What can we do about it?
Petrol prices - they’re on every street corner, they’re a buzz topic for the evening news and, if you’re anything like me, they’ll leave you scratching your head more often than not. Every couple of weeks prices shoot up and then gradually ease back again. This process is so ubiquitous and predictable that it’s even got a name – the petrol price cycle. It’s been a part of motorists’ experience for so long that no one seems to question its very existence.
But take just a small step back and you’ll quickly realise that something seems a little strange. Why do petrol prices vary so drastically from suburb to suburb? And why do all the retailers seemingly change their prices at the same time?
Competitive markets where retailers are selling the same good in the same region should be selling at the lowest price they can while remaining profitable, or at least that’s the theory. That’s a far cry from the ACCC website (2021) which instead says that “price cycles are the result of deliberate pricing policies of petrol retailers and are not directly related to changes in wholesale costs.” Ask any economist and they’ll say this smells of collusion. But of course, you won’t hear the retailers admitting it. Quite the opposite. The Australasian Convenience and Petroleum Marketers Association (ACAPMA) issued a rejoinder to a 2018 ACCC report, arguing that price cycles are not anti-competitive, rather the intense price under-cutting is a sign of “fierce market competition” that is “almost bordering on extreme” (ACAPMA 2018). Evidently, this argument seems to have fallen on deaf ears, and for good reason too.
The petrol market has long been associated with dodgy behaviour, so consumers have every right to be wary when they hear ACAPMA spruiking that they are the epitome of market-based competition. A study by Wang (2008) found empirical evidence of explicit collusion by retailers to coordinate price hikes in the Ballarat gasoline market. Wang was able to get access to phone call records and pricing data used from a related court case, giving us a rare glimpse into the underbelly of the Australian retail petrol market. The findings are alarming, but perhaps not all too surprising, as he concludes that phone calls were made between retailers so that price leaders could coordinate the timing of price hikes and limit their volume loss.
To this end, the ACCC (2018, p.23) toughened their guidelines to clamp down on what they call ‘concerted practice’ to coordinate prices. In line with Wang, the ACCC notes that “retailers go to considerable lengths to ensure that their conversations occur in secret” and even “refer to each other by code names.” I don’t know about you, but this doesn’t sound like a market brimming with competition. And, at the end of the day, it ultimately spells bad news for the consumer.
So what can we do about it? When it comes to breaking up cartels, it comes down to the ACCC to detect and punish anti-competitive practices. Fortunately, the growing body of research and the rise of “Big Data” is making this much easier for the watchdogs to keep an eye on (Byrne, 2017). In a micro sense, we can be using our wallets to fight back against malign pricing tactics. Real-time apps, like Fuel Check, make it easy to know where the lowest prices are. Flocking to the lowest cost provider might just be enough to convince them to renege on the price hike and undermine cooperation. But maybe that’s just wishful thinking. In reality, the big disruptor to petrol price cycles is already knocking at the door. The seismic shift from petrol to electric will force the hand of petrol stations and, more importantly, democratise access to fuel. So be smart with your petrol purchases, shop around for the best deal, and take comfort in knowing that price cycles will soon be a relic of the past.
By John Dundas - Masters of Economics
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