Monday, 8 October 2018

Fuel Prices: The AA's Cost Breakdown and a Longer and Deeper View (Updated 9 Oct.)

Costs that make up a litre of petrolpn121

UPDATED. Read  Gordon Campbell on the political costs of the price rises.

The Automobile Association (AA) Breakdown
New Zealand has a de-regulated market and as such retail prices are influenced more by global supply and demand factors rather than the cost of refining fuel locally (although half our finished fuel is imported). 

The price you pay for a litre of petrol is made up of the imported cost of the petrol, taxes (fuel excise, ETS and GST), shipping costs and an importer margin (the amount the fuel companies earn to offset their operating costs, plus profit margin).
Although the cost of crude oil is one of several factors that comprise the cost of imported petrol or diesel, they are not intrinsically linked as the market prices of oil, and refined petrol and diesel can each be influenced by different factors, and therefore international refined fuel commodity prices may not move in line with crude oil.
Currently, just over a quarter of the pump price is the actual cost of refined petrol while about 50% is tax i.e. 69.984 cents per litre in fixed excise (not including the 10c Auckland Regional Fuel tax), plus the Emissions Trading Scheme levy (approximately 5.5cpl) and GST (NZ has the sixth lowest fuel tax in the world; in many OECD countries, taxes account for around two-thirds of the price). 

This is important when monitoring movements in the international price of fuel: if the benchmark price changes by 10%, the pump price might adjust by 25% of that, i.e. only 2.5% (subject to the exchange rate). 

Despite our high taxes, New Zealand has some of the lowest fuel prices in the Western world.

A Longer and Deeper View
While my sympathy goes out to those protesting the increase in petrol prices we need to ask why Government is taking what they must know is an unpopular action, becoming even more unpopular when September's 3c/l increase is followed by two more 3c/l increases over the next two years. 

Firstly, we need to note, as the AA has observed, that NZ has the 6th lowest fuel costs in the OECD where the fuel tax in some countries accounts for over two-thirds of fuel prices. Ours is still under one-third. 

Secondly, that not all the increase is due to tax.  The AA has said  recent increases by the big fuel suppliers were unjustified with....  

... for example, BP  which paid $300m of its profits to its London HQ in 2015, and with Z Energy increasing its shareholder dividend by $200m. 

If the big suppliers do not regulate themselves, Government regulation may not be too  far over the horizon. (See Related at end of this posting.)

Thirdly, we need to recognize that decades of neglect has resulted in today's grossly inadequate public roading and rail systems, as successive national and local governments feared raising taxes that could lose them support and even elections.  

Fourthly, few would dispute that major work is needed to improve our land transport efficiency,  with particular attention given to where we live and how we travel to work. 

  • Urban growth continues to impinge on rural land
  • Commuters travel greater distances,
  • No serious efforts have been made in decentralizaton and regional development, or reviewing
  • Sharing  public infrastructure costs with the private sector.  
  • Public transport needs massive reconnects. 

In Auckland alone an estimated $1.3B a year's productivity is lost due to congestion!

Fifthly, unless Government takes further action, fuel price increases place a proportionally higher burden on the poor and others with little discretionary income who have to use their car to get to work. Its Family Package will help but lower personal taxes and/or GST exceptions need further consideration.

The AA think government should remove GST on fuel (which would help the poor)  and ensure that all the tax is paid on road transport. At present, 19c is spent for other purposes.

Finally, we need to note that a major shortcoming of democracies is their combative format. One side is pitted against the other, with both sides rarely in agreement.  

This has the advantage of being a check on Government, but it can result in many essential decisions -- that will bring long-term benefits to all -- being avoided or deferred ---because of short-term political expediency.  

The belated fuel tax is an example. Aucklanders and others are now paying for what they have avoided paying in council rates over the years. 

Political Football
Fuel taxes have become a political football. 
Simon Bridges says National did not increase tax because of advice that new roads, etc., could be paid for out of existing funding.   Jacinda Adern disputes this, saying the advice was that tax would need to increase by 10-20c -- not much different from the Government's planned take. National says it will abolish the taxes if returned to Government, taking us back to square one.

The county needs its politicians to show more unity on this important issue.

-- ACW

Government to check on fuel companies. Largest take in OECD countries.

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