Download PDFParliamentary Paper No. 99/1976
The Parliament of the Commonwealth of Australia
THE MARKETING AND PRICING OF PETROLEUM PRODUCTS IN AUSTRALIA
Royal Commission on Petroleum
Fourth Report
Presented by command and ordered to be printed 19 May 1976
The Government Printer of Australia Canberra 1976
Commonwealth of Australia 1976
ISBN 0 642 02085 : · '
F. D. A t ki nson, Government Printer, Canberra
15 April 1976
Your Excellency,
In accordance with Letters Patent dated 12 September 1973, I have the honour to present to
you the Fourth Report of the Commission of Inquiry
into production, marketing and pricing of petroleum, diesel and other fuels.
Yours sincerely,
(W.H. COLLINS) Commissioner
His Excellency the Honourable Sir John Kerr, A.C., K.C.M.G., K.St.J., Q.C., Governor-General of Australia, Government House, Yarralumla, CANBERRA, A.C.T. 2600
SUMMARY OF CHAPTER HEADINGS
Chapter Para Topic
INTRODUCTION
1 . SUBJECT MATTER
2. BACKGROUND
3. TERMS OF REFERENCE
4. COURSE OF INQUIRY
5. ACKNOWLEDGEMENTS
6. GENERAL OBSERVATIONS
BOOK I
PART I
THE INDUSTRY IN AUSTRALIA
7. THE COMPANIES
7 .2 Shell Australia Limited 7.3 Mobil Oil Australia Limited 7.4 Esso Australia Limited 7.5 Caltex Oil (Australia) Pty. Limited
7.6 The British Petroleum Company of Australia Limited 7.7 Total Holdings (Australia) Pty. Limited 7 .8 H.C. Sleigh Limited
7 .9 Ampol Petroleum Limited 7.10 Amoco Australia Pty. Limited 7.11 Independent Marketers 7.12 XL Petroleum Pty. Limited
7.13 Fina Petroleum Pty. Limited 7.14 Kookaburra
7.15 ACTU-Solo Enterprises Pty. Limited (The Solo Group) 7.16 I.O.C. Australia Pty. Limited 7.17 Other Independent Operators 7.18 Conclusions
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Para Topic Page
THE COMPANIES' MARKETING METHODS 36
8.1 Before 1951 36
8.2 1951 and Solus Trading 37
8.3 Why Did the Companies Introduce Solus Trading? 39
8.4 Company Explanations are Unacceptable 40
8.5 Changes Resulting from Solus Trading 42 8.6 Proliferation and The Role of Solus Trading 42
8.7 The New Classes of Dealer 44
8.8 Completion of Vertical Integration 44
8.9 Brand Image: Differentiating the Undifferentiable 46
8.10 Fungibility 47
8.11 Consequences of Vertical Integration: Price Transference 48
8.12 The Taxation Approach to Price Transference 50
8.13 How is the True Price Determined? 51
8.14 The Contrast with Price Control Determinations 52
8.15 Why No Self-Service? 53
8.16 Conclusions 55
PART II
THE INDUSTRY TODAY
RETAIL OUTLETS 57
9.1 Outlets and Market Share 57
9.2 Outlets by Category: Ownership and Operation 58
9.3 Company Owned - Dealer Owned: Comparative Throughputs 58
9.4 The Lessee Dealer 59
9.5 What Every Good Dealer Needs 60
9.6 Dealers in the United States 62
9.7 Lessee Dealer Turnover: Rates and Reasons 64
(vi)
Chapter Para
10 .
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
1 1 .
11.2
11.3
11.4
11.5
11.6
11.7
11.8
12.
12.1
12.2
12.3
12.4
12.5
12.6
12.7 12.8
Topic Page
LESSEE DEALER COMPLAINTS 66
Dealer Complaint: Company Control 66
Dealer Complaint: Insecurity of Tenure 67
Dealer Complaint: Long Working Hours 69
Dealer Complaint: Too Many Service Stations · 69
Dealer Complaint: Price Discrimination 70
Dealer Complaint: Tyres, Batteries and Accessories 70
Dealer Complaint: Disclosure to Company of Dealer's Financial Affairs 71
Dealer Complaint: Company Product Promotions 71
THE COMPANIES' ATTITUDE - THE "INDEPENDENT BUSINESSMAN" 71
Is the Description Justified? 75
The Dealer Company Contract: Lease and Licence 75
The Dealers' Terms 76
Lease Provisions 76
Oil Companies' Explanation of Terms of Lease 84
Shell Contracts: The Trade Practices Commission Determination 85
Commission's Observations on Form of Lease 87
THE OWNER DEALER 88
Numbers and Gallonage 88
Owner Dealer Service Stations: Standards 90
Owner Dealers: Contractual Arrangements with Companies 91
The Supply Agreement 91
Loan Agreements 94
Equipment Loan or Hire Agreements 94
Lease and Lease-back 94
Commission's Observations on Owner Dealers 95
(vii)
Chapter Para
13.
14.
15.
Topic Page
PART III
"RENT" AND THE SERVICE STATION
CONCEPTS OF RENT 96
13.2 The Amount Described as "Rent" in Dealers' Accounts 97
13.3 "Rent" as Part of the Wholesale Price - 1 Buried' Rent 98
13.4 The Result of the Two Rents 98
13.5 True Economics are Disguised 99
13.6 The Owner Dealer Contribution to Rent 103
13.7 Dealers' Incremental Economics are Opposed to Companies' Incremental Economics 104
13.8 The Owner Dealer's "Discount" 105
PART IV
DEPOT TRADING
ORIGIN OF DEPOTS 107
14.2 Retail Trading from Depots 108
14.3 Complaints about Retail Trading from Depots in Queensland 110
14.4 Queensland Government Legislation 111
14.5 Complaints from Victoria 112
14.6 Complaints from Other States 113
14.7 Bulk Purchasing in New Zealand 114
14.8 The Commission's Observations on Depot Trading 114
PART V
THE AUSTRALIAN MARKETS
GEOGRAPHY AND REFINERY SITING 116
15.2 Product Exchanges 117
15.3 State Representation and Market Share 117 15.4 State Markets have Separate Histories 121
15.5 The Nature of Price Wars 122
15.6 Essential Preconditions of Price Wars 123 15.7 History of Price-Cutting in Victoria 124
(viii)
Chapter Para Page Topic
PART VI
THE VICTORIAN MARKET TODAY
16. CONFUSION, PRICE DISCRIMINATION AND
UNFAIR PRACTICES 135
16.2 Price Discrimination in Victoria 136
16.3 New Zealand Comparison 137
16.4 The Service Station does Buy in Bulk 138 16.5 "Buried" Rent 138
16.6 Price Tiers: Turning Product Back into Another Tier 13 8
16.7 Major Areas of Price Discrimination 139
PART VII
INDIVIDUAL STATE MARKETS TODAY
17. THE NEW SOUTH WALES MARKET 160
17.1 State Government Initiatives 160
17.2 Proliferation of Retail Outlets 160
17.3 A Rationalisation Program 161
17.4 Did Rationalisation Succeed? 163
17.5 Price Control in New South Wales 166
17.6 Price War in New South Wales 167
17.7 Trading Hours 170
17.8 Effects of Multi-Tiered Price Structure 171
17.9 New South Wales Petrol Resellers Committee 172
17.10 Commission's Observations on Marketing in New South Wales 174
18. THE WESTERN AUSTRALIAN MARKET 175
18.1 Characteristics 175
18.2 Historical Background 176
18.3 Rostering 178
18.4 Supply Companies 179
18.5 Price-Cutting 179
18.6 Disinvestment 180
18.7 The Commission's Observations on the Western Australian Market 181
(ix)
Chapter Para
19.
19.1
19.2
19.3
19.4
19.5
19.6
20.
20.1
20.2
20.3
20.4
20.5
20.6
20.7
20.8
21.
21.1
21.2
21.3 21.4
22.
22.2
22.3
22.4
22.5
22.6
22.7
Topic
THE SOUTH AUSTRALIAN MARKET
General Background
Legislative Innovations in South Australia
South Australian Licensing System
Trading Hours in South Australia
Price-Cutting in South Australia
Observations by the Commission on Marketing in South Australia
THE QUEENSLAND MARKET
Characteristics of Queensland Market
Price War in Queensland
Use of Price Boards Proliferation of Retail Outlets
Depot Trading and Trading from Industrial and Commercial Pumps
Restricted Trading Hours - Rostering
Fuel Shortages
Observations on the Queensland Market TASMANIA, NORTHERN TERRITORY AND THE AUSTRALIAN CAPITAL TERRITORY
Introduction Tasmanian Parliamentary Inquiry
Trading Hours and Rostering Australian Capital Territory IN SUMMARY - THE INDUSTRY TODAY
Amendment of System Form of Recommendations
The Need for On-going Programs
An Administrative Solution Will the Oil Companies Cooperate?
