly from Singapore). Singapore is the regional refining and distribution centre and among the world’s largest.  If Australia’s petrol prices were below Singapore prices, Australian fuel suppliers would have no commercial incentive to import to Australia (because sales of that fuel would be at a loss here). In addition, Australian refiners would have an incentive to export production."
The Australian Institute of Petroleum concludes that "This pricing methodology is called import parity pricing".  It is able to demonstrate that the Australian wholesale price of petrol is effectively the sum of the Singapore price, plus transport and taxes, plus 5%.  For example, if the Singapore price was about $0.80 ($A) per litre then the transport costs and taxes would be about $0.50 and the Australian wholesale price would be about $1.40.  

Since the report, significant changes have occurred in the domestic market. 

Issues

As noted above, media commentators track two oil benchmarks: West Texas Intermediate and Tapis Crude describing these benchmarks as having been "traded" on a particular day. In particular, reputable news services like the ABC, report the price of Tapis Crude in all of its market reports but, after a brief period of accurate reporting, in 2015/16 its newsroom journalists reverted to describing Tapis Crude as having "traded" at a particular price.

In light of the background above:
  • if used at all, it would be more accurate to describe West Texas Intermediate and Tapis Crude price information being "benchmark" prices rather than trading prices; and
  • in the light of the Australian Institute of Petroleum advice, it would be more meaningful for the media to report the Singapore price of petrol (MOPS96 Petrol) (and, perhaps, an extrapolation of the Australian price as above).
In 2017 comprehensive research was undertaken to determine an independent basis explaining:
  • the significant price difference between West Texas Intermediate and Tapis Crude; and
  • the basis for key financial decisions impacting on retail prices and product security.  
The methodology set out by the Australian Institute of Petroleum underlying Australian oil prices has not been challenged by the Australian Government.  The methodology significantly distorted both price and production.  It is clear that local Australian production has the capacity to meet most local demand.  It may be that pricing or Government revenue considerations are artificially constraining local production.  Have they also influenced decisions about the location of refineries? Are they influencing (against a backdrop of a crash in the world price of energy products, and a corresponding decline in taxation revenue) calls for the introduction of super-taxes, such as a new Australian tax on the distance travelled by motor vehicles?

The price of oil is a most important economic marker - and a serious barrier to business growth in this country.  A drop in the retail price of petrol would have a strong stimulative effect on Australian business and put money back into the hands of consumers (this has recently happened in 2016-17 in relation to some air transport operators, who are able to source fuel directly).  Continued high domestic prices harms the economy. A significant drop in price would be good for jobs and economic growth, more than sufficient to replace any foregone revenue.

So why doesn't it happen? 





Peter Quinton
Palerang
February 2014 
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