Rise in LPG and Motor Fuels Prices
LPG
The Consumer Council notes Shell's rise in the list price of LPG, calculated in accordance with their indexing mechanism based on current and projected increases in import prices. The Council's study noted that there was an upward trend in the average import price of LPG, based on publicly available information up to September 1999, even though list prices had remained at the same level. The Council is not in a position to state whether the increase is reasonable, given that it is unaware whether the base price on which the indexing mechanism is based was reasonable in the first place.
The Council noted in its study that in the previous application of the mechanism in July 1999, Shell found room to absorb the rise in costs and not increase in line with what it would have if it had followed the mechanism. However, Shell has chosen not to absorb this current increase.
Moreover, the use of Shell's complicated indexing mechanism, which poses an actual price increase as a decrease will be confusing for consumers.
The Council's position is that prices for LPG, as with other products, should be set in a competitive market. It would hope that given the oil companies' presumed different costs and modes of operation, each one will determine its own price in accordance with those costs and the competition it faces.
This also applies to LPG dealers. A Council survey in its study noted that cylinder retail prices varied between dealers, reflecting competition at that level. Consumers are advised to shop around for the best deal.
Motor Fuels
The Council also notes Caltex proposal to raise the price of diesel and gasoline as a result of increased product costs. Caltex has stated that "Crude oil, which is a very good indicator of gasoline and diesel prices, has risen by 30% in price since September 1999". The Council notes from public information to September 1999 that there has been an upward trend in the import price for motor gasoline and diesel, and the price of crude oil.
The Council notes that when the relationship between fuel prices and crude oil prices was discussed in November 1998, at a time when crude oil prices had reduced significantly, the response from the oil companies was that the relationship was not of a simple ratio or percentage type.
The Council expects that when these prices go down, there would be a corresponding decrease. In any event, as noted above, prices should be set in a competitive market.
The Council would hope that given the oil companies' presumed different costs and modes of operation, each one will determine its own price in accordance with those costs and the competitive advantage it faces. The Council assumes that this competitive advantage would be reflected in the price that each company actually charges customers.
As regards to whether the price increase, if followed by other oil companies, signifies a cartel is in operation, it is stated in the Council's study that in oligopoly markets a pattern of marketplace conduct can evolve that serves mutual self interest, and this can only be improved through exploring mechanisms by which competition can be introduced. The Council suggested in its study that independent operation, i.e. not vertically integrated, and independent sources of supply, was a way of achieving that outcome.