Flexibility and Continuity
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(x)
Chapter Para Topic Page
BOOK II PART VIII
FUTURE SUPPLY - SOURCE AND COST
23. THE NEED TO ASSESS THE BALANCE
BETWEEN FUTURE DEMAND AND SUPPLY 208
23.2 Present Consumption 209
23.3 Consumption Rising 209
23.4 Market Estimates to 1984/1985 210
23.5 Product Break-up 210
23.6 Shift in Demand Pattern 212
23.7 Indigenous Resources 213
23.8 The Erosion of Indigenous Supply 215
23.9 What Can be Done to Help Supply? 216
23.10 Future Discovery of Crude 217
23.11 Impact of Government Policies 217
23.12 Current Crude Prices in Australia 218
23.13 Other Crude Resources 219
23.14 The United States of America and Canada 220
23.15 New Finds of Crude Oil 221
PART IX
WHAT WILL THE COST BE? CONSERVATION & COST
24. WILL THE COST OF IMPORTED CRUDE
CONTINUE TO RISE? 222
24.2 Attitudes in Exporting Countries - OPEC 223
24.3 Estimates of Future Import Costs 224
24.4 Conservation and Cost 225
24.5 Governments Should Initiate Conservation Policies 226
24.6 Public Education on Conservation 226
24.7 Will High Prices Aid Conservation? 227 24.8 Price Elasticity 227
(xi)
Chapter Para Topic Page
PART X
HOW TO CONSERVE SUPPLY
HIGHWAY MODE IS LEAST EFFICIENT 229
25.2 Technological Prospects for Reduced Consumption 230
25.3 Smaller Vehicles are Essential 230
25.4 The Example of Singapore 231
25.5 Some Countries Have Smaller Vehicles 232
25.6 Specific Recommendations on Conservation 232
PART XI
REFORMING DEALER COMPANY RELATIONSHIPS
AUSTRALIA AND OVERSEAS 234
. 26.1 Fair Marketing Petroleum Act (U.S.) 234
26.2 The Dealer Company Relationship is Fundamental 234a
26.3 The Alberta Report Recommendations 235
26.4 The Petrol Retailers Charter 238
26.5 Major Disadvantages of Australian Dealers 238
26.6 The Companies' Answer 240
26.7 Negotiations in Australia 242
26.8 Shell's Response to Dealer Proposals 242
26.9 B .P .'s Position 244
26.10 The Commission's View 244
26.11 Proposals for a Lease 250
PART XII
RATIONALISATION OF OUTLETS WIDE AGREEMENT - TOO MANY SERVICE STATIONS 251
27.2 Australian Throughputs Compared with Canada and the United States 252
27.3 Market Share and Service Station Numbers 252
27.4 Solus Trading Helped Cause Proliferation 253
27.5 Australian Product Sales Generated Upstream Profits 254
(xii)
Chapter Para Topic Page
27.6 Competition was not Price Competition 254
27.7 High Dealer Margins Protected the Inefficient 255
27.8 No Effective Control of Outlet Numbers 255
27.9 Failure of South Australian and New South Wales Schemes 255
27.10 South Australian and New South Wales Schemes - Lessons to be Drawn 256
27.11 Are Such Schemes Practical? 256
27.12 Advantages of Rationalisation 257
PART XIII
BASIC ECONOMIC FACTORS IN RETAIL MARKETING
28. SERVICE STATION ACTIVITIES 259
28.2 Service Station Economics for the Dealer - the Balanced Operation 259
28.3 The Dealer's Investment in his Site 260
28.4 Service Station Economics for the Oil Company 262
28.5 Site Selection 263
28.6 The Company's Return on Investment 263
28.7 Economies of Scale in Motor Spirit Marketing 264
28.8 Cost Savings on Higher Volumes 270
PART XIV
RATIONALISATION PROPOSALS: WHAT AND WHERE
29. SOME COMPANIES HAVE RATIONALISATION PROGRAMS 272
29.2 Close Sites or Redistribute Gallons? 272
29.3 Gallonage Objectives and Redistribution 274 29.4 Focus of Program 274
29.5 Rural Outlets: Dealer-Owned 274
29.6 Rural Outlets: Company-Owned including Depots 276
29.7 Metropolitan and Provincial Town Outlets: Dealer-Owned 277
29.8 General Recommendations 280
(xiii)
PageChapter Para Topic
29. 9 Metropolitan and Provincial Town Outlets: Company-Owned 281
29. 10 Policy Objectives 287
29. 11 The Disinvestment Objective 288
29. 12 What Margin will be Needed? 289
29. 13 Margins for Rural Stations 289
29. 14 Should Prices be Reduced? 290
30. COMPANY ATTITUDE: LET THE MARKET DO IT 290
30. 2 Licensing Outlets 293
30. 3 Alternative Methods of Disinvestment 296 30. 4 Matters to be Taken into Account in Program of Disinvestment 297
30. 5 What is the Benchmark Station? 298
30. 6 How is it to be Done? 302
30. 7 Estimating Leakage 306
30. 8 Disinvestment Effects on the Least Efficient - Withdrawal from Market 309
30. 9 Establishing the Data Base 310
30. 10 Calculating the Closures Required and the Gallonage to be Redistributed 310
30. 11 Variations in Average Gallonages: Company-Owned and Dealer-Owned and from Market to Market 312
30. 12 Companies' Disinvestment Plans: Gallonages Achieved by 1980 313
30. 13 The Administrative Proposal 313
PART XV
PROBLEMS WITH CURRENT MOTOR SPIRIT " PRICING PRACTICES
CROSS SUBSIDIES 321
31. 2 Cross Subsidy: City v Country 321
31. 3 Cross Subsidy: the Rest of Motor Spirit Supports the Barrel 322
31. 4 Cross Subsidy: Rent Disguises Price 322
31. 5 Cross Subsidy: Melbourne and the Rest 323 31. 6 Cross Subsidy: The Economic Support the Uneconomic 324
31. 7 High Dealer Margins Support Everybody 324 31. 8 Price Discrimination 324
(xiv)
Chapter Para
31.9
Topic Page
A New Motor Spirit Pricing Structure 325
31.10 Engender Retail Competition 328
PART XVI
PETROLEUM PRODUCT PRICE CONTROLS
32. HISTORY OF PRICE CONTROL 331
32.2 War and Post War Controls 331
32.3 Commission's Observations 337
32.4 General Considerations in Regard to Price Control 339
32.5 Justification for Price Control 342
32.6 Alternative Price Control Systems 344
32.7 Conclusions and Recommendations 350
PART XVII
A SYSTEM OF ADMINISTRATION
33 .
33.1 The Agency: Its Establishment and Functions 362
33.2 Data Collection 368
SUMMARY 369
(xv)
SUMMARY OF ANNEXURES
Annexure Topic
"A" , NO. 1 Range of Motor Spirit Additives
"A" , No. 2.1 Motor Spirit Sales by Companies to all Australian Outlets - Year 1974 "A" , No. 2.2 Numbers of Retail Outlets Supplied by Companies - Year 1974 "A" , No. 2.3 Average Monthly Motor Spirit Sales by Companies
to Retail Outlets - Year 1974
"A" , No. 2.4 Numbers of Australian Retail Outlets according to Level of Motor Spirit Sales - Year 1973 "A" , No. 2.5 Numbers of Australian Retail Outlets according to Level of Motor Spirit Sales - Year 1975 "A" , No. 2.6 Number of Retail Outlets Supplied by Companies
- Year 1975, Metropolitan and Country "A" , No. 2.7 Number of Retail Outlets Supplied by Companies - Year 1975, Metropolitan "A" , No. 2.8 Number of Retail Outlets Supplied by Companies
- Year 1975, Country
"A" , No. 2.9 Percentage of Company and Dealer Owned Retail Outlets Supplied by Each Company - Year 1975, Metropolitan and Country "A", No. 2.10 Percentage of Company and Dealer Owned Retail
Outlets Supplied by Each Company - Year 1975, Metropolitan "A", No. 2.11 Percentage of Company and Dealer Owned Retail Outlets Supplied by Each Company - Year 1975,
Country
"A", No. 2.12 Percentage Breakdown of Retail Outlets Supplied by Companies - Year 1975, Metropolitan and Country
"A", No. 2.13 Percentage Breakdown of Retail Outlets Supplied by Companies - Year 1975, Metropolitan
"A", No. 2.14 Percentage Breakdown of Retail Outlets Supplied by Companies - Year 1975, Country "A", No. 2.15 Levels of Motor Spirit Discounts Given by Companies to Dealer Owned Retail Outlets - May 1975 ''A", No. 2.16 Motor Spirit Sales by Companies to Depots - Year
1974
"A", No. 2.17 Forecast Australian Demand of Petroleum Products
(xvi)
Annexure Topic
"A", No. 2.18 Australian Petroleum Import Bill "A", No. 2.19 Cost of Imported Crude "A", No. 2.20 Forecast Australian Import Bill "A", No. 2.21 Percentage of Retail Outlets and Motor Spirit
Retail Market Shares
"A", No. 2.22 Average Monthly Motor Spirit Sales by Companies to Retail Outlets - Year 1975, Metropolitan and Country Markets
"A", No. 2.23 Average Monthly Motor Spirit Sales by Companies to Retail Outlets - Year 1975, Metropolitan Markets "A", No. 2.24 Average Monthly Motor Spirit Sales by Conpanies
to Retail Outlets - Year 1975, Country Markets
"A", No. 3 Contractual Arrangements between Oil Companies and Dealers - Company Owned Sites
"A", No. 4 Contractual Arrangements between Oil Companies and Dealers - Dealer Owned Sites
"B" List of Clauses Appropriate for a Form of Lease
between Companies and Dealers
"C" Motor Spirit Marketing Economics
"C", Table 1 Service Station Economics - Labour Schedule - Dealer Excluded "C", Table 2 Service Station Economics - Other Retail Expenses per Month "C", Table 3 Motor Spirit Marketing Economics
"C", Table 4 Service Station Economics of New Company Owned Outlets compared to Commission's Model
(xvii)
SUMMARY OF TABLES
Table Topic Page
1 Table of Motor Spirit Market Shares 16
2 Average’ Annual Dealer Turnover 6 4
3 Numbers of Company-Owned and Dealer-Owned Retail Outlets according to Level of Motor Spirit Sales 89
4 Comparative Service Station Economics 101
5 Percentage Company Motor Spirit Market Shares by State : 1974 118
6 Outlet and Market Shares by Company 119
7 1970 - Numbers of Discount Price Boards
Displayed Throughout Victoria 125
8 Historical Consumption of Petroleum Products in Australia 209
9 Forecast Demand of Petroleum Products in Australia 210
10 Consumption Estimates of Petroleum Products 211
11 Trends in Petroleum Production Slates 212
12 Historical Indigenous Crude Production 215
13 Forecast Indigenous Crude Production 216
14 Exploration and Development Wells Drilled Since 1970 217
15 Australian Petroleum Import Bill 225
16 Progressive Engine Tax Scale 231
17 Average Service Station Throughputs - 1974 252
18 Retail Outlet Closures in Australia - 1973 to 1975 257
19 261
20 Motor Spirit Marketing Costs and Required Margins 267
21 Comparison of Service Station Economics: 1975 269
22 Analysis of Closures - 1973/1976 283
23 Estimated Redistribution of Motor Spirit from Closure of Retail Outlets 285
24 Estimated Retail Sales of Motor Spirit of Company-Owned Retail Outlets - 1980 305 25 Leakages Resulting from Closure of Retail Outlets 311
(xviii)
Table Topic Page
26 Estimated Average Gallonage of Company-Owned Outlets, 1980 313
27 Commission's Estimate of Shell's Sales of Motor Spirit to Company-Owned Outlets 314
28 Wholesale Prices of Motor Spirit 337
29 Summary of ex Refinery Values Obtained by Various Methods, April 1975 351
Figures
1 Australian Crude Production and Imports to meet Demand for Petroleum Products 214
11 Required Motor Spirits Marketing Margins 265
111 Motor Spirit Marketing Economics 266
Attachments to Part XIV
1 National Cumulative Distribution for Company-Owned Retail Outlets - 1975 318
2 An Example of the Commission's Rationalisation Plan as Applied to all Australia 319
3 An Example of Calculation of Leakages Occurring under Commission's Rationalisation Plan 320
Attachment to Part XVI
Table A Refining Margin Persian Gulf v Singapore, Early April 1975 354
Table B Import Parity Values based on Singapore Export Prices, April 1975 356
Table C Australian Refinery Margins based on Import Parity, April 1975 357
Table D Calculation of ex Refinery Prices by the Local Refining Method, April 1975 360
(xix)
ROYAL COMMISSION ON PETROLEUM
FOURTH REPORT
THE MARKETING AND PRICING OF
PETROLEUM PRODUCTS IN AUSTRALIA.
INTRODUCTION
1. SUBJECT MATTER
This Report concerns the marketing, distribution and pricing of petroleum products in Australia. It concentrates
upon the major product - motor spirit.
2. BACKGROUND
2.1 The industry's marketing methods have, for many years,
been the subject of substantial criticisms. The criticisms are familiar. They echo those made in many other countries. Down
the years the reports of a long list of commissions of inquiry of one kind or another have referred to them.
1
(a) There are far too many service stations; the
industry and through it the community is burdened
by immense over-investment in retail outlets:
(b) Motor spirit and other petroleum products are
over-priced; both wholesale and retail margins are
excessively high:
(c) There are too many oil company marketers; the
petroleum market in Australia is irrationally
fragmented by up to nine parallel marketers:
(d) The market is sometimes chaotic and often not
price competitive:
(e) Unfair competition and especially discriminatory
pricing practices are rife:
(f) The "tiers" of price and the pricing structure generally are archaic and irrational:
(g) Dealers are sometimes dealt with oppressively.
2.3 The Commission finds that all these complaints contain
certain significant elements of truth. Let it be said, in the
interests of balance, that there are elements of positive
achievement. How the allegations came to be at least partly
true, is discussed in the following pages, not to recriminate or to allot blame, but for the purpose of considering how the industry may be restructured on a basis at once more rational
and in the better interests of the community and of the oil companies, as well as those who find employment in the industry.
