There has been talk about the recent increase in petrol prices. The PM also spoke about it.
I do not have access to all data from where I am, but I could access Stats NZ petrol prices from the Consumer Price Index (CPI). The plot shows the petrol price index in the CPI, the CPI, and two measures of crude prices: West Texas Intermediate (WTI), and European Brent (seasonally unadjusted). All indexes have base 2007 Q2 =1000. The second plot, which is more relevant to any analysis, is for the inflation rates of petrol and crude prices.
What do we see?
First, the price of petrol has been increasing lately. The average quarter-on-quarter growth rate over the period from 2006 Q2 to 2018 Q2 is 0.44 percent. The growth rate in 2017 Q4 was 5.9 percent. Since then it fell to 2.5 percent in 2018 Q1 and picked up a little to 3.1 percent in 2018 Q2. The data show that the price of NZ petrol did not fall as much as crude did after the collapse of the oil market in 2014.
Second, petrol prices in New Zealand are associated with crude oil prices. The simple correlation between crude prices and our petrol prices inflation rates is 82 and 84 percent and highly statistically significant for the WIT and Brent respectively.
High petrol price could be explained by (1) high tax on petrol at the pump; (2) excess demand for petrol; (3) higher international crude prices; (4) lower NZ dollar; (5) higher company profit margins; (6) higher cost of production such as unit labor cost; and (7) noncompetitive market (i.e., the marginal cost > the price). There could be an omitted variable, but I would say these are the important ones to start with.
I believe that New Zealanders have the right to complain about the tax rate on petrol, but not about the companies profit margins.Company profit is taxable.
The profit margin declines as competition increases because new entrants in the market would chew bits of the market profit. Hence, prices should fall as competition increases.
Unlike countries like Singapore, for example, we have no restrictions on the number of cars in the streets. Petrol is a normal good. We buy less of it when the price goes up. And, we buy more when income and population increase. If the supply of petrol is a little bit inelastic, an upward shift in demand raises the price considerably. The government should have an idea about the elasticities of supply and demand of fuel.
From the above, the only assured measure to reduce petrol price in the hand of the government is the tax on petrol (it's been a long time since I checked, but I assume we don't have import duties on crude!).
The government has no control over international crude prices, domestic excess demand for petrol, the value of the Kiwi dollar, the company profit margin, and the cost of labor.
Re competition, if petrol companies have been making large profits and the market is competitive we would have expected new entrants in the market, which should have resulted in lower petrol prices over time. That did not seem to have happened. Why? Is it because companies have not been making extraordinarily high profit as some might suggest? Or because there is a lack of competition?
Could the government promote more competition in the NZ petrol market? I don't know much about this, but maybe there are "restrictions to entry," which the government could remove.
Also, the higher the tax on petrol the higher the price. If the price of petrol is higher than the marginal cost then the tax reduces competitiveness.
I do not have access to all data from where I am, but I could access Stats NZ petrol prices from the Consumer Price Index (CPI). The plot shows the petrol price index in the CPI, the CPI, and two measures of crude prices: West Texas Intermediate (WTI), and European Brent (seasonally unadjusted). All indexes have base 2007 Q2 =1000. The second plot, which is more relevant to any analysis, is for the inflation rates of petrol and crude prices.
What do we see?
First, the price of petrol has been increasing lately. The average quarter-on-quarter growth rate over the period from 2006 Q2 to 2018 Q2 is 0.44 percent. The growth rate in 2017 Q4 was 5.9 percent. Since then it fell to 2.5 percent in 2018 Q1 and picked up a little to 3.1 percent in 2018 Q2. The data show that the price of NZ petrol did not fall as much as crude did after the collapse of the oil market in 2014.
Second, petrol prices in New Zealand are associated with crude oil prices. The simple correlation between crude prices and our petrol prices inflation rates is 82 and 84 percent and highly statistically significant for the WIT and Brent respectively.
High petrol price could be explained by (1) high tax on petrol at the pump; (2) excess demand for petrol; (3) higher international crude prices; (4) lower NZ dollar; (5) higher company profit margins; (6) higher cost of production such as unit labor cost; and (7) noncompetitive market (i.e., the marginal cost > the price). There could be an omitted variable, but I would say these are the important ones to start with.
The profit margin declines as competition increases because new entrants in the market would chew bits of the market profit. Hence, prices should fall as competition increases.
Unlike countries like Singapore, for example, we have no restrictions on the number of cars in the streets. Petrol is a normal good. We buy less of it when the price goes up. And, we buy more when income and population increase. If the supply of petrol is a little bit inelastic, an upward shift in demand raises the price considerably. The government should have an idea about the elasticities of supply and demand of fuel.
From the above, the only assured measure to reduce petrol price in the hand of the government is the tax on petrol (it's been a long time since I checked, but I assume we don't have import duties on crude!).
The government has no control over international crude prices, domestic excess demand for petrol, the value of the Kiwi dollar, the company profit margin, and the cost of labor.
Re competition, if petrol companies have been making large profits and the market is competitive we would have expected new entrants in the market, which should have resulted in lower petrol prices over time. That did not seem to have happened. Why? Is it because companies have not been making extraordinarily high profit as some might suggest? Or because there is a lack of competition?
Could the government promote more competition in the NZ petrol market? I don't know much about this, but maybe there are "restrictions to entry," which the government could remove.
Also, the higher the tax on petrol the higher the price. If the price of petrol is higher than the marginal cost then the tax reduces competitiveness.
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