Fuel pricing FAQs: Caltex Australia

Frequently Asked Questions

Are petrol companies ripping off consumers?
How do price cycles work?
Why is petrol in regional towns more expensive and why don't they have price cycles?
Do prices increase for long weekends?
Why don't all service stations sell their fuel at the same price?
Why are petrol and diesel different prices?
But isn't diesel just a by-product of refining?
Why is E10 cheaper than regular unleaded petrol?
Why doesn't autogas follow the same weekly cycle as petrol?
Why is fuel no longer cheaper in Queensland?
What is price support?
What's the difference between retail petrol margins and shop margins?
Why are petrol prices quick to rise and slow to fall compared to benchmark prices?
How do Australian petrol prices compare to international prices?
Why are Singapore benchmarks prices used when calculating Australian fuel prices?
What about the price of crude oil?
Is it cheaper for Caltex to make fuel than import it?
What is the terminal gate price?
What exactly is the quality premium?
How does the value of the Australian dollar make a difference to fuel prices?
Doesn't Australia sell gas to China very cheaply - why isn't LPG priced this low?
How do external factors, such as 2005's Hurricane Katrina, affect fuel prices here?

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Are petrol companies ripping off consumers?

No. Caltex Australia's financial results for calendar year 2008 averaged out to a profit of just one cent per litre for all petroleum products sold. Meanwhile, the government collected more than fifty cents in excise and GST for every litre of petrol and diesel sold to motorists.

More than half of each litre of petrol sold is the product cost (that is the cost of the product from the refinery). Tax is the next largest cost.

Fuel retailers achieve very small gross margins on petrol, typically up to three-and-a-half cents per litre in metropolitan areas. Shop sales actually account for about 70 per cent of gross margins at many larger service stations, making them convenience retailers more than fuel retailers.

How do price cycles work?

Price cycles are the outcome of intense competition between "discounters" who typically drive prices down and "non-discounters" (or "price followers") who typically remain competitive with the discounters, but individually increase prices when the cost of discounting becomes unsustainable. Price cycles mainly occur in major metropolitan areas on a weekly basis.

The price of petrol generally goes up on the same day each week due to competitive discounting over the previous week. Because discounting increases sales for a short period until competitors react, some service stations will continually move prices downwards in small steps. It takes about a week to reach the point where petrol is being sold close to or below cost, which is unsustainable. Consequently, at different times on Wednesday or sometimes Thursday in the eastern states and WA, other petrol retailers independently increase their prices at some or all of the sites where they control the price. This usually occurs over several hours. Competitors are carefully watched and if their prices don't increase to similar levels, retailers may reconsider their price increases.

This means that motorists can save money by buying fuel at a heavily discounted rate on the typically 'cheap day' of Tuesday and part of Wednesday.

Diesel prices are generally not affected by the price cycle. That's because the vast majority of diesel in Australia is sold in bulk to companies in industries such as mining and transport, rather than at the retail level. While retail sales of diesel are growing, for many service stations diesel is still less than 10 per cent of their fuel sales and discounting does not lead to a sufficient increase in fuel sales and shop sales to offset the loss of retail margin.

Why is petrol in regional towns more expensive and why don't they have price cycles?

Prices are higher in many country towns due to higher freight and distribution costs and lower service station sales volumes. Country service station providers often have higher retail margins (margin equals pump price less wholesale price) to ensure their viability as they generally have lower petrol volumes and non-fuel income such as shop sales than their metropolitan counterparts.

Service stations in regional areas still offer their most competitive prices to gain customers, although competition is usually less intense than in the city. The less intense competition also means there tends not to be price cycles in regional areas because there is a smaller potential market to respond to the discounting of prices.

Do prices increase for long weekends?

No. In the lead up to and throughout holiday long weekends, pump prices follow their typical weekly cycles in the eastern states and WA. This behaviour is typical of all holiday periods in major metropolitan areas. The price cycles typically (but not always) mean an end to discounting on Wednesday or Thursday ahead of holiday weekends - just like most other weekends. This is illustrated in the chart below.

Long weekend petrol prices

Why don't all service stations sell their fuel at the same price?