2.2 Specifically, these allegations include the following :~
2
3. TERMS OF REFERENCE
3.1 In general, the Commission is directed to make inquiry
into and report upon all aspects of the marketing and pricing,
in Australia, of all types of petroleum, diesel and other fuels
for internal combustion and jet engines, derived from any form
of liquid or gaseous hydrocarbons, whether such hydrocarbons are
produced in Australia or elsewhere and all types of residual
furnace and heating fuels and other by-products likewise derived. (Term of Reference 1)
3.2 The Terms of Reference go on to particular matters which
clearly reflect government and community concern about the com
plaints listed above. Without limiting the generality of Term
of Reference 1, the Commission is required to inquire into and
report upon :-
" (c) whether the prices of such fuels and other by-products are excessive and the extent to which the marketing, management and trading practices, prolifera tion of service stations and other retail outlets, and
the granting of secret or other discounts, and the maintenance of a multi-tiered price structure by refiners and wholesalers of such fuels, are contributing thereto;
"(d) whether, and if so, to what extent, the policies and objectives of any of the refiners or wholesalers of such fuels have contributed to price-cutting wars in any one retail sector to the detriment of any other sectors;
and
"(e) to what extent fuel pricing by companies operating in Australia which are subsidiaries of foreign corporations has been influenced or determined by the decisions of their overseas principals in such matters
as inflating original prices paid to overseas crude oil producers and shipping freight thereon thus creating an artificially high landed price to the detriment of Australian consumers."
3
4. COURSE OF INQUIRY
4.1 The Commission commenced its public hearings on 5th
December, 1973. On that date, Counsel Assisting announced that
the Commission had decided to divide the subject matter contem
plated by the Terms of Reference into several divisions and that
the first of such divisions concerned major aspects of the
marketing and pricing of motor spirit. The Commission circulated
a document amongst the parties which had then appeared and which
included all the marketers. The document sought information on
the topics of marketing and pricing of motor spirit.
4.2 However proceedings on these topics were interrupted by
the decision of the Commission, at the request of the parties,
including the Australian Government, to report upon proposals
for new refineries in New South Wales. This separate inquiry
took up most of 1974 and was concluded with the presentation of
the Commission's Second Report on 20th December, 1974. The First Report, which was presented on 15th October, 1974, concerned
temporary shortages of product which occurred in New South Wales
during 1974.
4.3 At the beginning of 1975, the Commission resumed its
inquiry into marketing and pricing but this was again interrupted
by an inquiry, at the request of the Australian Government, into
the circumstances of the transfer of allocated indigenous crude
oil by Allied Petrochemicals Pty. Limited to ACTU-Solo Enterprises
Pty. Limited, which resulted in the presentation of the
Commission's Third Report on 19th September, 1975.
During 1975, the Commission held public hearings into
marketing and pricing. Forty-two days of public hearings were
held in Melbourne and 14 days in Sydney. In addition, the Commission inspected service stations in Melbourne and Geelong,
in Brisbane, Toowoomba and the Gold Coast, in Adelaide and in Perth and Bunbury. The Commission visited New Zealand in January and February, 1975 and the United States of America,
Canada, United Kingdom, Norway, France, Iran and Singapore in
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June and July, 1975. During its visits to tho:se countries, the
Commission inspected service stations and refineries and spoke to
a large number of government and industry representatives. The
public hearings of the Commission concluded on 17th December, 1975.
5. ACKNOWLEDGEMENTS
The Commission has been aided in its inquiry by a number
of persons and agencies of Government in overseas countries. It
wishes to record its appreciation for the assistance received from the following persons :-
NEW ZEALAND The Hon. W.W. Freer,
Minister of Trade and Industry, and Minister for Energy Resources, WELLINGTON.
UNITED STATES OF Mr. Melvin Conant, AMERICA Assistant Administrator for International Energy Affairs, Federal Energy Administration,
WASHINGTON, D.C.
Mr. Peter Ward, Assistant Director, Bureau of Competition, Federal Trade Commission, WASHINGTON, D.C.
Mr. L . Lehman, Assistant Commissioner for Rules and Regulations, U.S. Customs Service,
Department of Treasury, WASHINGTON, D.C.
CANADA The Hon. Donald S. Macdonald,
Minister of Energy, Mines and Resources, OTTAWA.
UNITED KINGDOM Sir Jack Rampton, K.C.B., Under Secretary of State, Department of Energy, LONDON.
Mr. L. Williams, Deputy Secretary, Oil Policy Home Division, Department of Energy,
LONDON.
5
FRANCE M . Jean Michel de Mourgues,
Special Adviser to the Director, La Direction des Carburants (DICA), PARIS.
M. Gerard Descours, Administrator, Elf Petrol Company (Groupe Elf),
PARIS.
IRAN His Excellency Dr. Manoutchehr Eghbal,
Chairman of the Board and General Managing Director, National Iranian Oil Company, TEHRAN.
His Excellency Dr. Jamshid Amouzegar, Minister for the Interior, TEHRAN.
SINGAPORE Mr. Lim Thean Soo,
Comptroller of Customs and Excise, SINGAPORE.
Mr. Tan Son Chuan, Deputy Director, Department of Trade, SINGAPORE.
The Commission also expresses appreciation of the assis
tance received from officers of the undermentioned bodies :-NEW ZEALAND (Wellington) Energy Resources Commission,
Department of Trade and Industry, Inland Revenue Department, Motor Spirits Licensing Authority,
Commission of Inquiry into the Distribution of Motor Spirits and Ancillary Products.
UNITED STATES OF AMERICA (Washington)
Federal Energy Authority, Federal Trade Commission, Department of Treasury, Department of State.
CANADA (Ottawa)
Department of Energy, Mines and Resources, Energy Supplies Allocation Board, National Energy Board, Department of Industry, Trade and Commerce.
UNITED KINGDOM (London) Department of Energy, Office of Fair Trading.
6
NORWAY Statoil Company, Stavanger,
Ministry of Industry, Oslo, Ministry of Finance, Oslo, Ministry of Foreign affairs, Oslo.
FRANCE Elf Petrol Company (Groupe Elf).
(Paris)
IRAN National Iranian Oil Company
(Tehran)
SINGAPORE Customs and Excise Department, Department of Trade.
6. GENERAL OBSERVATIONS
6.1 The Commission is firmly persuaded that by a coincidence
in time the present is the moment most fit for the industry to assess its future and for industry and consumers to move to a
different and more effective economic relationship.
6.2 The actions taken by the Organisation of Petroleum
Exporting Countries (OPEC'' of October, 19 73 involved far more than a very large and very inconvenient rise in the price of
energy. They also emphasised the loss of control by oil companies
of the sources of supply which were the base from which all down
stream activity sprang. This disruption of the basis of an international vertically integrated system has meant that the
roles of refining, distribution and marketing as individual profit centres must be recast. In precise terms it means that
refining, distribution and marketing in Australia must pay their
way in a manner that they have never been required to do before.
6.3 The single most distinctive feature of the industry in
Australia is that its evolution and development has been almost untouched by the rational and integrated policy requirements of government. This policy vacuum is matched by the paucity, in
the public domain, of published material which seriously analyses the industry's problems.
7
6.4 It is not reasonable to expect commercial companies to
do better in the absence of established national objectives and
informed and appropriate machinery for the generation of policy
options and the supervision and administration of programs. This
may cost money, but the cost would be an insignificant proportion
of the enormous body of wealth misallocated or lost over the
last thirty years, much of it drawn from the Australian consumer.
6.5 It became immediately apparent that in each country
visited the question whether public administration had to take a
substantial supervising and sometimes executive role in distribution
and marketing (including prices, especially transfer prices) had
long since been considered and decided in the affirmative. The
methodology varied. Some countries set up independent agencies
(Federal Energy Administration (F.E.A.) in the United States,
Direction des Carburants (D.I.C.A.) in France); others relied
upon departments of State (United Kingdom, New Zealand, Norway);
others owned sections of the oil industry and attempted to use
this position as a "window" on the industry (British Petroleum
in the United Kingdom, Total and the Elf Group in France,
Statoil in Norway) - most in fact had a series of approaches on
different policy levels.
6.6 Underlining however every government's organisation was
the view that security of supply, balance of payments, price to
consumers, social utility of investment and basic industrial
organisation were too important to be left to the commercial
rivalries of what were mostly international corporations.
Australia is one of the very few countries which has elected
(if indeed any deliberate decision has ever been taken) not to
have its organs of public administration enter this field. It is true as later discussed that governments, both State and
Federal, in situations of price or market crisis, have made sporadic and uncoordinated forays into the area to attempt to limit prices, reduce the proliferation of outlets and rationalise
trading hours. Seldom have these forays been truly successful in
their objectives. Most have been total failures. They have
8
failed because they have lacked the back up of administrative
know-how, and have been advanced on a local piecemeal basis. In
short, they have been "band-aid" solutions to what were seen as particular crisis problems, where in fact the real problem and
the true solution lay hidden and unperceived in the national structure of the industry.
6.7 When the Commission first commenced its activities in
this area, it sent a series of letters to all State and Federal
Governments containing wide-ranging interrogatories designed to
elicit information relating to marketing and pricing and distribution.
The Commission received assistance from many quarters, including the State Governments of South Australia, Western
Australia, New South Wales and Tasmania. No State Government
attempted to answer the questions in any comprehensive way though the State Energy Commission of Western Australia, in a
quite recent submission, forwarded a report on "Motor Spirit Retailing in Western Australia".
The questions were also furnished to the Australian
Government which has been represented by Counsel during the hearings. No answer was received from the Australian Government
to these questions, but approximately 17 months after the original questionnaire was furnished to the Government, a
letter dated May 1975 was received from the Minister for Minerals and Energy, which is reproduced in full :-
9
"Minister for Minerals and Energy, Parliament House, CANBERRA A.C.T. 2600
13 May 1975
Dear Mr. Justice Collins,
I refer to your letter of 24 March enquiring whether my Department is able to provide information about the various topics you have mentioned, namely the motor spirit "price war , the relationship between oil companies and service station proprietors and the causes and remedies for the proliferation of service stations.
In summary, these topics all relate to the retailing of petroleum products, a matter about which my Department has virtually no information, and regrettably it cannot therefore be of any real assistance to you. Your officers are of course welcome to consult mine to see if the little information they
do have on file is of any assistance.
Yours sincerely,
(signed)R.F.X. CONNOR.
The Hon. Mr. Justice W.H. Collins, Commissioner, Royal Commission on Petroleum, G.P.O. Box 4377, SYDNEY. N.S.W. 2001"
6.8 The real question then that emerges is this - has
Australia suffered adversely, when compared to other countries
with sophisticated administrations by the apparent neglect of its organs of public administration to intervene in this field of
industry in any effective way?
6.9 The answer regretfully must be a strong and definite
affirmative. There can be no doubt at all that Australia's present system of distribution and marketing was not inevitable,
could be and should be less wasteful and more efficient and that
its products most certainly, tax considerations put aside, could
and should, in the future, be cheaper to the consumer. The cost to the Australian consumer of this failure to impress upon the
10
industry policies which reflect the true needs of the consumer
has been and continues to be high.
6.10 This Report will deal in detail with all these issues.
For the present the Commission tenders a single illustration in
a limited field - what is the cost of mere retailing, that is
selling motor spirit at the service station to a motorist in
Australia compared to the same cost of mere retailing in New
Zealand? New Zealand is chosen as an example because direct
money comparisons can be made with some accuracy and in New
Zealand, unlike Australia, government policies have been imposed
upon the industry for forty years and have profoundly altered
the shape of the industry in ways desired by the Government
of New Zealand.
