Are petrol retailers ripping us off?

With global oil prices plunging to less than a third of what they were trading at in mid-2014, many motorists must be wondering why our petrol and diesel prices haven’t fallen as far.

Average national retail petrol prices were around $1.20 for unleaded in the week ending January 17, 2016, compared to around $1.50 a litre in June 2014. So why have retail petrol prices only fallen by 20% when oil prices have plunged 74%?

Clearly someone along the line is making much larger profits currently, with motorists bearing the brunt of those higher margins. However, the Australian Institute of Petroleum (AIP) says that thanks to vigorous competition petrol suppliers only make a small profit – around 2 cents a litre of all fuels sold over the past 12 years.

The problem appears to be the baseline that Australian petrol suppliers use – which has hardly changed in the past year – as you can see in the chart on the AIP’s web page here. The baseline – MOPS95 petrol – which represents the mean of Singapore prices for 95 octane petrol a year ago was around 45 Australian cents, but rather than falling in line with global oil prices, MOPS95 petrol actually increased over the year, before beginning to fall from around July – but certainly not following the plunge in oil prices.

MOS95 represents the refined end product from TAPIS oil, but it seems clear that refiners and retailers are making substantially higher profits – something the Reserve Bank of Australia (RBA) appears to agree with.

In August 2015, the RBA addressed the issue of higher petrol prices, “The recent increase is only partly explained by higher international prices for crude oil and the depreciation of the Australian dollar over that period. Refining margins have also increased and there has been an increase in retail margins, which had been compressed with the earlier decline in petrol prices“.

Unfortunately, unless you subscribe to Bloomberg, getting historical data on the benchmark TAPIS oil price is difficult, but I’d bet you that the margin between TAPIS and MOPS95 is the main reason why Australian motorists are still paying $1.20 a litre of petrol.

Around 88% of the price we pay for petrol at the pump is made up of the international benchmark price and taxes – according to Caltex Australia Limited (ASX: CTX). The company says the remaining 12% covers the cost of transporting, storing and retailing the fuel, including a small profit for the retailer. However, Caltex also said in December last year that it expected to report a record full-year profit, some of which may be to due to higher margins.

From August 1, 2015, Australian motorists pay 39.2 cents a litre in excise tax for petroleum and diesel. On top of that, we also pay 10% in GST (goods and services tax), which is already included in the petrol price. To find out how much GST you are paying – divide the petrol price by 11. If the petrol price is $1.21, then you are paying 11 cents per litre in GST. Add that to the excise and for each litre of petrol, motorists are paying 50 cents in taxes.

Foolish takeaway

Not to be forgotten is the roughly 2-week time lag between prices in Singapore and at the pump in Australia and pressure from the ACCC. Cheaper prices should soon be on the way to motorists.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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