On petrol pricing and calls for enquiries
ACT Leader David Seymour

Labour MP Stuart Nash recently called for a parliamentary inquiry into petrol prices. National MPs in the finance and expenditure select committee voted against such an enquiry. They were right to do so.

Inquiries can be expensive and often politically motivated. Enquiries should only be initiated on solid evidence, not on a politician’s hunch. Too often they are motivated by opportunistic grandstanding.

For a start you need some evidence that there is a problem. The evidence offered was weak, citing MBIE weekly oil price monitoring data – namely the time series data on the “importer margin”.

What is the “importer margin”? Most people will assume it somehow represents profit margins.

But it does not. It represents the amount available to retailers to cover domestic transportation, distribution and retailing costs, and profit margins. If all those elements other than profit margins had been stable, which of course they have not, then there may be an issue to consider a little further.

So, the data simply does not connect with the issue that is claimed to be a problem. No wonder the FEC rejected the idea of an enquiry.

More broadly, the last inquiry into the industry in 2008 found the New Zealand domestic petrol market is fundamentally competitive and that retail petrol prices are not fast to rise and slow to fall. Subsequent NZIER studies in 2011 and 2013 also found no asymmetry in adjustment of prices in New Zealand petrol prices.

Here are some points to consider on this, and other, enquiries.

• Inquiries should be initiated on solid theoretical and empirical evidence, and not on a politician’s hunch after looking at a graph of aggregate data that does not even mean what the label suggests.

• New Zealand politicians have a track record of calling for populist inquiries (e.g. milk and supermarkets) that find nothing.

• In 2008, the AA called for an inquiry into fuel prices. The MED inquiry found that the domestic petrol market is fundamentally competitive and that retail petrol prices are not fast to rise and slow to fall.

• Inquiries/investigations are not costless. Indeed, they can be very expensive. For example, the 2009 Commerce Commission electricity investigation cost millions ($3.5m).

• The Commerce Commission can initiate a part 2 investigation or part 4 inquiry, if it thinks one is required.

• The illegal exercise of market power is very difficult to detect using empirical data and the results are very easy to dispute. For example, the ‘Wolak’ electricity price investigation was widely criticized and theoretically it was never going to be able to say whether firms were illegally exercising market power.

• An asymmetry in adjustment of prices is often used as evidence of anticompetitive behaviour. But NZIER studies in 2011 and 2013 found no asymmetry in adjustment of prices in New Zealand petrol prices.

• Even if an asymmetry in adjustment of prices was found it is not in itself evidence of market power – this price pattern (called ‘Rockets and feathers’ - prices often rise like rockets but fall like feathers) has been found across many industries – even extremely competitive ones. There are a number of economic theories to explain this.

• The “importer margin” data from MBIE obviously does not give a useful perspective on petrol company margins, in so much as these margins might reflect a public policy concern. Apart from not representing just the profit margin, the MBIE’s retail price data also doesn’t include supermarket fuel and loyalty card discounts, regional discounts (which can be 20 to 30c under the average national price) and other costs such as credit card interchange fees, distribution costs, advertising and rental costs. Exchange rate hedging adds yet another level of complexity to assessing the margins in this extremely complex industry.

In short, the evidentiary hurdle for an enquiry was not only not met, it didn’t even get off the ground.

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