6.11 What has this meant to the consumer? In February
1975, the Commission visited New Zealand and in May 1975 took
evidence from Mr. J.D. Leslie, now Chairman of the Board and Managing Director of Mobil Oil (Australia) Limited and formerly
Managing Director for four years of the Mobil Companies in
New Zealand. It has to be noted that New Zealand, having no indigenous resources, imports all its crude at world parity
prices, then approximately four times the price of Australian
indigenous crude which meant that motor spirit so derived would be dearer because of the higher feedstock price. The exchange
rates for the Australian dollar and the New Zealand dollar were in approximate parity, the price of motor spirit and tax
almost the same. The price of motor spirit was N.Z. 78 cents,
which included duty of NZ 21.80 cents, to leave an ex tax price of N.Z. 56.2 cents. The retail mark-up permitted under the New Zealand system was 6.37 cents.
6.12 The full price of motor spirit in Victoria, not taking account of price-cutting, was in May 1975 65.4 cents, of which 22.3 cents was excise duty. The mark-up of an independent proprietor, to take the example of Mr. D.F. Woodhouse, who took
a prominent part in these proceedings, was 12.2 cents (the
11
recommended Victorian Automobile Chamber of Commerce margin) plus
6.75 cents allowed him by his supplier, that is a total mark-up
of 18.95 cents against 6.37 cents in New Zealand.
6.13 To display a further example - in New South Wales
the approved margin was in 1975 approximately 10.9 cents a
gallon. In addition, there was buried in the wholesale list
price charged to the dealer an amount of approximately 7 cents
a gallon, which was part of the true rental paid to the lessor
company for the outlet. When this is added, the total retail
margin in New South Wales was approximately 17.9 cents a gallon,
as against 6.37 cents a gallon in New Zealand.
6.14 It is true that, although the Australian dollar and
the New Zealand dollar were in approximate parity, wages were
lower in New Zealand, service stations provided a lesser service,
for example were open for fewer hours, and some weighting has
to be applied to the figures cited, so that the comparison is
not quite as stark as it might appear.
6.15 But making all allowances the gap in charges to the
consumer was enormous. These comparisons can best be made in
percentage terms. In New Zealand, the retail margin of 6.37 cents was 11.3% of the total ex tax price. In Victoria, the
retail margin accounted for 44% of the total ex tax price paid
by the motorist and in New South Wales 42.8%. Indeed, the
"buried" rental of about 7 cents a gallon which was and still
is charged every consumer in Australia who pulls into a
company-owned retail outlet was greater than the whole cost of
retailing in New Zealand.
In the United States of America, the retail margin is
about U.S. 7 cents per U.S. gallon on the larger stations.
6.16 There can be no escape from the position that because
of the shape and organisation that the industry has acquired in Australia, retail "mark-ups" including the true cost of rental
12
have been notably excessive down the years and continue to be so.
6.17 In summation, New Zealand has evolved a system of distrib ution and marketing suitable to its own needs. It has avoided
the excesses of the system in Australia and effectively kept those
elements of cost it can control in check. In terms of the
avoidance of unnecessary costs, this supervision has been to the marked advantage of the New Zealand consumer. The system of
distribution and marketing is an organic product of the indigenous New Zealand society.
6.18 The New Zealand figures suggest that the Australian con
sumer may well have paid a high price for the lack of governmental
oversight of this area. This lack of oversight is all the more
remarkable in view of the nature of the industry. Despite
market fragmentation by nine parallel marketers and despite
their common policies of "brand loyalty", "service", "magical"
additives and the paraphenalia of product differentiation, it is
perfectly apparent that all marketers sell what is basically an undifferentiated product.
Further, these products are staple products produced by what by most normal tests would be a utility industry. In its
socio-economic context motor spirit, as a staple consumer product,
resembles electricity, town gas, water supply, postal and commun ication services, meat, milk and bread supplies. All these
areas have acquired distinctive forms of regulation. The policy objectives of regulation include security and comprehensiveness
of supply, availability to the public, public pricing and market
costing, cheapness and standardisation.
The observed style of marketing and the relative absence
of regulation with respect to petroleum products remains unex plained by any evidence before the Commission and is seemingly i inappropriate.
13
6.19 This absence of governmental intervention has resulted
in the growth of the industry largely unmodified by the force of
public opinion except tenuously through the marketing mechanism.
The present shape of the industry is therefore a
product of the commercial exigencies and rivalries of the major
oil companies. In the Commission's Terms of Reference there is
some emphasis placed upon the role that overseas principals
may have had on the policies of local subsidiaries. The answer
perhaps is more profound than the question - the overseas
principals have in fact exported to Australia their marketing
style and structure. The industry today represents not so much
an indigenous industry which has evolved in response to the
organic needs of the Australian people; rather it is an imposition
upon the Australian people of a convenient marketing strategy exported by the international oil companies and utilised by them
in Australia.
14
BOOK I
PART I
THE INDUSTRY IN AUSTRALIA
7. THE COMPANIES
7.1 Nine major oil companies operate in Australia today:
Shell Australia Limited (Shell); Mobil Oil Australia Limited
(Mobil); Esso Australia Limited (Esso)· Caltex Oil (Australia)
Pty. Limited (Caltex); The British Petroleum Company of Australia
Limited (B.P.); Total Holdings (Australia) Pty. Limited (Total);
Ampol Petroleum Limited (Ampol); H.C. Sleigh Limited (Sleigh);
Amoco Australia Pty. Limited (Amoco). These companies supply the whole market for motor spirit in Australia, which, in 1975,
consisted of just over 2,850 million gallons.
Two of the companies, Ampol and Sleigh, which together supply about 18% of this market, are Australian companies whose shares are publicly listed on the Australian stock exchanges.
The seven others are foreign owned. Five of them represent six
of the seven largest international oil groups in the world, Gulf alone being not represented in Australia. The three European companies, Shell, B.P. and Total, supply over 43% of the
Australian market for motor spirit. The four United States corporations, Caltex, Mobil, Esso and Amoco, supply over 38% of the market.
A number of small independent marketers supply about 3% of the retail market but they rely on the major oil companies
15
for supply and tend to restrict their activities to the capital
cities, particularly Melbourne, at high volume, low capital sites.
TABLE 1
TABLE OF TOTAL MOTOR SPIRIT MARKET SHARES
Year ended 31/12/1965 Year ended 31/12/1975 Company Million
Gallons
Market Share
Million Gallons
Market Share
Ampol 198 11.6% 280 9.8%
Amoco 46 2.7 131 4.6
B.P. 297 17.4 517 18.1
Caltex 211 12.3 370 13.0
Esso 135 7.9 219 7.7
Mobil 253 14.9 375 13.2
Shell 404 23.8 622 21.8
Sleigh 125 7.3 231 8.1
Total 28 1.6 92 3.2
Others 8 0.5 13 0.5
1,705 100.0 2,850 100.0
7.2 Shell Australia Limited In 1901 the Shell Transport and Trading Company Limited,
which was incorporated in England in 1897, established a storage
tank installation for kerosene at Gore Bay in Sydney. In 1902 the Royal Dutch Petroleum Company, which had been formed in the
Netherlands in 1890, began importing oil to Melbourne. In 1907
Shell and Royal Dutch amalgamated. Today the Royal Dutch-Shell
group is second in size only to Standard Oil Company of New
Jersey and comprises some 500 companies operating throughout the
world. In 1927 the British Imperial Oil Company, a United Kingdom affiliate of the group which had operated in Australia
since 1905, changed its name to The Shell Company of Australia
Limited. This company was incorporated in New South Wales in 1937 and in Victoria in 1964. In 1926 Shell acquired the Neptune
Oil Company, an Australian company which had begun marketing
motor spirit in 1917.
16
One feature of Shell's trading in Australia has been the part it played in the introduction in the 1920's of the "tied
pump" arrangement and in 1951 of the solus system of marketing.
Until 1924 when Neptune installed pumps exclusively for the sale
of its motor spirit, most motor spirit retailers installed and
owned their own pumps. In 1925 Shell introduced company-owned
kerbside Vickers pumps for which it charged a nominal amount of £l0 for installation and a small annual rental fee. Many such
pumps were installed.
On 22nd January, 1926, in great secrecy, Shell initiated
a program of "tying" pumps. Company representatives approached
retailers between midnight and 6.00 a.m. and persuaded them to
sign agreements whereunder the retailer undertook to use his
pump exclusively for distributing Shell's motor spirit and the
company agreed to pay the retailer one halfpenny a gallon for all the motor spirit sold through the pump. Hundreds of retailers
signed such agreements with Shell. The system became a feature
of all oil companies trading in the period before the outbreak
of war in 1939.
The outbreak of war led to an entirely different pattern of marketing. Rationing was introduced on 1st February, 1940 and
remained in force until 8th February, 1950. From August 1941, the Australian Government took control of the industry and introduced a pool arrangement under the National Security
(Petroleum Productions Distribution) Regulations. This achieved
complete coordination of the distribution and led to the market
ing of all petroleum products under a single brand. The market ing companies withdrew their trade names and accepted a pre
scribed quota of business. The pool arrangements continued by agreement between the companies after hostilities ceased until
1948. Indeed, there was little opportunity for normal market operations until rationing stopped in February 1950.
17
Then in August 1951, Shell again took an initiative,
conceived in secrecy, which dramatically changed the character
of the petroleum market in Australia. On 15th August, 1951,
Shell's sales staff persuaded a large number of dealers to sign
contracts under which they agreed to sell only Shell motor
spirit. The proliferation of service stations consequent upon
this move to solus trading is described elsewhere in this Report.
The number of service stations peaked in about 1966. At about this
time Shell instituted a plan to reduce the number of its retail
outlets. In its evidence it stated that the number of Shell
retail outlets in 1965 was 5,322 but that by the end of 1972,
the number was 3,983. (Exhibit 46(g), p.69) Further, in 1970,
after considerable research and analysis, Shell instituted a
master network plan relating mainly to service stations conducted
on sites owned or leased by Shell, which has operated since and
is projected through until 1980.
Shell operates two crude oil refineries in Australia.
The one at Clyde near Sydney was acquired in 1927 from William
Fell. It was re-opened by Shell in late January 1928 and was
expanded in 1930's and 1950's. In the early 1960's, a major
expansion was undertaken with the crude distillation facilities
upgraded to handle sour crudes and a large catalytic cracking
complex being added. Further expansion has taken place since.
Construction of Shell's other refinery at Geelong commenced in
1951. It came on stream in 1954.
Shell has the largest share of the motor spirit market
in every State except New South Wales, where B.P. Australia
Limited has a marginally greater share. It has 21% of the total
retail outlets for motor spirit in Australia.
The financial statements of Shell Australia Limited
and subsidiary companies at 31st December, 1974 disclosed a net
profit for the year of $15,555,397 with total assets of $531,461,010.
It was stated that the ultimate holding company was
18
N.V. Koninklijke Nederlandsche Petroleum Maatschappij, incor porated in the Netherlands.
7.3 Mobil Oil Australia Limited.
Mobil Oil Australia Limited is the holding company
responsible for all activities conducted under the Mobil name
in Australia. It is wholly owned by Mobil Petroleum Company
Incorporated, which is registered in Delaware, United States of
America. The company was incorporated in Victoria in 1904 but
it had been operating in New South Wales as early as 1895 under
the name Vacuum Oil. It changed its name to Mobil in 1962. The
ultimate parent company is Mobil Oil Corporation of New York,
United States of America, which was formed by the amalgamation of the Standard Oil Company of New York and the Vacuum Oil
Company.
Mobil has 14% of the total outlets in Australia for
motor spirit, ranking third amongst the companies and has 13.2%
of the retail market, ranking third.
