Driven to distraction by petrol prices

04/03/2009 - 22:00

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There seems to be a disconnect between the price of oil and petrol’s price at the bowser.

Driven to distraction by petrol prices

AN astute reader sent a comment to our website asking why retail petrol prices had not fallen in line with the collapse in the oil price.

My first thought was that this must be wrong. Since their peak in the middle of last year (I have to admit I don't track the local prices that closely), I figured they'd gone down substantially, so we were all better off.

But rather than leaving it at that, I grabbed some data from a few sources, including Western Australia's very own FuelWatch, that price regulating agency which so enthralled Kevin Rudd.

I found some monthly data that could be turned into a graphic representation and, bingo, our reader is right.

At first glance, local unleaded prices look reasonable, given they didn't spike as much as the oil price at its highest in July.

In fact, going back to oil's decade-low in late 2001, the current oil price is more than double the $US20 a barrel from that time. In comparison, unleaded petrol dropped to a level that was just 25 per cent higher than 2001, before kicking back to a figure more like 40 per cent higher.

So oil is twice as expensive now than it was in 2001, whereas unleaded petrol has moved at less than half that rate. We ought to be pleased, right?

There is one spanner in the works of this, and that is the federal government's fuel excise of around 38 cents a litre, which is a base level cost that should not be counted - as it is static (actually it's falling in real terms), and unrelated to the real economics of the industry.

For our purposes, it distorts the picture.

If you remove that excise, the 80c/L price for unleaded in 2001 becomes 42c/L and the $1.15/L price in February 2009 becomes 87c/L. That equates to a rise in the non-excise component of the retail price of unleaded petrol of 87 per cent since 2001. That is nudging close to double but still less than the base oil price. Again, that looks relatively good.

A better way to look at it, though, might be to compare with early 2005 when oil price levels were approximately what they are today - just above the $US40 per barrel mark.

Then, unleaded petrol was retailing at about 95c/L. Today, it's trading at an average of $1.15/L. In the retail price, that's more than a 21 per cent increase from four years earlier. Remove the excise and it's a 37 per cent increase on the cost in January 2005.

Given the cost of the main input is the same, there seems to be a big gap in favour of someone on the selling side of the equation.

Maybe petrol companies are improving margins after last year's peak prices, or maybe my DIY research based on monthly prices doesn't quite do the situation justice in the short term.

Nevertheless, at a time when consumers are tightening their belts and businesses are looking to save every dollar they can, it appears as if petrol prices are not making the economic contribution they could.

PRIVATE APPROACH

PRIVATE business is a unique world that gets a lot less attention than it deserves. Without huge numbers of shareholders private companies can be just that - private.

So it's that rare insight into a different part of the economy that allows us to understand more of what is going on and where mistakes have been made in the past.

Over recent weeks, I spoke to a number of private business leaders and the more I looked at the more I started to grasp one of the fundamental differences between these businesses - the ones that have survived for decades or longer - and their competitors.

My sense is that shareholders in large private businesses have a different mindset. They are about wealth preservation rather than growth at all costs.

Many of these businesses are family owned, started by an entrepreneur and developed by succeeding generations; the leadership is not encouraged by the shareholders to bet the farm time and time again.

They take a more custodial approach to wealth because, in many cases, they plan to live off the returns of these assets for many years.

Fundamentally, the most successful of these businesses have shareholders who know when enough is enough.

In comparison, public-listed companies have shareholders who never have enough. Capital shifts the so-called best performer, always seeking the best return possible and less likely to reward long-term performers.

The more I look at the crisis that has enveloped our world the more I see investors as the place to lay blame. Investors are never happy with what they've got. They push fund managers to perform better, and in turn do the same to companies they invest in.

Of course, not everything in private business works perfectly. Right now, Harvey Beef is struggling with new owners after it failed in the hands of its once-proud family owners.

Sometimes private businesses just can't keep up with pace of public companies that spend huge sums on management expertise.

Sometimes private shareholders' needs change and those businesses come under similar pressures to improve performance.

However, big surviving private businesses that I spoke to appear very well positioned in the current market, due to their conservative approach to managing risk and reward.

Debt averse, cautious in protecting their markets and often owned by shareholders that fundamentally understand their operations, big private businesses are watching the wasteland left by public companies to take advantage of the many opportunities that will arise from the current maelstrom.

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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