Service stations drive sales by pricing their fuel to match or beat their local competition. Generally their competitors are other service stations in that town or neighbourhood. As such, prices at service stations are generally influenced by the number of potential customers and their likely sales volumes as well as the number of service stations in the immediate area and their prices.

For example, service stations on major traffic routes can increase sales substantially by reducing their prices by a relatively small amount - but only until competitors see what they are doing and drop their prices also. Service stations with less passing traffic would not find discounting as successful a way to increase sales.

Service stations will try to balance the lower margins resulting from discounting fuel against the resultant higher volumes. Fuel sales can affect shop sales also. Reduced prices could attract customers who also purchase items from the convenience store, while expensive fuel could deter customers from visiting the site. But high fuel sales may also discourage store customers because forecourts are clogged with fuel customers.

Why are petrol and diesel different prices?

Diesel and petrol prices are driven by the forces of supply and demand, but with diesel in mainly used in the industrial, agricultural and transport sectors, and petrol in the domestic sector, demand for the products differ.

For example, from the late 1990s up to 2008, a resources boom in Asia saw a growth in demand for diesel, which pushed up international diesel prices relative to petrol. As a result, local prices for diesel were much higher than those for petrol. But a drop in diesel demand in 2008 and 2009 as a result of the global economic downturn saw the price for diesel fall, relative to petrol, to the extent that retail prices for diesel were below petrol.

But isn't diesel just a by-product of refining?

No. During the refining process crude oil splits into a number of different substances which, after further refining, become petrol, diesel, jet fuel, fuel oil, gases such as propane and butane, and non-fuel products like bitumen and waxes. While refineries can be designed to produce more of one substance than another, all those products will still come from each barrel of crude oil. For example, Australian refineries are designed to produce mostly petrol as there is a high demand for petrol in Australia, while many refineries in Asia have been designed to produce mostly diesel, due to a high demand for diesel in Asia. The prices, however, are determined by supply and demand for the products across the Asian region.

What we produce

Why is E10 cheaper than regular unleaded petrol?

The price of E10 petrol is influenced by the cost of both its components - ethanol and petrol. Significant fluctuations in one or both markets impact the cost of E10. However a government subsidy to encourage ethanol's use means motorists can currently buy Caltex Bio E10 Unleaded petrol at a discount to regular unleaded petrol.

Why doesn't autogas follow the same weekly cycle as petrol?

Just like petrol and diesel, the retail price of autogas is primarily influenced by local competitive factors. In some capital cities, particularly Melbourne where more LPG is sold, strong competition for market share can lead to strong discounting from some service stations. At other service stations, LPG is a small proportion of their fuel sales and discounting LPG does not lead to increased fuel sales and shop sales to the same extent as discounting petrol. These varying marketing strategies mean discounting of LPG is irregular rather than following a weekly cycle.

The wholesale price of LPG is linked to the international benchmark price for LPG (Saudi Aramco Contract Price), plus shipping, insurance, wharfage and the effects of the value of the Australian dollar. Freight is also added (LPG is more expensive to transport than petrol as it is transported in pressurised tanks).

Government excise is currently not applied to LPG but is expected to be phased in from 1 July 2011.

Why is fuel no longer cheaper in Queensland?

Up to 30 June 2009 the Queensland Government had a Fuel Subsidy Scheme where fuel retailers were paid a subsidy of 8.34 cents per litre (excluding GST) for reducing the price of petrol and on-road diesel they sold. This reduced Queensland prices by 9.2 cents per litre (including GST) compared to the price without the subsidy.

The NSW Government also paid a subsidy, ranging from 1.37 cents to 8.34 cents per litre , to service stations in five geographical areas south of the Queensland border to ensure those retailers could compete with their Queensland counterparts.

From 1 July 2009 the Queensland Government abolished the scheme, and the subsidy for NSW service stations was also removed.

What is price support?

Price support is an arrangement that allows Caltex franchisees, who are typically small business people, to compete with other service stations during periods of discounting. Franchisees are responsible for setting retail prices at their sites except where they operate as commission agents for the sale of fuel. The following discussion relates to franchisees who purchase the fuel at wholesale from Caltex then sell it to their customers.