Since the turn of the century, when it virtually had the
market to itself, Mobil's share of the market has gradually declined as other marketers have come in. From time to time the company has, alone or with other companies, sought to halt this
decline by encouraging exclusive or restrictive terms of trade with dealers. Between 1928 and 1932, a number of smaller
marketing companies had doubled their market share and Shell and Vacuum retaliated by the employment of restrictive conditions of
sale. Thus in December 1931, an agreement was introduced where- under Vacuum, together with four other major companies, agreed to
allow a rebate to all resellers who sold only the product of the five. The five companies closed their accounts with independent motor spirit resellers. This move was not, however, successful
and despite vigorous efforts, both Shell and Vacuum together
lost over 11% of the market during 1930's. In 1950 , when war time rationing was finally abolished, Vacuum supplied about 25%
of the motor spirit consumed in Australia.
19
Within 24 hours of Shell's introducing solus marketing
in August 1951, Vacuum followed suit. During the fiscal year
ended 30th June, 1953 it spent over £ 192,000 acquiring solus
sites. However, its market share for motor spirit during the
period 1953 to 1960 fell from 21.1% to 17.8% and it has continued
to fall since.
One particular feature of Mobil's market posture should
be noted. Perhaps because in 1951 it was early into the field
of solus trading and the tying of outlets owned by independent
dealers, a markedly higher proportion of Mobil's service
stations are dealer owned, than are the service stations of the
other major marketing companies. At 31st December, 1975 Mobil
had 2,287 retail outlets in Australia and marketed in all States.
Of these, 1,530 are dealer owned.
Mobil has a 65% interest in Petroleum Refineries (Australia) Pty. Limited, which operates two crude oil refineries
in Australia, one at Altona, Victoria and the other at Port
Stanvac, near Adelaide, South Australia. The Victorian refinery
came on stream in 1955 and the South Australian one in 1963.
The other 35% interest in the refining company is owned by Esso.
Mobil also operates a lubricating oil refinery at Port Stanvac.
This came on stream late in 1975.
The balance sheet of Mobil Oil Australia Limited and subsidiary companies as at 31st December, 1974 included total
assets at $313,356,863. The net profit of the group for the year
was $1,126,658, as contrasted with $15,626,981 for 1973.
7.4 Esso Australia Limited The ultimate parent company of Esso Australia Limited
is now Exxon Corporation, a company incorporated in the United States of America and one of the Standard Oil Company of New
Jersey Group,· the largest oil company group in the world.
20
Esso Australia Limited and its subsidiaries are a group of inter
related companies engaging in the marketing and refining of motor
spirit and not directly associated in Australia with the Esso/
Broken Hill Proprietary Company Limited development of the Bass Strait oilfields.
As a company, historically, Esso Australia Limited was
incorporated in Australia in 1927 as the Atlantic Union Oil Company. In 1929 it acquired the petroleum interest of an
Australian company, F.W. Williams and Company Pty. Limited. The
company operated mainly in Sydney and Melbourne until after the
Second World War. Its plans to distribute motor spirit through
out Australia were delayed by the depression and unsettled
conditions of the late 1930's. In 1933 it was purchased by the
Standard Oil Company of New Jersey, that being the year in which
the Standard Vacuum Oil Company was formed by merging interests of the Standard Oil Company of New Jersey and Socony Vacuum.
The company changed its name to Esso in 1951.
Esso has a relatively small share of the retail market,
with 8% of Australian retail outlets. It is however in the fore front of market developments and trends. It has for some time been
divesting itself of small volume uneconomic service stations and has advocated to the Commission that there should be an industry
wide reduction of service stations of the order of 50%. It claims successfully to market at substantial discounts below the whole sale list price to jobbers and independent distributors. It
supplies the largest independent chain in Melbourne. (Transcript, p.3152) First in South Australia and then Victoria it has intro
duced a practice of charging its lessee dealers an economic rent, arrived at after independent valuation of service station sites.
As a consequence it has been able to reduce the wholesale price of motor spirit sold by it by an amount of 6 cents a gallon. The company appears to be an active and innovative competitor in the
market.
Esso has no outlets in the Northern Territory or Tasmania
but has outlets in all other States. It also has a 35% share in Petroleum Refineries (Australia) Pty. Limited, which has
21
refineries at Altona in Victoria and Port Stanvac in South
Australia.
Its balance sheet as at 31st December, 1974 showed its
total assets at $179,482,000 and its trading profit as
$3,470,000.
7.5 Caltex Oil (Australia) Pty. Limited
The Texas Company (Australasia) Limited was incorporated
in New South Wales in 1918. Its parent, the Texas Company,
incorporated in the United States of America, had traded earlier
in Australia through an agent. In 1936, the California Texas
Company was incorporated with the Standard Oil Company of
California and the Texas Company, each holding a 50% interest.
The production, refining, distribution and marketing activities
of both parent companies through the eastern hemisphere, includ
ing Australia, were thus combined under one administrative agency
for the whole area and the trade name "Caltex" was introduced.
The Australian subsidiary's name was changed to Caltex in 1941.
In November 1951 Caltex commenced solus marketing in
Victoria and later extended it into other States. At about this
time, the California Texas Oil Company provided substantial funds
to the two Australian companies, Ampol and Sleigh, which funds
enabled those companies to undertake the financing of the large scale capital expense necessary for them to commence solus
marketing. In 1960 California Texas Oil Corporation acquired
10.000. 000 deferred "B" class shares in Sleigh and in 1965,
through its wholly owned Australian subsidiary Martin Properties
Pty. Limited, 10,000,000 deferred "C" class shares in Sleigh as
set offs against the amount owing by Sleigh on the loans made
to it. At the present time, Martin Properties Pty. Limited holds 20,000,000 ordinary shares in Sleigh, which represent 22.8% of the issued capital and 26.6% of the ordinary issued capital
of Sleigh. In 1961, California Texas Oil Corporation took up 3.000. 000 deferred shares in Ampol. Through Martin Properties
Pty. Limited, it now holds 2.6% of the issued capital of Ampol.
22
The shares in the United States parent company, now
called Caltex Petroleum Corporation, are owned as to 50% by the
Standard Oil Company of California and as to the other 50% by
Texaco Incorporated. These two companies rank amongst the largest oil companies in the world.
During the 1950's, Caltex supplied both Ampol and Sleigh
with their product requirements. The companies represented a
useful market outlet for Caltex' supplies of Indonesian crude oil.
Ampol1s refinery at Lytton, near Brisbane, which came on stream
in 1965, was originally designed to handle Indonesian crude oil supplied by Caltex. Sleigh continues an arrangement with Caltex
whereunder Caltex processes overseas crude oil supplied by it and
Sleigh's indigenous crude oil at its Kurnell refinery. Caltex
also has interests with Sleigh in Australian coastal shipping.
In 1974 Caltex made a profit of $2,513,000 with total assets at 31st December, 1974 being shown as $151,957,000.
The oil refinery at Kurnell is held in the name of Australian Oil Refining Pty. Limited which company is also a
subsidiary of the Caltex Petroleum Corporation. In 1974, profit was reported as $3,621,000 whilst at 31st December, 1974 total
assets were recorded at $70,954,000. The lubricating oil refinery
also at Kurnell, is owned 50% by Caltex Oil (Australia) Pty.
Limited, the other owners being Ampol (25%) and Sleigh (25%).
7.6 The British Petroleum Company of Australia Limited
On 14th May, 1920 Commonwealth Oil Refineries Limited
(C.O.R.) was incorporated as a result of an agreement made
between the Australian Government and the Anglo-Persian Oil Company Limited. The Commonwealth of Australia owned 50% of
the capital, plus one share. The principal objective of the company was to refine mineral oil and a small refinery was opened at Laverton in Victoria in 1924. However, the company grew as a marketer in the metropolitan areas of the eastern States and
23
South Australia. Initially, it had great difficulty establishing
itself in competition with the overseas companies. In the 1920 ' s
by various means, it sought, with success, to keep its motor
spirit prices below those of its overseas rivals. Its activities
and those of the other smaller marketers led in the early 1930's
to the introduction by its competitors of restrictive practices
such as rebates in favour of dealers who sold only the competitor's
product. These practices led in 1933 to the appointment by the Commonwealth Government of the Royal Commission into the industry,
headed by M r . S.E. Lamb, K.C. In the 1930's, the company took
some market initiatives such as the introduction in 1935 of a
benzol mixture selling at the same price as standard grade motor
spirit. However the company, despite these initiatives was unable
to maintain its ability to undercut the price of its competitors.
Upon the introduction of solus marketing in 1951, C.O.R.
together with Sleigh and Ampol, combined as an independent group
to supply garages other than those which had gone solus. The
company found that as a result of the first solus agreements it
had lost the throughput of about 1,000 kerbside pumps. Indeed, it was compelled to turn its attention to supplying directly to
industrial accounts in order to maintain its market share.
On 25th September, 1952 the Commonwealth sold its
interest in C.O.R. to the other shareholder, then named the Anglo-
Iranian Oil Company Limited, which subsequently became the British Petroleum Company in 1954. The sale, it was said, reflected
doubts then entertained by the Australian Government as to con
stitutional validity of appropriating monies to finance, by
further investment in the company, expanded storage and distri
bution facilities at the Laverton refinery. With the sale of its
interest in C.O.R., the Australian Government lost its ability to monitor at first hand the operations of a large oil company.
Judging from the value placed upon participation in refining ventures by administrations overseas, and the lack of hard
knowledge of the industry available today in Australia, the loss
of this ability is to be regretted.
C.O.R. changed its name to B.P. Australia Limited on
29th October, 1957. The Group operates two refineries, the refinery
at Kwinana in Western Australia which came on stream in 1955 and
a refinery at Crib Point in Victoria, which came on stream in 1966 .
As at 31st December, 1975 B.P. had 3,079 retail outlets
in Australia, of which 1,354 were company owned. The company has,
for the most part, concentrated on a neighbourhood location and
style of service station; in consequence few of its service
stations emulate the large city and highway stations favoured by some of the other companies.
The chief shareholder in the company's parent, The
British Petroleum Company Limited, which is incorporated in the
United Kingdom, is the British Government. In the Australian Group's balance sheet for the year ended 31st December, 1974, total assets
were shown as $361,676,000. A consolidated profit of only
$607,000 was reported for the year in contrast to a profit of $10,700,000 for 1973.
7.7 Total Holdings (Australia) Pty. Limited The Total Group of Companies in Australia are wholly owned subsidiaries of a French group headed by the Compagnie
Francaise des Petroles (C.F.P.), a company founded in Paris in 1924, the shares of which are owned as to 35% by the French
Government, which also, with the shares, controls 40% of the voting rights. C.F.P. is one of the major international oil
groups, ranking within the first ten for production, refining
and marketing. It is at the head of the international group known as "Total", a brand name introduced in 1954. C.F.P.
entered the Australian market in January 1955, when it became a 50% shareholder in a listed public company incorporated in Australia to market petroleum products. The Australian public
owned the other 50% of the shares. However, after the company, then called Total Oil Products (Australia) Limited, had made a series of losses and it had become obvious that no dividends
25
would be paid to shareholders for some years, C.F.P. acquired
the shares of the Australian shareholders at terms attractive
to the latter.
When Total first entered the Australian market in 1955,
it sold petroleum products in New South Wales only. However it
extended distribution to Victoria in 1960 and to Queensland in
1970. It does not operate in the other States or in the Northern Territory.
Total owns a refinery at Matraville on the northern
side of Botany Bay. The refinery was built in 1948 as a bitumen
plant by Bitumen Oil Refineries (Australia) Limited (Boral). It
was extended in 1956 and in 1960. As from 1st January, 1969 the
refinery was operated for the production of petroleum products
in Australia pursuant to an agreement between Boral and Total.
Total and Boral each had a half interest in the venture. In
1971, Boral withdrew from the venture and sold its share of the
refinery to Total.
