With widely fluctuating fuel prices over the past year, motorists have expressed concern over how prices are set, how they change and whether they are being treated fairly by energy companies. In 2008, Chevron New Zealand, the company behind the Caltex brand, participated in a review of New Zealand Fuel Prices. The review was conducted by the Ministry of Economic Development and its findings were independent.

Some key findings of the review were:

• The New Zealand petrol market is fundamentally competitive
• Retail petrol prices are not fast to rise and slow to fall
• Recent price rises are mainly due to increases in crude oil prices overseas

We invite you to review the report on the MED website: http://www.med.govt.nz/templates/MultipageDocumentTOC____37852.aspx.

The Ministry of Economic Development regularly reviews fuel prices throughout NZ and updates are available from www.med.govt.nz.

What's driving current price rises?

Worldwide demand for oil continues to grow, as investors look to invest in high-demand commodities instead of slumping property and shares and the economies of India and China continue to boom, while ongoing unrest in the Middle East adds supply uncertainty.

In New Zealand, there are four major factors impacting on the price you pay for fuel:

1. The world price of refined fuel, over which we have no control and which represents more than 50% of the pump price;
2. The New Zealand exchange rate, as oil and refined fuel are internationally priced in US dollars;
3. Taxes in New Zealand which make up around 40% of the pump price (the actual tax take varies as a percentage depending on what percentage the world price of oil makes up);
4. Local market competition.

World Oil and Refined Fuel Prices
The world prices of oil and refined fuels have risen dramatically over the last year, at times fluctuating more than 23%. The base price of crude has been at record levels, closely followed by the price of refined fuel on the Singapore exchange. Recently the price of diesel has risen faster than the price of petrol.

The price increases are driven by several factors:

1. The weakening US dollar is a factor as oil is traded in US dollars;
2. Investor flight to commodities. As property and shares become less attractive and more risky for US investors, many are turning to rising commodities as investments. Oil is a high demand commodity that holds its value;
3. General geopolitical uncertainty due to unrest in the Middle East, Africa and other supply regions;
4. Relentless demand pressure from China and India, fuelling the diesel-powered machinery of economic growth;
5. Exchange rate pressure as the NZ dollar is trading with a high degree of volatility.

NZ Exchange Rate
The NZ dollar has fluctuated widely during 2008, with variations of up to 20 cents against the US dollar. Because fuel is internationally traded in US dollars, these fluctuations can have a big impact on prices at the pump.

Taxes
Around 40% of the pump price goes to tax and duties, comprising GST (12.5%), ACC levies (about 6-7 cents per litre), and a regional fuel tax of up to 10 cents per litre from 2009, with the balance going to the National Land Transport Fund. Government initiatives to reduce greenhouse gas emissions also add to the cost of fuel used in New Zealand. Some such initiatives include new “sulphur-free” diesel specifications and charges for tailpipe emissions under the Emissions Trading Scheme (from 2011).

Local Market Competition
Intense competition in the local market, alongside very high public price awareness, is the main pressure keeping prices as low as possible in the current environment.

Petrol Prices – the Plain Facts

We understand that customers are concerned about prices and have many questions. In 2008 the Ministry of Economic Development conducted an independent inquiry into fuel prices in New Zealand, in order to address many of those concerns. You can view their findings at http://www.med.govt.nz/templates/MultipageDocumentTOC____37852.aspx.

Here are some quick facts from Caltex that may help.

Q1. Why has the price of petrol gone up again?
A1. Continued shortages in supply combined with greater demand for refined fuel worldwide has driven up the price Caltex pays for refined fuels. The shortage in refined fuels has been caused in part by continued unrest in major supply regions, including the Middle East and Africa. However, there was already a shortage of refined fuel, especially diesel, due to increased demand from developing economies such as China and India, and recent moves by investors into high-demand commodities such as fuel. There are expected to be ongoing challenges around supply, demand, the market and competition that will continue to put pressure on prices.

Q2. How long will it last
A2. No-one can predict the future price of oil. Many indicators point to higher prices for the foreseeable future.

Being more fuel-efficient will have the biggest impact on how much you will pay for petrol. Many consumers are using high-grade fuel, often costing five cents per litre more than Regular 91, when it just isn’t required. You may be interested to know that Regular 91 is the recommended grade for most cars.

Q3. Why do you pass these price rises on to consumers?
A3. Retailers have very small margins on petrol so need to raise the price to remain in business. We understand that customers are paying some of the highest prices for petrol they have ever paid and we are doing everything we can to deliver fair prices for fuel. The higher pump prices do not reflect higher profits in the New Zealand fuel industry; in fact the Ministry of Economic Development’s independent monitoring of fuel company margins shows these are lower today than they used to be.

