Petrol’s great cash-out

If selling petrol in New Zealand is a sunset industry, as motorists begin to convert to electric or hybrid cars, shareholders do not appear to be feeling the pain just yet.

In 2015, BP New Zealand paid its Londonheadquarters a $300 million dividend.

On Thursday, Wellington-headquartered Z Energy reaffirmed plans which could see the cash it returns to shareholders increase by more than 50 per cent in 2019, to $200m a year.

As the fuel companies prepare for a future in which sales will eventually plunge, petrol executives appear to hope plenty of cash will keep investors in the game in the meantime.

This is a dangerous strategy, which will attract intense scrutiny.

The public reaction to a Stuff article detailing BP’s pricing tactics shows the Labour-led Government is preaching to the converted when it describes the market as ‘‘broken’’. At least in its final term in government, National’s rhetoric was heading in the same direction.

For an industry that has long said it competes where it can, the strategy appears to be one of pushing prices as high as it possibly can, everywhere it can, until a rival blinks.

On one level this is simply charging what the market will bear, but Labour has promised intervention and fuel companies have little sympathy from the public.

Although competition in the retail fuels market has increased in some parts of the country, margins in areas where there is less competition appear to have risen to cover losses elsewhere.

The Government has confirmed it will need the recommendations of the Commerce Commission before it acts, meaning any intervention would likely be at least two years away. But Energy Minister Megan Woods’ comments, that she believes BP’s actions to be cynical and probably industry-wide, suggest her mind is made up.

The petrol industry may face a difficult choice. Try to ride out the storm and take its chances with the competition watchdog, or find a way to deliver to motorists what Government regulation would aim for.

This could come in one of two obvious forms. Expose the wholesale fuel market to scrutiny with transparent pricing mechanisms and, frankly, lower prices. Doing so before the Government forces it to may allow the industry to design a system which is more efficient than one created by bureaucrats.

Striking a deal which sees Australian-owned fuel discounter Gull, or another new entrant, into the South Island would be a tangible sign of competition working.

Alternatively, the industry could take the more direct route, which would be to reduce margins in areas where there is little competition, especially outside the major cities where high land prices arguably justify higher margins.

The way margins on petrol have climbed in some areas, dulling the pain felt elsewhere, is a sign of a lack of competition, in some parts of the country at least.

In hiking dividends, the industry appears virtually to be asking to be regulated. It has around two years until that regulation arrives, giving it a last chance to act before it is forced to.

Margins in areas where there is less competition appear to have risen to cover losses elsewhere.