A pricing manager employed by Caltex monitors petrol prices of competitors. If the pump price of a Caltex franchisee does not allow the site to earn a reasonable fuel margin (taking into account the site's net buy price), Caltex may provide price support to a level which allows a pre-determined reasonable fuel margin to be earned.

The petrol market regularly faces competitive price pressure and in the normal course of business Caltex may receive a request from a franchisee for price support, or may make a decision to offer price support on a market group by market group basis to allow them to remain competitive. (A market group as defined by Caltex is a group of service stations in a limited geographical area.)

Point of sale (POS) equipment at each site records volume sold through the pumps at each price level and relays this information to Caltex to calculate the dollar amount of assistance due to each site which is then paid within 24 hours by Caltex. Franchisees receiving price support from Caltex always remain free to post pump prices at less than the maximum supported price.

What's the difference between retail petrol margins and shop margins?

The petrol margin is the difference between the wholesale and the retail price of the petrol, while the shop margin is the difference between the cost of buying shop products wholesale and the retail cost. The margin is calculated before deducting any day to day running costs or the costs of repaying loans.

Service stations generally have low petrol margins, up to three-and-a-half cents per litre for a typical metropolitan service station (that is 2-3% of the pump price). Shop margins are much higher and vary depending on the individual product. Shop sales actually account for about 70 per cent of gross margins at many larger service stations, making them convenience retailers more than fuel retailers.

Why are petrol prices quick to rise and slow to fall compared to benchmark prices?

This is a myth, as petrol prices follow international prices at the same speed regardless of whether they are going up or down. Caltex uses a weekly average of the international benchmark prices to calculate wholesale petrol prices, which smooths out daily movements as a result of price volatility. This means there is usually a lag of about a week between movements in international benchmark prices and wholesale prices here in Australia - but that happens whether the price is going up and down, as can be demonstrated by the chart which compares the benchmark price, average TGP prices and average unleaded prices for the past 12 months.

Australian pump prices

How do Australian fuel prices compare to international prices?

Petrol in Australia is among the cheapest in developed (OECD) countries, as shown in the chart below. Those countries such as North America and Mexico that do sell the cheapest petrol have a lower tax component when compared to Australia's rate of about 40%. When prices excluding taxes are compared, Australia is still among the cheapest, with prices in many European countries higher than Australia.

OECD petrol pricing

Why are Singapore benchmarks prices used when calculating Australian fuel prices?

While petrol and diesel are produced throughout Australia at seven refineries, including two operated by Caltex, demand has overtaken supply with more than 30 per cent of all Australia's fuel now imported from overseas. That means Australian refineries must compete against imports and Singapore, as a fuel refinery and trading hub, is the major source of fuel for imports.

Caltex uses MOPS95 for its petrol price calculations, which is industry jargon for the market price of generic quality 95 octane petrol quoted by Platts (a subscriber-based global information service) sold by Singapore refineries. But as this generic quality petrol doesn't usually meet our strict fuel quality standards, Australian-quality unleaded petrol attracts a premium over MOPS95. Gasoil 10ppm sulfur (also known as extra low sulfur diesel) is used as the benchmark to calculate diesel prices.

Caltex uses a one-week rolling average of the Singapore benchmark price when setting its wholesale prices. This averaging occurs regardless of whether prices are going up or down and smooths out daily fluctuations. The time required for fuel to turn over at service stations could further extend the response time to Singapore benchmark prices at the bowser with non-metropolitan markets typically taking longer to respond.

As the chart shows, average retail gate prices closely follow Singapore benchmark prices.

Australian and Singapore petrol prices

What about the price of crude oil?

Crude oil in its unrefined form can't be used in motor vehicles, so supply and demand for refined petrol and diesel is what drives their prices.

While an increase in the price of crude oil will increase the costs of operating refineries, those increased costs may not be able to be passed on in the form of higher prices for refined product if there is there's an oversupply of those products in the region. Likewise, if there is a shortage of refined products in the region, their prices may increase sharply even if there has been no increase in crude oil prices.