On 31st July, 1974 Total announced to the Commission
that it had been forced to reach a decision that as from the end
of 1974 the production of the Matraville refinery would be limited to supplying bitumen and other products arising from the
bitumen-making process. This involved partial closure of the
refinery. A proposal by Total jointly with Ampol to construct a refinery in New South Wales was considered and reported upon
by the Commission in its Second Report.
Total is a relatively small marketer in Australia.
As at 30th November, 1975 it ranked ninth amongst the major oil
companies operating in Australia. In 1975 it had only 373
retail outlets in Australia, of which it owned 248.
26
The Group's balance sheet shows that as at 31st
December, 1974 the gross assets of Total Holdings (Australia)
Pty. Limited and subsidiary companies were $71,282,002. The
Group incurred a loss of $2,852,369 in 1974, with a loss of
$710,162 in 1973.
7.8 H.C. Sleigh Limited
Sleigh, which trades under the brand name "Golden
Fleece", is the oldest of the Australian oil companies. Its
shares are listed on Australian stock exchanges. The company
was incorporated in Victoria on 30th June, 1947 for the purpose
of acquiring the business of H.C. Sleigh, a business founded in
Melbourne in 1895, which commenced operations as an importer and
distributor of petroleum products in 1913. It is interesting
to note that in the 1920's, the proprietor, Harold Sleigh, convinced that kerbside service was essential to the motorist,
opened twenty service stations, as an experiment, in Melbourne, Sydney and Adelaide to sell H.C. Sleigh products. The stations provided drive-in facilities which are standard today. However
the principle of exclusive marketing proved to be ahead of its
time and it was decided to develop "Golden Fleece" pump repres entation at multiple outlets in the manner adopted by the other
motor spirit marketers at the time.
In the period of intense competition amongst companies
to acquire or retain market share with the introduction of solus
marketing, Sleigh found itself handicapped by the lack of capital
resources to match its competitors, with the benefit of overseas affiliations, which had available to them the expertise provided
by operations in other countries where service station systems' were based upon solus marketing. It was at this point in 1951 that the California Texas Oil Corporation came forward with long
term loans to help Sleigh. These loans assisted it in the finance necessary to establish its own solus marketing system.
In 1965, Sleigh issued shares to Caltex as a set off against
the amount of these loans.
27
In 1962 Sleigh acquired Kangaroo Petroleum Company Pty.
Limited, an Australian company which had been trading in Victoria
since 1959, and in 1967 Phillips Oil Products Limited, which had
been trading in Queensland and northern New South Wales since
1962 .
Up until 1965, Sleigh met its market requirements by
purchasing refined products from Caltex. On 1st July, 1965 it
entered into a processing agreement with Australian Oil
Refineries, a wholly owned subsidiary of Caltex. This agreement
provided for the processing by A.O.R. into refined products of
crude oil acquired by Sleigh from Caltex or from its own sources
of indigenous crude oil. Currently, Sleigh meets a substantial
part of its requirements pursuant to this agreement and by
purchase of refined products from Caltex. An application by
it to join with the Broken Hill Proprietary Company Limited in
building a refinery at Newcastle was dealt with by the
Commission in its Second Report.
Sleigh markets motor spirit in all States and ranks
sixth amongst the oil companies marketing in Australia. The
paid up capital of the company and its subsidiaries as shown
in the balance sheets as at 30th June, 1975 was $43,817,000.
Its total assets were $188,533,000 and its trading profit for
that year was $370,000 , $3,105,000 having been earned in the
second half of the financial year to offset the loss of $2,735,000 incurred in the first half. Sleigh attributed this
loss in the main to delays by the Prices Justification Tribunal in granting increases but now acknowledges and
welcomes the preparedness of the Tribunal to approve interim
increases where lengthier studies must follow.
Sleigh has a 25% interest in Australian Lubricating
Oil Refineries Pty. Limited.
28
7.9 Ampol Petroleum Limited
Ampol, which was initially incorporated in 1936, as the
Australian Motorists Petrol Company Limited, is a company 85% of
the issued capital of which is owned by shareholders with regis
tered addresses in Australia. The company and its subsidiaries
are involved in oil exploration, oil refining and the marketing of refined petroleum products and lubricants.
The company owns one oil refinery in Australia at Lytton near Brisbane. It also has a 25% shareholding in A.L.O.R. It
markets in all Australian States. The value of its sales of
petroleum products in Australia for the year ended 30th September,
1975 was estimated to be $217,789,000. It ranks fifth amongst the oil marketers in Australia, both in number of retail outlets
and percentage of motor spirit sales. Gross assets were
$255,241,000 as at 30th September, 1975. Its profit for that year from all sources was $11,173,000.
The Commission observes a change in pattern in Ampol's
marketing in recent times. The company is currently supplying
a number of large distributing chains at prices discounted below
the wholesale list price approved by the Prices Justification
Tribunal. Examples are Yellow Cabs in Queensland and Southern
Cross Petroleum Pty. Limited in Victoria. By contrast the
Commission has observed numbers of large company-owned Ampol
service station sites in the Melbourne area which are occupied
by lessee dealers, who currently receive no assistance from Ampol to compete with price cutters in the market. Thus it
would seem that inevitably Ampol is losing retail volume at these
service stations. It would seem that the company is attempting to make up this volume by bulk contracts at cut prices with distributing chains of the sort described.
When Ampol entered the New South Wales market in 1937 it emphasised merchandising rather than price cutting and thus was not seen as an immediate direct threat to the established companies. However it did import and distribute electric motor
29
spirit pumps, which up to that time had been excluded from
Australia by agreement between the international oil companies.
The action of Ampol forced other companies to replace manual
with electric pumps with a resultant increase in efficiency in
retailing. Surplus manual pumps tended to be installed in
country areas where previous distribution had been by packaged
supplies.
By 1940 Ampol had gained 8% of the New South Wales
market, though part of this represented sales to two small
distributors, W.J. Dunlop Pty. Limited and the British
Australasian Petrol Company, both of which were later absorbed
by Ampol.
The introduction of the solus system of marketing in
1951 found Ampol unprepared. The company could not itself
introduce solus trading because it did not sell a full range
of petroleum products and further would have had difficulty
in financing the acquisition of solus sites. For some time
it opposed the scheme and continued to supply multiple brand
stations with Sleigh and C.O.R. However it succeeded in
obtaining financial assistance from the California Texas Oil
Corporation and in late 1952 left the independent trading
scheme and began to develop its own independent market facil
ities. The first service station built by Ampol was opened on
1st December, 1952 and between 1954 and 1960 Ampol added more
service station sites to its chain than any other company.
In the result it greatly increased its market share. In 1950
Ampol had approximately 7.2% of the market. By 1960 its share
had grown to 11.9%. Between 1960 and 1963 Ampol increased the number of its sites from 1,873 to 2,071. Thereafter some
reduction in site numbers took place and as at 31st December, 1975 Ampol had 1,883 retail outlets, of which 880 are company
owned or controlled.
30
7.10 Amoco Australia Pty. Limited
Amoco began marketing in Australia in 1962, apparently
as a result of a decision by its United States parent, The
Standard Oil Company of Indiana, to extend its markets worldwide
as an outlet for Middle East crude available to it. During the
period from 1962 to 1975 , Amoco built 232 service stations and
spent over $22 million on service stations alone. In 1965 it
opened a refinery at Bulwer Island near Brisbane. Apart from
the Total refinery at Matraville, this refinery is the smallest
crude oil refinery operating in Australia. It can, however,
process both indigenous crude oil and sour Middle East crude oil.
Queensland's other refinery, that owned by Ampol at Lytton across
the Brisbane River from the Amoco site, is a bigger refinery in
terms of primary processing capacity, but is unable to process sour Middle East crude oil. In simple terms there would
be advantage in rationalising the operation of these two
refineries so that the Amoco refinery concentrates on sour crude
oil and the Ampol refinery on indigenous crude oil. The Amoco
refinery by reason of its size does not enjoy economies of scale. When the Commission comes to report on the national
refining policy, it will consider the possibility of rational ising the operations of the two Queensland refineries.
Amoco's late entry into the market necessitated its
selecting outlets with care. It did not have a significant number of suitable dealer-owned outlets available to it, thus inevitably it has tended to build up the number of company-owned outlets. As at 31st December, 1975 the company operated outlets
in New South Wales, Victoria, Queensland and South Australia
numbering 460, of which 323 were company owned.
The balance sheet of Amoco Australia Pty. Limited as at 31st December, 1974 showed its net profit for the year as
$935,606 and its total assets as $88,203,000. This compared with a profit of $2,422,588 in 1973.
31
7.11 Independent Marketers
Apart from the nine major oil companies, there are
operating a number of independent companies which currently
acquire product from the nine major marketers and then arrange
for its distribution and sale through their own chains of outlets.
7.12 XL Petroleum Pty. Limited This company was incorporated in Victoria and in 1966
began marketing in Geelong on a price-cutting basis with product
imported cheaply from Japan. The discount was about 5 cents a
gallon. Surrounding outlets met this competition by cutting
prices in turn and the Victorian "price war" can be said to have
begun from about this time.
XL's discounts have extended to 15 cents a gallon below
the ruling retail price. It no longer has access to overseas
supplies, but continues to retail from about 12 sites in Victoria
and about seven sites in New South Wales. XL has recently acquired from Ampol, which supplies XL with product, several sites,
including one at Newcastle, which XL re-opened after the site had been closed and disinvested by Ampol as part of the New South
Wales Government rationalisation program.
Its Managing Director is Mr. Ian G. Sykes who gave
evidence before the Commission.
7.13 Fina Petroleum Pty. Limited
This company was incorporated in Victoria as J. & P .
Mooney Pty. Limited. It changed its name to Fina Petroleum Pty.
Limited in 1971. The Directors and major shareholders are
Messrs. Costas Georgeou and John George. The company supplies
approximately 40 retail outlets in Victoria, some owned by it
and others owned by Esso. It does not trade outside Victoria.
It has a history as a significant and aggressive discounter.
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7.14 Kookaburra
"Kookaburra" is a brand name of motor spirit marketed
by Mobbs and Company, a partnership formed in the early 1950's
and comprising Mr. Jackson Mobbs and family. The business is
engaged in the wholesale and retail supply of petroleum products
in Victoria. Its main centre of business is its depot at
Daylesford, Victoria. It supplies 15 service stations, including
five owned by it outside the Melbourne metropolitan area, two shire councils and 300 primary producers.
Since 1969 it has obtained its supplies from Sleigh. Except for its metropolitan sites it supplies "Kookaburra"
outlets in its own fleet of tankers. The sales of motor spirit under the name "Kookaburra" are currently about 6 million gallons
a year. Three of its sites have a turnover of from 80,000 to
130,000 gallons a month.
7.15 ACTU-Solo Enterprises Pty. Limited (The Solo Group)
Since early 1973 a group of companies, known as the
"Solo Group" and including Solo Oil Company Pty. Limited, Solo
Discount Petroleum Pty. Limited, Kolet Trading Pty. Limited and
Ditta (Service Station) Pty. Limited, had been selling motor spirit at substantial discounts of up to 16 cents a gallon from two sites, one at Hawthorn Road, Caulfield and the other at
Beach Road, Brighton. In March 1975, the station at Hawthorn
Road had a throughput for the month of 226,000 gallons and the station at Beach Road a throughput for the month of 315,000
gallons. The promotors of these companies were, amongst others, Mr. D. Goldberger, a former Mobil dealer, and Mr. D.C. Wieland.
