Understanding of the key components of fuel prices

Announcement

Date: 20 July 2008

Subject: Fuel prices

From: The ValueAdd Company

With the volatility in petrol and diesel pump prices, it is difficult for those outside the industry to determine the impact of the two key variables; crude oil prices and exchange rates. That is until now.

With the benefit of information from the Ministry of Economic Development (“MED”) website, The ValueAdd Company has just launched a user-definable online calculator designed to allow users to get an understanding of the key components of fuel prices. (See http://fuel.nzh1.com)

For the purposes of the analysis, the marker date is the week ending 11 July 2008. The information from MED website includes the: (i) Dubai crude oil price; (ii) exchange rate; (iii) average pump prices; and (iv) the government levies. From this information the refining, transport and margin component of the pump prices for 91 octane petrol and diesel can be derived. Using these derived figures, predictions can be undertaken as to the impact of the two key variables, crude oil price and the $NZ $US exchange rate into the future.

The model also allows the user to see the impact on pump prices of both local government levies (as permitted under recent legislation) and the proposed requirement for biofuel additions to petrol and diesel.

The components of a $2.172 per litre marker price for petrol, are interesting.

The crude oil component is $1.049. Government levies total 52.55 cents with a further 24.1 cents in GST, making a total of 76.68 cents or 35.3% of the retail price. Surprisingly, the refining, transport and margins total 35.6 cents per litre, less than half of the Government’s take.

A further surprise is that the refining, transport and margins component of diesel is nearly 80% more than for petrol at 63.8 cents per litre. We are sure that the transport industry would like to understand why this is the case.

Included in the model is a separate section showing the impact of a greenhouse gas emissions charge on fuel prices with further analysis translating this to cost per tonne-kms for freight. There is also a macro analysis estimating that the total revenue in the Government coffers from the sale of petrol and diesel is close to $900 million.

In terms of the impact of variables, by way of an example, a $US125 Crude oil price, $US0.60 $NZ with the full allowable 6c per litre local government levy and the full imposition of a GHG emissions charge (as advocated in the short term by the Greens), the price of 91 Octane petrol would be knocking on the door of $2.60 per litre! This would surely be unsustainable?

ENDS

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