West Texas Intermediate (WTI) crude oil, for which prices are often quoted in the Australian media, is the US benchmark and not used here in Australia. Other global crude oil benchmarks include Brent (used in Europe) and Urals (used for oil from Russia and the Former Soviet Union). While Caltex imports its crude oil from around the world, we source most of our crude from the Asian region where the regional benchmark for low sulphur crude oils is Tapis.

The chart shows the benchmark price of refined petrol compared to Tapis crude oil.

Australian pump prices

Is it cheaper for Caltex to make fuel than import it?

That depends on the international market forces of supply and demand and how they offset the value of refinery production. The difference between the cost of crude oil and the price of a refined product is called the refiner margin. This refiner margin changes on a daily basis and can at times be negative (where the cost of crude oil is greater than the price of the refined product). The cost of running a refinery, including capital investment, must be recovered from the refiner margin.

What is the terminal gate price?

Caltex's terminal gate prices (TGPs) are spot prices for bulk supply of fuel ex-terminal and are therefore a good proxy for wholesale prices. They are calculated based on the cost of imports to Australia, terminal costs and a wholesale marketing margin, plus excise and GST.

Contract wholesale prices typically include charges for brand, credit, and site and equipment rental but also may be discounted according to competitive conditions in various markets and customer size.

What exactly is the quality premium?

Australiahas mandatory fuel quality standards which are stricter than most countries in Asia. This is part of Australian Government policy to reduce air pollution and greenhouse gas emissions from vehicles. Because Caltex calculates regular unleaded prices using the Singapore benchmark MOPS95, a quality premium needs to be added to take into account the additional costs of buying higher-quality fuel with tighter quality specifications, eg for sulfur, benzene olefins and MTBE (methyl tertiary butyl ether).

This quality premium can vary but usually accounts for between two and three cents per litre of regular unleaded petrol.

There is currently no quality premium on diesel.

How does the value of the Australian dollar make a difference to fuel prices?

Crude oil and refined petroleum products are traded globally in US dollars. That means fuel prices in US dollars need to be converted to Australian dollars when determining the import parity price or paying for actual imports. When the Aussie dollar is high it lessens the gap between Australian and Singapore prices, which in the past has cushioned Australia from high global petrol prices, while a lower Aussie dollar increases that gap. Freight, insurance and the quality premium are also denominated in US dollars.

Doesn't Australia sell gas to China very cheaply - why isn't LPG priced this low?

LPG is often confused with Liquefied Natural Gas (LNG). Australia is a major exporter of relatively cheap LNG due to abundant resources of natural gas.

Automotive liquefied petroleum gas (LPG) or autogas is a combination of propane and butane which both occur naturally in gas fields and are separated out when the gas is processed. Propane and butane are also produced from crude oil in the refining process.

Australiaexports about the same amount of LPG as is used domestically with the largest markets being Japan, the Republic of Korea and China. Pricing for exports is based on the Saudi Aramco Contract Price, which is the same benchmark as used in Australian LPG wholesale pricing.

How do external factors, such as 2005's Hurricane Katrina, affect fuel prices here?

Events in other parts of the world that affect either the supply or demand of crude oil or refined products can lead to changes in the price of refined products in the Asian region and Australia. The USA is the world's biggest user of refined products, so if a natural disaster (like Hurricane Katrina in 2005) affects a significant number of the refineries that normally produce products for domestic use, more imports are needed which can be drawn from other regions around the world. As markets for petroleum products are connected globally, this can affect prices for the Asian region, pushing up prices in Australia.

Similarly, demand for refined products could increase more than expected in other parts of the world, such as Europe during an unusually cold winter, leading to pressure on diesel and heating supply. This in turn could mean more imports are needed by Europe to supplement domestic supply or by countries normally supplied by Europe such as the USA. Either way, this could result in higher prices in the Asian region.

Terrorist attacks in oil producing countries such as Nigeria can affect the price of crude oil as, even if the incident doesn't result in actual lost production of crude oil, speculators could perceive that as a result of the attack availability of crude oil may be reduced, thereby increasing the value of crude oil already in the market.

Closer to home, if refineries in the Asian region are undergoing maintenance they may require extra imports of refined products to meet customer demand while they are not refining, or they could cease or reduce exports of refined products. In both cases this results in reduced availability of refined products in Asia increasing the price of the available products.

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