The Real Reason Petrol’s So Steep

While the price of fuel has been dropping in recent days, it’s still steep — teetering around the 30-year high of $2.48 per litre.

At a surface level, the price of fuel affects us through our cost of commuting, as well as our cost of leisure. Wherever you go, petrol’s got its hands on you.

And even if you cycle or take public transport, petrol costs still hit you through the cost of goods and services you consume.

Folks like Andre Buitendag of AD Electrical and a Tauranga moving company owner both had to bump up prices to reflect the high petrol tax.

And you can bet that, down the supply chain, folks are baking in petrol costs into their material costs…which either diminishes margins for sellers or ends up on the price tag for buyers.

Either way, it’s a pain.

The big debate recently has been whether to attribute the pinch at the pump to:

  • Big oil
  • Local petrol stations
  • Or the state

After reading hundreds of articles and watching dozens of interviews, I’ve come to the alarming conclusion that most people in New Zealand have no idea how petrol prices are formed…and who’s digging into their pockets.

Of course, the state’s been quick to point fingers. Transport Minister Phil Twyford proclaimed in the New Zealand Herald that ‘fluctuations in the global crude oil price had a far bigger influence on New Zealand petrol prices than minor excise increases.

Sure, Mr Taxman.

And Prime Minister Jacinda Ardern has also been outspoken on the matter, putting the full burden of blame upon fuel companies. She said that New Zealanders have been ‘fleeced’ by the companies.

And in nearly every interview on the matter, she follows up by a ‘trust me — it’s not taxes’ comment.

The trouble is, the New Zealand government actually makes massive revenues off each litre you pump — much more than the oil importer and much much more than the local petrol station.

In fact, let’s just take the local petrol station out of the equation. Those guys make very little off fuel sales — somewhere between 0% and 2%. Their profit margins come from the other stuff they sell — snacks, drinks, etc. They’re not the ones fleecing you.

The petrol-flavoured pie can be divided into three slices:

  • Price of refined fuel
  • Importer margin
  • Taxes (Excise, GST, ETS)

Before we continue, take a guess how you think the price of petrol breaks down. Price of refined fuel 50% — Importer 40% — Taxes 10%? Something like that?

Now, with your guess in mind, take a look at what it actually is. Here’s a graphic from AA Motoring:

AA

Source: AA

[Click to open new window]

The price of refined fuel comes in at…35% of the final cost. Lower than you expected?

The importer’s margin racks up a total of…19%. Definitely lower than you expected.

Lastly, how much do taxes contribute?

  • Fuel Excise — 29%
  • GST — 13%
  • ETS — 2%

For a grand total of…44% of your fuel costs.

To put that in a tangible perspective, let’s say you’re paying $2.40 per litre at the pump. [openx slug=inpost]

 

The state is walking away with $1.06 from every litre you buy.

And for Aucklanders, don’t forget to add on another 10 cents to that highway robbery.

If the state were to get its sticky little hands out of that cookie jar today, you’d be paying $1.34 at the pump tomorrow.

Now, Twyford and Jacinda are intelligent folks. They knew that we’d find that out…so if you read through their statements on the matter, they always like to add a little clause to the tune of ‘taxes haven’t changed, but fuel has. Blame that on them, not us.’

For example, last month, Jacinda stated on The AM Show, ‘I know people have focused a lot on excise, but if you look at the last year, up until the end of September when the regional fuel tax had come in, fuel had gone up 39 cents in a year.

But she failed to clarify what that 39 cents came from…

Fortunately for us…the Ministry of Business, Innovation and Employment (MBIE) records this data. Here

MBIE 2018

Source: MBIE — 2018

[Click to open new window]

As you can see from the data, the lime green section sandwiched in the middle represents the importer’s margin. Over the past year, it’s hardly budged.

The bottom teal block represents the state’s share. It’s steadily rising at a low rate.

The top light blue chunk — which represents the unavoidable cost of drilling, refining and importing — has gone up from around 55 cents to around 80 cents per litre.

There’s your unexplainable increase…and it’s not the importer’s fault…but the state wouldn’t tell you that.

In fact, regarding how fuel prices have skyrocketed, Jacinda recently told Newshub Nation, ‘Things have happened in the last 10 years and no one’s been able to provide me a reasonable explanation.

She added, ‘The jump that they have seen cannot be answered by that regional fuel tax. I can’t guarantee that if we removed excise or the regional fuel tax, that we wouldn’t see that price at the pump continue to stay high.

Well, you’ll never know until you try…

Remove the excise and regional fuel tax. See what happens. I triple-dog dare you.

Best,
Taylor Kee
Editor, Money Morning New Zealand

PS: I apologise for the breach of etiquette for going straight for the throat with the triple-dog dare.


Taylor Kee is the lead Editor at Money Morning NZ. With a background in the financial publishing industry, Taylor knows how simple, yet difficult investing can be. He has worked with a range of assets classes, and with some of the world’s most thought-provoking financial writers, including Bill Bonner, Dan Denning, Doug Casey, and more. But he’s found his niche in macroeconomics and the excitement of technology investments. And Taylor is looking forward to the opportunity to share his thoughts on where New Zealand’s economy is going next and the opportunities it presents. Taylor shares these ideas with Money Morning NZ readers each day.


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