There is an expectation that LPG prices should fall when petrol and diesel prices fall, but there are several reasons why this is not so - LPG prices are not directly linked to oil prices and never have been; LPG prices are set internationally and not domestically; LPG prices are only reviewed once a month, and not daily like petrol and diesel; and LPG prices can vary between individual service stations whereas petrol and diesel prices at company-owned sites are typically set nationally.
LPG prices are not directly linked to oil prices
Petrol and diesel are derived from oil, so it stands to reason that international oil commodity prices have some influence on petrol and diesel prices. Although refined petrol and diesel prices are set independently of each other, let alone oil, if the price of oil rises or falls it is reasonable to expect that the refined price might follow suit, although it doesn’t necessarily follow that it will move by the same proportion.
The purpose of this explanation is that LPG (Liquid Petroleum Gas, namely propane) is not derived from oil. Therefore there is no direct link between LPG and petrol or diesel prices. Just because the price of petrol comes down doesn’t mean LPG will respond the same way, or vice versa.
Aside from being forms of energy, the only thing LPG and petrol or diesel have in common is that they are all subject to the laws of supply and demand. So when oil and refined fuel prices rise sharply, so could LPG. In many countries, diesel fuel is used for electricity generation or heating, as is LPG. During high (oil and refined) prices, demand shifts to cheaper LPG, which then leads to higher international LPG prices. In addition, the petrochemical industry can use either naptha, which is derived from oil, or LPG as a feedstock. If LPG is purchased instead of naptha because oil prices are higher, this pushes up world LPG prices and vice versa.
LPG prices are set internationally
Until a few years ago, LPG prices were set locally, based on the cost of capturing and distributing domestic LPG supplies. These costs did not vary much, and prices were fixed for long terms, so pump prices were fairly flat. NZ had abundant supplies of cheap LPG. We once exported it, but domestic supplies have been slowly running out, and we now import more than half our needs. In the past, the pump price was an average of the domestic and import price, but in January 2008, NZ moved to setting the entire retail price according to the international contract price for LPG, in our case based on the Saudi Contract Price.
Although NZ has again become largely self sufficient in LPG since mid-2009 after the Kupe gas field started producing natural gas and LPG, pricing is still based on the international contract price.
Global LPG prices are reviewed once a month
The Saudi Contract Price is set once a month, at the start of the month. It remains fixed for the entire month, and does not adjust until the following month. Compare that to oil, petrol and diesel prices, which are set on the international commodity market daily. In practice, NZ oil companies tend to spread these daily fluctuations over the course of a week.
Retail LPG prices normally can only change a maximum of 12 times a year, but this could be less often; because of shipping times it can take six weeks before changes in the Saudi Contract Price are reflected in retail prices.
Taxes and price comparison
The retail price is based on the monthly Saudi Contract Price, adjusted for the exchange rate at that time, and with shipping costs, local taxes, and ‘importer margin’ added. GST is charged on all fuels, but in addition there is fuel excise and other taxes. The table below shows the amount of excise per litre:
|Fuel||Excise and taxes (cents/litre)|
Diesel excise and tax is low because there is a separate Road User Charge, which for light vehicles is calculated to be comparable to petrol excise for a typical annual mileage. There are no additional charges for LPG (or CNG), yet if LPG users were to pay the same amount of road tax per litre as petrol users, the retail price would be about 47c per litre higher.
The reason for the lower excise on LPG is historical, but it does make meaningful price comparisons difficult. Generally, price comparisons between petrol and LPG are made by adding 30% to the retail price of LPG to recognise its poorer fuel economy due to lower energy content. On that basis, the retail price of LPG needs to be at least 40 cents per litre less than 91 octane petrol for LPG users to be saving money, even with the lower tax rate.
Note however, that the LPG pump price may not be the price that many users pay as some LPG suppliers offer a fuelcard with prices that are notably lower than retail.
Service station LPG prices can vary
The retail LPG price is not set by the oil company, but by the LPG supplier, although oil companies will then recommend a retail price to company-owned sites. There are several LPG suppliers operating in NZ: BOC (Elgas), Nova LPG; OnGas; and Rockgas (part of Contact Energy).
Most service stations tend to charge the same price for petrol and diesel. This is because it costs the same to buy on the commodity market, and competing oil companies have similar freight costs and overheads. Besides, for marketing reasons they do not often let their prices differ significantly from their competitors. Most service stations in metropolitan and provincial centres are owned by the oil companies so the prices across the chain will be the same. The high turnover of petrol and diesel means changes to international product prices can be reflected quickly at the pump. Independently-owned rural service stations may have slightly higher prices to reflect different operating costs and higher freight costs, and lower turnover means price changes may not occur until the retailer restocks.
With LPG, each service station can set their own retail price, based on the converted Saudi Contract Price, and turnover. The much lower sales turnover of LPG means that prices may not even be reviewed monthly at every service station. Some may only replenish LPG supplies every few months, meaning the retail price may reflect the Saudi Contract Price at the time their LPG tank was last refilled, and won’t be adjusted until they restock. But a competing service station may have a higher turnover or smaller storage tank, meaning they will be able to pass on the latest Saudi Contract Price more promptly, be it higher or lower.
For that reason, the AA recommends motorists shop around for the cheapest LPG prices. While you can reasonably expect petrol and diesel prices to be the same from station to station, that will not necessarily be so for LPG. But service stations do not advertise the LPG price, so check the bowser before filling up or phone ahead to compare prices.
Note also that LPG re-fill bottle prices tend to be higher than automotive LPG prices, with the former attracting a higher margin than is typical for automotive fuels.
In Australia, LPG prices are typically less than half the price of petrol.
There are a number of reasons for the lower Australian LPG price. For one, there is no excise on LPG, unlike petrol, while their exchange rate is stronger against the US dollar. Australia also has substantial supplies of cheap LPG (it is a net exporter whereas we import half our needs), while infrastructure costs are spread over a higher sales volume.