THE PRESS TUESDAY, FEBRUARY 11, 1986. Competition in oil industry

Press, 11 February 1986, Page 20

THE PRESS TUESDAY, FEBRUARY 11, 1986. Competition in oil industry

The Government is considering deregulation of the oil and petrol distribution industry, a move that could open the way for petrol-price discounting. The Cabinet considered a report from Government officials last week and further discussions will be held with petrol retailers — the Motor Trade Association — and with the oil companies before coming to any decision. An announcement is expected by the end of the month. At a time when world oil prices have slumped to their lowest in six years, motorists naturally are keen to benefit from the downward slide.

The Government was able to decree cuts in the price of petrol in August and October, last year, but the Minister of Energy, Mr Tizard, says that New Zealand consumers are unlikely to feel any immediate big benefit from the latest drop in spot prices for oil. Distance from world markets, a traditional — but rapidly disappearing — reliance on longterm contracts for the supply of oil, and the supply of a large portion of our fuel from the new synthetic petrol plant help to account for the lack of domestic reaction to falling world prices. In addition to these is the complicated system of regulation under which the industry has laboured for the last half century and the inflexible structure that the controls have moulded.

The distribution of oil and petrol is one of New Zealand’s most tightly controlled industries. The Government can control, by licence issued through a licensing authority, who may sell motor spirits at both wholesale and retail levels. The Government fixes the price of petrol, and also determines the margins taken by wholesalers and retailers. This state of affairs came about, not to protect consumers from profiteering, but to protect an infant New Zealand oil company from savage price cutting by overseas-based companies. Fifty years ago the first Labour administration — in one of its first actions, days after its election success and months before the new Parliament sat — brought down motor spirit pricing regulations under an act that had been passed three years earlier but never enforced. The purpose of the controls against price-cutting was to promote the welfare of the people engaged in the industry.

Even today, the Motor Spirits Distribution Act — the controlling legislation — still has stated in the preamble as one of its prime objects “maintaining the economic welfare of those persons engaged in the business of selling motor spirits.” Of the economic welfare of the customer, it says not a word. The oil companies that hold the only wholesale licences are said to be expecting radical reform of the present structure from

the present Labour Government. Some reports have the companies — which at present are prohibited from owning petrol stations except those few acquired in the early 1950 s — already seeking options to buy strategically-placed service stations in the main centres in anticipation of a change to this restriction.

Whatever changes eventuate — if, indeed, any are made — the time certainly seems opportune to put more competition into the industry. The fall in international oil prices must add an edge to the Government’s own preference for deregulation in all sections of the economy.

Petrol retailers are unnerved by the prospect. The Motor Trade Association predicts that removal of controls will lead “inevitably” to a price war and fears that up to 1000 of New Zealand’s petrol stations, or about a third of the present outlets, and of the association’s membership, would be casualties. Citing Australia and Britain as examples, the association predicts that this number of outlets would close because, unless a service station was owned by one of the oil companies, or had substantial backing from a wholesaler, it would be unable to compete in a price war.

The association is realistic enough to admit that the country has too many outlets, and that the present rate at which petrol stations are closing — about 80 a year — might be increased to the good of the public and the industry; but full deregulation it finds alarming. It may also have in mind that, although deregulation opens the way to pricecutting competition, it may also open the way to increases in the wholesale prices in some areas. The days of a standard price all over the country may come to an end. Full deregulation might be an unrealistic concept in present circumstances anyway. The Marsden Point refinery expansion must be paid for and the present arrangements for doing so are likely to make it very difficult for the Government to open up the oil industry to as much competition as it might like. The Government is unlikely to be willing to consider refinancing the debt repayment for the refinery in a manner similar to the refinancing of New Zealand Steel, for instance; but it could not contemplate a greater level of imports of refined products while the debt repayment relies heavily on the levy upon petrol from Marsden Point and while the greatest benefit of Synfuel derives from maximum production. All users of petroleum fuels, as well as the oil companies, petrol resellers, and taxpayers will be keen to see if the Government can find a way to reduce the level of restraint on the industry and how it might be done.