risen dramatically over recent years, so have retail prices.
But crude oil is not the product you buy at the pump – it’s simply an ingredient in the petrol production process. Just as a paper mill turns timber into paper, a refinery takes crude oil and earns a “refiner margin” for turning it into petrol. Ninety-eight per cent of Australia’s total fuel requirements are controlled by four refiners – Shell, Mobil, Caltex and BP.
The petrol they refine is an internationally traded commodity whose price is largely determined by movements in global markets. Petrol prices in most countries are established with reference to the relevant refined petrol benchmark price. Australian retail petrol prices closely follow the Singapore Mogas 95 Unleaded benchmark, which is the price of refined petrol in Singapore.
The international benchmark prices of crude oil and refined petroleum are typically traded in US dollars. Thus, the value of the exchange rate between the USD and the local currency influences the retail petrol price. The recent strength of the Australian dollar has protected consumers from the effects of higher international petrol prices.
The next factor to be added to our wholesale fuel price breakdown is government taxes. There are two components to petrol taxes – a fuel excise and GST. All petroleum fuels in Australia have an excise tax of 38.143 cents per litre which represents the second-largest component (25-30 per cent) of the price of petrol in Australia. GST is also applied to the total price, at 10 per cent.
When all of the above components are added together, the price is referred to as the Terminal Gate Price (TGP). The TGP is the wholesale price for petrol in each Australian capital city but does not include distribution costs and retail margins.
With regard to distribution, once fuel leaves capital city ports it is sent to rural and metropolitan areas. A large part of the increase between retail and wholesale prices is the transport cost of getting the fuel to the bowser which is why fuel prices are generally higher in rural and remote areas.
Finally, competition also accounts for variances in retail prices and this is what drives the daily fluctuations that you see at the bowser. Petrol retailers discount prices to gain additional sales volume. Competitors respond and prices spiral down until they reach unprofitable levels. The market then corrects itself by ceasing or reducing the discounts.
This “normal pricing” holds only for a short while until someone starts the discount price cycle again. The big retailers, Coles and Woolworths, are key players in these price wars. It is claimed that they are killing independent service stations. With 90 per cent of Australian households keeping at least one registered vehicle in their garage or dwelling, petrol prices directly impact most Australians.
Posting Date: 13 February 2012
Regulation gone mad
Is Australia becoming a police state? Do we have too many rules and laws? Has common sense been replaced with legislation? Is the level of regulation unnecessarily burdening business? In answering these questions, let me begin with three examples.
First, my parents have lived in the same house for 52 years and there has NEVER been a car accident outside their home. But that did not stop their local council from erecting a “No Standing” sign in front of their home a few years ago. When my father and his neighbours complained, they were told the bend in the road where they live had been classified as a dangerous blind spot.
Second, at lunch times I swim in a private pool in the city. Last year, following a periodic routine health and safety inspection of the pool by the city council, the gym manager was forced to erect a “No Diving” sign. The new inspector decided that the pool was too shallow for diving, even though there has NEVER been an injury at the pool in its entire 29 year history caused by someone diving into the pool.
Third, earlier this year, the Gateway Credit Union team celebrated the end of the financial year with a night out at Sydney’s Luna Park. We had a great time and, for me, it brought back happy childhood memories. But the unsupervised fun I used to have as a youngster was replaced by safety inspectors on every ride. Even the more sedate rides in Coney Island now attract a watchful eye from the ride attendants.
So, let’s recap. I can’t park outside my parents’ home, I can’t practise my dive starts at the pool and I can’t be too adventurous at amusement parks. Frankly, I’m staggered that I’ve managed to live as long as I have given my “reckless” childhood. I slept in a cot adorned with lead paint, rode a bike without a helmet and travelled in a car without seatbelts.
Risk is inherent in everything we do but it should not paralyse us from doing things. I compete in ocean swims even though I could get eaten by a shark, stung by a blue bottle, dumped by a wave or caught in a rip current. Please don’t tell the authorities or ocean swims might also become heavily regulated – or banned completely!
The serious point I am trying to make here is that it’s impossible to go through life or run a business without taking risks. Indeed, it’s unhealthy to even try as you’ll risk stagnation. Companies which can see beyond risks to the opportunities they present are much more likely to prosper. But what is an acceptable level of risk appetite for a business?
Well, if you are in the business of financial services you cannot adopt a cavalier attitude to risk. In fact, the business of banking is all about managing risk. One of the lessons of the Global Financial Crisis (GFC) is that it’s not enough to manage risk within individual banks. Risk needs to be examined on a system-wide basis.
Around the world regulators and governments agreed to restructure the approach to risk in the financial sector. The cornerstone of this global initiative to contain risk is an international accord – Basel III – which contains sweeping new regulatory standards for banks on capital adequacy and liquidity.
Basel III was primarily intended for internationally active and systemically important banks. But the same regulatory standards are being applied to smaller institutions in a one-size-fits-all approach, putting smaller players with fewer resources at a competitive disadvantage. The new requirements will drive the cost of regulatory compliance to potentially unaffordable levels for credit unions and building societies (mutuals). This represents a risk to competition.
The efforts by regulators to bolster financial system stability and to avoid a repeat of the GFC turmoil are laudable. Few would challenge the goal of a more resilient banking sector. But care must be taken not to punish those, like mutuals, which did not engage in the reckless behaviour that contributed to the GFC.
At the end of the day, most regulation is a reaction to the last big disaster and, as I noted in an earlier post, Global banking laws, no set of rules can ensure the solvency of the banking system or its resilience in a crisis. Like driving a car, banking involves risks which can’t be totally eliminated. Let’s not unnecessarily burden mutuals with legislation that will diminish competition.
Posting Date: 19 November 2012
A fairer tax system
Albert Einstein once said that the hardest thing in the world to understand is income tax. There’s no doubt that our tax system is baffling, which is why more than 75 per cent of Australians use a tax agent. Tax reform in Australia is long overdue – the system needs to be made easier and fairer.
I suspect that most Australians would readily agree to tax reform if it resulted in a smaller tax bill for them personally. Of course, that’s utopian and therein lies the problem. We all want governments to raise sufficient revenue to provide common infrastructure but we don’t want to individually pay any more tax.
But with a growing and ageing population, taxes need to rise to cover increased public spending. We need more schools, more hospitals, more roads and the list goes on. Without an increase in government receipts, we are setting ourselves up for permanent structural deficits.