Their ability to offer such substantial discounts derived from
supply agreements entered into by one or other of the companies in late 1972 or early 1973. Under these agreements Mobil agreed
to supply unlimited quantities of motor spirit at a fixed price a gallon, with a cost escalation clause. Effectively, as events turned out, these supply agreements enabled the companies to
33
acquire motor spirit at approximately 12.5 cents a gallon as
at March 1975 below Mobil's wholesale list price. The latest
of these agreements expired on 22nd November, 1975. Thereafter
for a period Solo was supplied by Total.
In about June 1975, the promotors of the Solo Group
and the Australian Council of Trade Unions agreed to form a
company known as ACTU-Solo Enterprises Pty. Limited. This
company operated out of the sites at Caulfield and Brighton
and in addition opened other retail outlets in Victoria and
the Australian Capital Territory, retailing motor spirit at
about 16 cents a gallon below the ruling retail price.
Currently Ampol and Total are supplying ACTU-Solo Enterprises.
Part of its supply is derived under a processing agreement
pursuant to which Ampol is processing at its refinery near
Brisbane a parcel of indigenous crude oil acquired by ACTU-Solo
from Allied Petrochemicals Pty. Limited, in circumstances which have been inquired into by the Commission and were reported
upon in its Third Report.
7.16 I.O.C. Australia Pty. Limited This group of companies, which marketed under the brand
name "I.O.C.", was founded in April 1969 by Mr. H.R. Roach and a group of real estate investors. It opened its first service
station at Preston, Victoria in December 1969. At that time
it was importing supplies of refined motor spirit and storing them initially at facilities owned by Allied Petrochemicals
Pty. Limited and later at its own terminal.
When it commenced business it sold motor spirit at
about 4 cents a gallon below the ruling retail price. By
April 1970 it had ten service stations operating in Victoria
and offering discounts of up to 6 cents a gallon. In December 1970 it opened retail outlets in New South Wales and in May 1971 in South Australia. At its peak in 1973, I.O.C. supplied
103 outlets, including 65 service stations, 15 of which it owned and operated itself. Others it supplied under supply contracts.
34
Some sites it leased to operators.
As a result of its importation of motor spirit I.O.C.
became obliged to take up an allocation of indigenous crude oil.
It eventually arranged in November 1970 to have this processed
by Mobil. Disputes as to payment for these processing facilities
arose and on 8th May, 1974 I.O.C. was wound up on a petition
presented by Mobil.
7.17 Other Independent Operators
There are a number of other independent operators, particularly in Victoria. Some are outlets for other motor
accessories such as tyres. Others concentrate on selling dis counted motor spirit. They are all supplied by one or other
of the major oil company marketers. Included amongst them are
the Bob Jane Corporation Limited, Gas-N-Go, J.A.P. Gas and Geisha.
7.18 CONCLUSIONS It is significant that during the last 75 years, six
out of the seven biggest oil companies in the world have entered
the Australian market.
What is in world terms a small market is divided up
amongst nine major companies, all of which have adopted identical
marketing styles. To take one example, Amoco entered the market at a time when there were already excessive numbers of service
stations and excessive capital outlay in retail marketing. It
entered the market by building more service stations and investing even more capital in the market. It entered at a time when the
interests of international oil companies in retail markets resulted from a desire to have outlets for as much crude oil as possible. If there were, after the introduction of solus
marketing, competitive forces at work, they were not sufficient to prevent not merely excessive investment by the existing
marketers, but the entry of further investment of new marketers.
35
Further, such price controls as there were did not prevent or
seemingly even curtail this expensive development.
It is also significant that from the time XL commenced
to market in 1966, discounters competing in some cases with
imported product against companies with local refinery capacity
have consistently been able, in the Melbourne area, to keep the
retail price well below that recommended by the Victorian
Automobile Chamber of Commerce. Only now, and that more than
two years after the October 1973 crude oil price rise, is there
indication that one or more companies may consider withdrawing
from the market.
The history of marketing in Australia, as revealed by
a short study of the activities of the individual companies,
strongly suggests that in terms of price, the companies have
not been truly competitive and have indeed been substantially
protected by price controls, from the stresses of price
competition.
8. THE COMPANIES' MARKETING METHODS
8.1 Before 1951 Until the latter part of 1951, retail outlets selling motor spirit were owned and operated by independent dealers,
the majority of whom sold more than one brand of motor spirit.
The oil companies usually installed and continued to own the
pumps and tanks. The dealer agreed to sell only the company's product through its pump but he did not tie his site by contract
to sell only the supplier's products and sold other brands from other pumps. The international companies then trading in the
Australian market (Shell, Vacuum (Mobil), Caltex and B.P. (through its shareholding in C.O.R.)) were integrated through the levels of production, refining and transportation, but not into the
retail level. There were few, if any, company owned or con trolled retail outlets. (Shell evidence, Exhibit 230, p.2)
36
During this pre-1951 period, there were two distinctive
features of the market. Firstly, the reseller associations were
strong and able to move effectively against individual oil
companies acting contrary to what the associations saw as resellers' interests. For example, in 1938 the companies and
the associations had agreed that the companies would not install additional pumps in new locations, that all traders would be
charged a fixed price and that a minimum size purchase would be
enforced where pumps were provided to commercial users. The
companies abided by this agreement until 1951. In 1950, the
Queensland Automobile Chamber of Commerce boycotted Shell for
supplying a new site against the Association's wishes. In
Victoria, in the period immediately after the Second World War,
the average rate of construction was nine sites a year. A new
service station could only be opened by closing an existing one.
The retail industry was stable and profitable. When sites changed hands, the goodwill was considered valuable.
Secondly, whilst there had never been brand loyalty amongst most resellers who operated on multi-brand sites, the
result of the pooling of motor spirit and the withdrawal of brands during the War was that the public lost its brand con
sciousness. Some of the companies saw the way open to improve their position by adopting a policy of selected distribution
through their best resellers who would agree to confine their
marketing and advertising to one brand of motor spirit.
8.2 1951 and Solus Trading
In August 1951 Shell took a marketing initiative which
brought about what a witness, giving evidence before the High Court in 1961 (B.P. (Australia) Limited v Federal Commissioner
of Taxation 110 C.L.R. 387) described as "probably the biggest change in marketing policy we have ever had in the oil industry,
at least in my time". (110 C.L.R. p.406)
37
On 14th August, 1951 the General Manager of Shell wrote
to B.P. in the following terms
"My Company has decided to introduce a Dealer Plan with the object of confining its trade to stations which are prepared to become solo outlets, on similar lines to the plans existing in the U.S.A. and as recently introduced in the U.K. I regret that it has not been possible in a move of this nature to discuss such a plan in advance but it will be clear that we could not risk giving our competitors unlimited time in which to frustrate our plans should they not be in agreement. What we propose to do involves risks, but if successful promises to provide substantial econ omies owing to our intending to trade in future through a reduced number of outlets. It is a set feature of our plan :-
" (a) we shall trade under the existing outlet policy unless the action of Reseller Associations or other Companies compels us to do otherwise.
"(b) we shall trade under the existing policies, and without any Company personnel as operators.
" (c) we shall adhere to existing intercompany marketing and prices policies as before, providing others do so, including the undertaking regarding motor spirit quality
limitations.
"(d) we are prepared to make reasonable mutual arrangements regarding superfluous tanks and pumps with other Companies.
" (e) we have left plenty of room for other Companies if they wish to follow the same pattern as our approach is to dealers who are predominately favouring our brands.
"I would ask other Companies to consider the matter carefully in the light of the trends in almost all Companies overseas; as to the interest of the Industry as a whole long term; and as to the economy in delivery
costs, pump maintenance, representation, accounting, etc.
(signed) E.N. AVERY"
(B.P. (Australia) Limited v Federal Commissioner of Taxation,
110 C.L.R. 387, pp.405-6)
38
On the evening of the same day, Shell informed the
committees of the various reseller associations that it intended
to introduce a solus system of marketing. On 15th August, 1951
Shell's sales staff fanned out throughout the whole of the metropolitan and country areas of Australia, signing up dealers
under Shell contracts. By these contracts the dealer agreed
to sell only Shell motor spirit. The move was well planned and
the dealer associations were unable, due to problems of communi
cation, to advise their members as to the course they should take. Within 24 hours of the introduction of the scheme by
Shell, Vacuum (Mobil) followed suit. Vacuum claimed it was
necessary, by reason of Shell's action, for it to take this
step to maintain its then existing trade through retail outlets.
It did so by accelerating tentative plans which it had previously
made for the introduction of solus site trading. (see Vacuum
Oil Co. Pty. Limited v Federal Commissioner of Taxation 110
C.L.R. 419, p.420)
8.3 Why Did the Companies Introduce Solus Trading?
In submissions made to the Commission, the companies have stated what, they say, were their reasons for the intro
duction of solus trading.
"For Mobil, single brand marketing was the natural development from the 'white stations' era and was introduced in an endeavour to reduce distribution costs and to obtain longer term market security
necessary to justify the large investment to manu facture gasoline, and better service the community since individual dealers did not have the capital to build adequate facilities at key sites."
(Exhibit 229A, p .17)
Shell, after referring to the system of distribution
as expensive and noting the lack of incentive for any one company to invest substantial extra capital in a site, the
increasing number of vehicles on the roads and growing conges
tion at then existing service stations, said :-
39
"Against this background, Shell adopted the policy of one brand marketing. The purpose of that policy was to rationalise its distribution of products and to create a situation in which it would be commercially
justified in making the investments of capital which were required to meet the growing demand for service. ... At the inception of the plan, it was not Shell's intention to build any new service stations itself but to fund the extension of facilities at existing
sites. A few service stations were acquired at the start of the program, mainly for protection against possible boycott, but it was not until 12 or 18 months after the one brand policy was initiated that
Shell began to build service stations and actively to pursue and to acquire takeover leases of sites on which there were retail outlets. The reasons for taking these new steps were, again, commercial; in a period of risk because the sums involved in many
sites in revamping, rebuilding and buying adjoining land constituted expenditure out of proportion to the security possessed by Shell." (Exhibit 230, pp.3-4)
Within a few short years solus trading from company- owned sites operated by company lessees substantially replaced the traditional form of trading by independent small businessmen
and traders.
8.4 Company Explanations are Unacceptable These explanations can be judged not only against
subsequent events but also against previous history. The cost
and waste of companies' entry into the retail market is dealt with in detail in the Report published in October 1936 (the
problems are hardly new) of Mr. Justice W.A. Macdonald relating to the petroleum industry in British Columbia. At page xii
of the Synopsis of the Main Features, he said
"23. Extravagant wholesale and retail costs are mainly due to company ownership and control of service stations and to the integrated structure of the oil companies.
"24. There are about five times too many service stations and retail outlets in the Province of British Columbia."
40
These findings could well be repeated today but applied
to Australia. They do not bear out the optimism expressed in
Mr. Avery's letter. The companies when they introduced solus
trading to Australia, had the experience of Canada, the United
States of America and the United Kingdom in solus trading
behind them and must be taken to have known what they were
doing. The introduction of solus trading related to the narrow commercial advantages that the system was seen to bring to
companies interested in further vertical integration and little
else.
In his Note of Dissent to the Report of the 1965 United
Kingdom Monopolies Commission on the Supply of Petrol to Retailers, Professor T. Barna said
"As regards the argument that petrol refineries needed security, this industry is of course no different from other industries where continuous processes and large amounts of capital are used. The risk taken by petrol companies is rewarded by profit and it would
appear that their profits in the past have not been inadequate." (p.172)
"The petrol companies have argued that such a system (that is a multi-brand system) would increase their costs of distribution but this is not necessarily so. At present the price charged to the retailer depends on the retailer undertaking not to sell com peting brands of petrol. If prices charged to the
retailer were related to costs of distribution, the operation of market forces would ensure that consumer demand was met in the most economical way. In some instances, however, he may find that it is to his
advantage, and to the advantage of his customers to stock and sell more than one brand. In this case it would be preferable to leave the regulation of the market to the price mechanism rather than to the
petrol companies." (p.174)
Although it is nowhere conceded by any of the major
oil companies, the Commission has no doubt that the companies
who first introduced solus trading were mainly concerned to gain control of the retail end of the market. As the Report
41
of the Western Australian Honorary Royal Commission into Matters
Relating to the Retail of Motor Spirits and Accessories pointed
out (p.25) :-
"It is obvious that as introduced and as it is at present operating, an implication of the one brand marketing scheme is that retailers, individually or collectively, have no effective method of countering
any proposal or policy of wholesalers which in their opinion is damaging t them or their businesses."
