Why does petrol and diesel cost so much? (2)

This e-mail came through this evening from a Value Ireland reader:

Just noticed on my way into work this morning that various petrol stations along the Cabinteely-Donnybrook route have increased the price of unleaded by 2c a litre. Considering the cost in $ terms has fallen by 22% since its highs, this should translate into about 1.05 a litre and not 1.28. Any idea why?

While I had posted about this earlier last week, it seems that this topic has come up again in the newspapers this morning following a call from the Consumer Association of Ireland Chief Executive, Dermott Jewell, that the Competition Authority get involved.

From todays Irish Independent, according to Mr. Jewell:

“The extraordinary situation continues,” he said. “The increases were put down to the price of a barrel, and then it was put forward that it was a currency issue. The reasons given are poor. We should be seeing reduced charges at the pumps. “We’ve put this off long enough. We need to have some form of investigation. The Competition Authority needs to urgently demand answers as to why this is the case. We need some intervention. This affects every part of our economy, not just the consumer. This is no more than continuing price taking.”

In short, this is pointless. As consumer’s we’ve shown that we’re willing to pay upwards on 140c per litre earlier this year – why would petrol retailers who are in the petrol selling business to make a profit reduce their prices that far below a level that they realise Irish consumers are grudgingly willing to pay.

It’s tough, I know, but it’s the hard reality of the petrol retail market in Ireland as it stands at the moment. There’s a lot more to illustrate the pointlessness of this suggestion – read on if you want to see more.

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Pointless Exercise

Bringing in the Competition Authority isn’t going to reduce the price of petrol for consumers.- I don’t believe there’s anything for them to investigate. If Mr. Topaz gets up in the morning and looks across the road to see Mr. Esso charging 3c more, and he ups his price by 3c – we end up with petrol uniformly increasing by 3c – but without any price fixing taking place.

As an aside, it’s a similar situation when you look at the recent National Consumer Agency grocery price survey. From a basket of 72 individual items, Dunnes, Tesco and Superquinn have exactly the same price on 41 items – yet there were no price fixing calls following that survey – they just happen to have the same price, apparently.

So what is going to cause the price of petrol to fall?

In short, unless there’s a massive fall off in the demand for petrol when we start using the trains and buses, or the government brings in price controls, the answer is nothing will.

Given that the sale and pricing of petrol in Ireland is a non-regulated market and selling petrol is a business, the petrol retailers will sell petrol at a price that consumers are willing to pay.

Over the summer, when a barrel of oil was touching $145, and a litre of petrol was 10-15c more than it is now, the petrol retailers found that people were still buying as much petrol as always, despite the price rises. Retailers now know we’re willing to pay a whole lot more – so, why would they drop their prices if they can charge more, and get it. Anyone in business would recognise the madness of doing such a thing.

Basically, in economics terminology, the price of petrol is inelastic – when the quantity demanded does not change much with the price change. Petrol retailers have identified that for most car owners, petrol has almost become a non-discretionary purchase – because at least up to a price of 140c per litre, consumers will still keep buying the same amount each week.

So, bring in the Competition Authority?

Presumably, as requested by Mr. Jewell, the Competition Authority could investigate the retail petrol market in Ireland – and therefore determine if we have enough competition.

But they’ve done this investigation already. For an organisation that takes years to produce their research, their 2006 observations following the Topaz/Statoil merger approval fiasco could almost still be described as current. The summary of their investigations back then were that:

Consistent with other decisions, such a market concentration (of a combined Topaz/Statoil market presence) does not give rise to competition concerns at national level.

It could be worse

To further illustrate the pointlessness of any new research completed now is the fact that relatively speaking, Irish consumers are better off now than they theoretically could be.

Even allowing for exchange rate differences, the price of a barrel of oil has increased 32% in the past 2 years since the original Competition Authority statement – but the price of petrol in Ireland has increased by only 20%.

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