Q4. Why, when crude oil prices are coming down, do prices at the pump remain the same?
A4. Despite public concerns, the 2008 MED Review of fuel prices confirmed that changes in the price of fuel, both up and down, are reflected quickly at the pump. Prices go down at the same rate as they go up.

Q5. Why is petrol so expensive?
A5. Supply, demand, competition and the marketplace determine the price of fuel. Currently increased demand, from countries such as China and India, and concerns about security of supply, have combined to drive up petrol prices around the world.

Included in the price of petrol are a number of government levies and taxes which make up almost half of the total. These taxes could rise in particular regions following the Government’s introduction of a regional fuel tax of up to 10c per litre, Emissions Trading Scheme cost of 8c per litre or more and Biofuels Mandate costs, as yet unknown.

Despite recent price rises – which have been happening all over the world – New Zealand generally has the fourth lowest petrol prices among OECD countries.

Q6. Will the price of petrol go back down?
A6. We are doing everything we can to deliver fair prices for fuel. While prices will fluctuate up and down again in smaller changes, most indicators point to higher prices overall. Being more fuel-efficient will have the biggest impact on how much you will pay for petrol.

Q7. Don’t petrol companies make heaps of profit on petrol anyway?
A7. There is a lot of media coverage about international fuel company profits, but such coverage is usually referring to exploring and drilling for oil and gas on a global scale. The profits of those parts of the business reflect the high cost and risk of exploration and drilling. They do not apply to the New Zealand business. Chevron New Zealand, like any business, needs to make a living selling petrol at service stations. The profitability of the fuel industry in New Zealand is precarious and margins are lower than they used to be, a point that was noted in the Ministry of Economic Development’s recent inquiry into petrol pricing.

Q8. Why do all the petrol companies put their prices up at the same time? Do you talk to each other?
A8. No. Chevron never discusses its pricing with competitors. Chevron is bound by New Zealand law, administered by the Commerce Commission, which forbids us from engaging in any anti-competitive practices to fix prices. We strictly follow these rules. Prices may appear to move at similar times as we react quickly to any changes in the market.

The Ministry of Economic Development’s recent inquiry into fuel prices found no collusion between fuel companies, but did note the competitive nature of the industry held prices as low as possible.

Q9. Why do prices vary in different parts of the country?
A9. Independent retailers make their own forecourt pricing decisions based upon local supply, demand, market and competition conditions. Retailers that are situated further away from main centres and terminals will also have additional transport charges. Further, the Commerce Commission forbids Chevron (and all other fuel companies) to mandate the prices charged by independent retailers.

Q10. What practical tips do you have to reduce my weekly fuel bill?
A10. Pressure on prices is expected to remain high, so modifying how and when you drive a car offers the best opportunity to manage how much you spend on fuel.

Many people are paying for more expensive fuel than they need to. To keep your fuel bill down always buy the lowest recommended octane grade your car needs as the higher octane grades offer no performance benefits if the engine is not designed to take full advantage of it. You may be interested to know that Regular 91 is the recommended grade for most cars.

Here are a few tips from the Energy Efficiency and Conservation Authority www.eeca.govt.nz to help you be more fuel-efficient in the way you drive your car. Implementing these could save you up to 30% on your fuel bill:

• Think before you drive - Consider walking, cycling, or taking public transport before getting into your car. If you need to use the car, plan your journey. Picking up groceries and other items on the way home saves taking the car out later.
• Avoid short trips - You use 20% more fuel driving when your engine is cold.
• Drive smoothly - Make sure you accelerate smoothly. Change gear early but don't labour the engine. If you drive an automatic, choose 'economy' gear switching as this will keep the engine speed down.
• Look ahead - Check what's happening, maintain a safe following distance and you'll keep at a more constant speed. This uses less fuel than accelerating and braking all the time. Don't speed - Driving faster doesn’t necessarily mean you’ll get there any faster. By travelling at 100km/h instead of 110km/h you can cut around 13% off your fuel bill.
• Reduce idling time - If you're going to be stationary for more than 30 seconds, switch your engine off.
• Love your car - A little love goes a long way. Keeping your tyres at the right pressure saves fuel, as does checking your alignment, engine timing, air filter and spark plugs regularly.
• Watch your air con - Only use air conditioning when absolutely necessary as it tends to eat fuel, up to 10% more in fact. Other features such as the rear window demist can also be a drain, so make sure you switch them off when they've done their job.
• Keep your load down - Sounds obvious, but a heavier vehicle means more drag. So take those golf clubs out of the boot after the game, and remove the roof rack when you're not using it. The same goes for the bike rack.

For more driving tips visit http://www.energywise.org.nz/ or www.makecarsgreen.com.