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How petrol prices are calculated

Fuel prices are made up in several ways in New Zealand. New Zealand has a de-regulated fuel price market and as such retail prices are influenced by global supply and demand factors rather than the cost of refining fuel locally (although half our finished fuel is imported).

How do our fuel prices compare with the international oil and refined fuel prices?

The price you pay for a litre of petrol is made up of the imported cost of the petrol, taxes (fuel excise, ETS and GST), shipping costs and an importer margin (the amount the oil companies earn to offset their operating costs, plus profit margin).

Although the cost of crude oil is a factor in the cost of imported petrol or diesel, there is limited price connectivity between them as the market prices of oil, and refined petrol and diesel can each be influenced by different factors, and therefore international refined prices may not move in line with crude oil.

Typically, around 40% of the pump price is the actual cost of refined petrol and up to half is tax i.e. 59.13 cents per litre in fixed excise, plus the Emissions Trading Scheme levy (approximately 3c/l) and GST (New Zealand has the fifth lowest fuel tax in the world; in many OECD countries, taxes account for around two-thirds of the price). This is important when monitoring movements in the international price of fuel: if the benchmark price changes by 5%, the pump price might adjust by 40% of that, i.e. only 2% (subject to the exchange rate).

However, the retail price of a litre of diesel is made up quite differently. Since there is no excise tax on diesel (diesel users pay Road User Charges instead), the imported cost of diesel currently represents over 60% of the pump price, with the remainder being freight, GST and importer margin. Seasonal changes and the global demand for heating oil, or demand for heavy transport fuel (which is subject to economic conditions) also influence diesel prices separately to petrol.

On an annual basis, we calculate that the importer margin (the amount left after subtracting the fuel cost, taxes and freight from the retail price) averages about 20 cents per litre (regardless of whether retail prices are high or low), but can vary by +/- 5 cents or more from day-to-day. This margin has slowly risen from 15 cents per litre in 2008. We're closely monitoring this importer margin to ensure it is within an acceptable range.

The difference between the international cost of fuel and the landed cost

Exchange rate fluctuations are a significant factor often overlooked when comparing domestic and international prices. Refined prices are set in US dollars so a drop in refined petrol prices can be offset by a decline in the NZ dollar. That’s why it’s important to monitor the imported cost of refined fuel – i.e. the international cost converted into NZ dollars. The chart on the right shows that the price in NZ dollars broadly reflects changes in the commodity price, even though our exchange rate has risen in the last year.

This gain in the value of the Kiwi dollar reflects a decline in the value of the US$, and as oil and fuel prices are set in US$, a fall in its value means a rise in the commodity price, but this is offset by the higher Kiwi$ (see the chart below), so one is basically cancelling out the other. Despite that, the 'Crude oil price' chart shows that commodity prices are generally on the increase, reflecting gradually rising demand as the global economy improves.

Note the crude oil blend applicable for the New Zealand market is Brent oil which typically costs 20% more than West Texas Intermediate which is more commonly reported in the media.

Even when our exchange rate is worth less, New Zealand still enjoys some of the lowest fuel prices in the Western world: only Mexico, USA, Canada and Australia have lower pump prices.

In addition, the chart above shows the international refined price (in US$) for petrol is usually higher than crude oil, reflecting the additional cost of refining. Refined diesel typically costs more again (see the chart below), due to stronger international demand from the commercial sector. However this differential has been eroded with the sharper fall in worldwide diesel demand caused by the global recession. Expect to see international diesel prices recover sharply when the economy does.

How quickly the pump price matches international price movements

While the effect of the exchange rate means retail prices haven’t fallen as much as international crude and refined petrol prices since the highs of 2008, they do closely follow movements in the benchmark international price. The chart on the right shows there is little delay in international price movements and subsequent changes to the pump price.

An independent review undertaken by Hale & Twomey published in July 2008 concluded that “retail prices go down as quickly as they go up” and that retail price movements generally lag international benchmark movements by a week¹.

¹(2007 ACCC report into Australian petrol prices – Review of applicability to the NZ petrol market, Hale & Twomey, July 2008, p. iii).