What was obvious in 1936 must have been obvious to
the international companies from their overseas experience
prior to their introducing solus trading in 1951.
8.5 Changes Resulting from Solus Trading
The introduction of the solus system brought with it
sudden and dramatic change. In the first place the oil companies
spent large amounts of money acquiring service stations and
building new ones. There was an enormous increase in the number of service stations over the next 15 years. In the second
place there emerged a new class of dealer, the licensee or
lessee dealer, operating on a site owned by an oil company,
often effectively supplanting the independent dealer. Thirdly,
the international companies completed the process of integration
from production at the wellhead through to the ultimate retail ing of motor spirit on the forecourt of the service station.
8.6 Proliferation and The Role of Solus Trading As the first companies came into an area and tied up
the best existing sites, other companies, finding their pumps excluded from these sites, as a part of their marketing
strategy set about building and opening new service stations. Companies, such as B.P., which had lost gallonage as a result of losing access to a large number of sites, sought to regain
their share of the market by supplying direct to industrial and commercial consumers previously supplied by the retailers.
42
Despite initial assurances given by the major marketers that
there would be no tie with respect to lubricants, ties were
being entered into and enforced within six months of the intro duction of the scheme.
Not only did the companies which had been so excluded
purchase new sites and open service stations. The companies
which had gone solo initially were looking for gaps in their
representation and filling these by building new service
stations or tying existing ones in areas where they felt they
did not have sufficient representation. In fact area "repres
entation" became h key marketing concept. In the financial
year ended 30th June, 1953 Vacuum spent & 192,701 securing sites
for the exclusive sale of its products, of which ,£66,902 was paid to service station operators pursuant to contracts entered
into with them, i 121,299 on promotion expenses and ^4,500 on legal costs. (Vacuum Oil Company Pty. Limited v Federal
Commissioner of Taxation, 110 C.L.R. pp.420-1)
According to Shell, immediately before the introduction of solus trading, there were 11,035 reseller outlets in Australia. (Exhibit 230, p .5) By 30th June, 1966 there were
21,291 operative reseller outlets in Australia. (Oil and Australia 1967, p .17) According to the Petroleum Information
Bureau, the total capital investment in marketing to June 1966 was $804,829,000. (Oil and Australia 1966, p.20)
By contrast, immediately after the War, the average
rate of construction of garages and stations in greater
Melbourne had been nine sites a year, with an expenditure of approximately,^30,000. In 1951 there was an increase to 89
sites and an expenditure of ^323,000. In 1958, 123 sites were added, with an expenditure of just over Z 1 million. During the 1950's, the number of sites, as the figures referred to above indicate, increased at an average of 1,000 a year all
over Australia, so that by 1960, there were approximately 9,450 more sites than in 1948, an increase of 85% over 12 years.
43
This overbuilding caused many independent resellers to be at a
competitive disadvantage as they lost trade from their older
sites to newly constructed company sites. In order to maintain
gallonage they were forced to work longer hours.
During this period new international marketers came
into Australia, notably Total, Amoco and Phillips. During the
period from 1962 to 1965, Amoco built 232 new service stations.
$22,453,266 was laid out by it on privately-owned and company-
owned service stations. (Letter from Amoco, 16th September,
1975, Exhibit 425)
8.7 The New Classes of Dealer
The general form of licence or lease agreement under
which dealers occupied company-owned or controlled sites meant
that these dealers were far less able than the pre-solus dealer
to negotiate with the oil companies on anything like equal terms.
Whereas the pre-1951 dealer was an independent proprietor,
secure on his site and in his business and able to purchase from a variety of wholesalers, the licensee or lessee dealer
occupied the site for a short term, in many cases only a year
and was bound to take his supply from his lessor oil company.
The precise terms upon which licensee or lessee dealers occupied their sites are considered elsewhere in this Report.
Contemporaneously with the emergence of this class of dealer,
there was a decline in the negotiating position of the reseller
organisations. Consistent with their pre-1951 policy, the
reseller associations after some hesitation opposed the pro
liferation of service stations. But whereas prior to 1951 this opposition had been entirely successful, after that date
it achieved nothing.
8.8 Completion of Vertical Integration It is not the function of this Commission to define with any precision terms well known to economists, such as
"oligopoly" and "vertical integration". It has been said auth
oritatively of the market in the United States of America
44
that two important structural features stand out.
"First, each geographic gasoline market is dominated by a relatively small number of financially powerful sellers, who also operate throughout different parts of the country. This structural property is called oligopoly. Second, frequently the successful stages
of activities of the petroleum industry are owned and coordinated by management of a single company. This structural characteristic is called vertical inte gration. Both oligopoly and vertical integration have been studied extensively in a variety of different
industries and certain structural patterns repeatedly emerged when these structural properties are present. Thus being able to classify the petroleum industry as a vertically integrated oligopolistic industry
is of considerable assistance in explaining much of the strategic behaviour one encounters in the industry. It also means that decisions at one level are influenced by strategic factors present at other
levels." (Allvine and Patterson, Competition Ltd.; The Marketing of Gasoline, pp.211-2)
One feature common to such a structure is that the participants will generally refrain from price competition.
There is an implicit understanding that any price cut could
well be met by all other large sellers. The market, certainly
so far as motor spirit supplied to motorists is concerned, is inelastic. It is recognised, therefore, that there is a direct
relationship between price reduction and a falling off of
profit, which may not be ameliorated by an increase in gallonage. In Australia list prices of the various brands are and have, for many years, been substantially identical. (Shell Exhibit
46C, pp.1-2, and schedules) Shell attributes this to the history of "virtual" price control involving the averaging
of prices throughout Australia. The lack of price competition
in. a large area of the motor spirit retail market, which itself represents 42% of the industry's turnover (Exhibit 46C, p .3)
hag. meant that companies wishing to increase market share have come to rely upon non-price competition. This essentially
takes the form of competition to give forecourt service and
sales promotion schemes. But its most notable characteristic
is the attempt by each company to project a brand image and to
45
differentiate according to brand between indistinguishable
products.
8.9 Brand Image: Differentiating the Undifferentiable
Technically, there is a wide scope for variation in the
characteristics and quality standards of motor spirit. Motor
spirit is a blend of many hydrocarbon compounds. However, the
cost of distribution in Australia has led the marketers to
distribute by means of product exchange arrangements whereunder
one company will draw a large part of the product distributed
under its name from the refinery of another company. Thus
Australia-wide only 40% of motor spirit sold by Shell retail
outlets is refined in Shell refineries, though Shell incorporates
its additives into motor spirit before sale under its brand
name. (Exhibit 46, Q.3, p.4)
Exchange arrangements and the need to satisfy large
consumers, such as government departments and the armed forces, have led to specifications common to all marketers. These cover
the following characteristics
anti-knock characteristic
volatility gum content and propensity for forming gum
corrosiveness
colour.
Because of the cost of the lead additive, put in to
achieve the specified anti-knock characteristic, all refineries
maintain very nearly the minimum octane rating specified. In
Australia, this stands at 98 for premium grade and 89 for
standard grade motor spirit. Characteristics associated with
volatility specifications change according to location and
season.
46
When motor spirit is collected by a road tanker from
the terminal or other supply point for delivery to retail outlets,
the marketing company under whose brand name the product is to
be sold, may introduce a small quantity of some ingredient,
usually a detergent, peculiar to the motor spirit sold under
its brand. The range of possible additives is extensive. (see Annexure "A", No. 1) Some of the companies advertise them
widely, claiming they overcome deficiencies associated with
volatility, gum content and corrosiveness. The improvement over
the common specifications of motor spirit can only be marginal.
The motor trading organisations (Western Australian Automobile
Chamber of Commerce, Victorian Automobile Chamber of Commerce,
Queensland Automobile Chamber of Commerce) submitted to the
Commission that there are no essential differences in the brands
of motor spirit sold to the consumer. The marketers claimed otherwise.
The following question and answer from the evidence
of Mr. E.F. Lever, the General Manager, Marketing and Operations,
B.P. (Australia) Limited, seems to describe the situation
"MR. FISHER, Q.C.: The fact is that one would think that any intelligently advised company would have a pattern of additives, whether it chose to advertise them or not, which was very much the same
as the next intelligently advised company would also have? ...
"A. I think so, technology being what it is today, that follows." (Transcript, p.2966)
Nevertheless, the mythology of brand differentiation
by product quality has formed a part of every marketing manager's armoury.
8.10 Fungibility The Commission is satisfied that, although there may be some marginal difference between one motor spirit and
another, according to the inclusion or lack of additives, the virtues attributed by the marketers to the motor spirit sold
47
under their various brands is part of a market strategy of
promoting brand image product differentiation where there is no
real difference in the product being sold. Such promotion may
take the form of a slogan or symbol, such as "put a tiger in
your tank". The image is built round the technical aspects of
the particular motor spirit, which most drivers cannot evaluate.
The claim by the oil companies that their motor spirit contains
a certain ingredient or additive is on a par with a baker's claim that his bread contains flour. All motor spirits contain
the particular ingredient advertised, or its equivalent. Even
where the particular additive may be peculiar to one brand and
indeed improve the quality of motor spirit marginally, the
other competing brands have their own additives which they may
or may not advertise but which result in there being no real
difference in quality between one brand and another. (see
generally Allvine and Patterson, Competition Ltd.; The Marketing
of Gasoline, p.21 and following)
8.11 Consequences of Vertical Integration: Price Transference
Where an industry is vertically integrated, managements
are able to choose the appropriate level of integration at which
profit is to be earned or loss sustained. Since most of the
companies trading in Australia are international, that is to say the subsidiaries of foreign parents and affiliated with other
foreign companies, this ability enables them to choose the
country in which profit will be taken or loss sustained. The
ability to make this choice has substantial consequences for
any national attempt to control price and collect revenue.
"1. A "transfer price", or a "clearing price" as it is sometimes called, is a book entry for transactions within a firm. The transaction may be between two branches of one corporation, or it may be between related
corporations. The related corporations may be a parent and its wholly owned subsidiary. Or they may be two sister corporations, owned by the same parent. Or they may be, for example, second-tier and fourth-tier sub
sidiaries of one parent. The degree of ownership by the parent or by the higher-tier subsidiary may not be 100%; there may be "minority stockholders" of the subsidiary.
48
"The essential point is that the prices recorded for these intra-firm transactions are not determined in the market, by arm's length negotiations or by going market prices. They are determined within the firm.
The determination is sometimes made by an appeal to market prices for the same or similar products or services, but often it is not.
"2. The word "firm" as used here refers to the entire business enterprise considered as a unit. The firm, or enterprise, consists of two or more branches, or "profit centres", or of two or more separately
incorporated concerns, or a mixture of all these. The word "transaction" is here taken in the broad sense to include not only (a) the transfer of goods from one part of the firm to another, but also (b) the transfer
of patents, or permission to use patented processes, against the payment of royalties, (c) the supplying of technical services by one part of the firm to another part, compensated by service fees or managerial fees,
(d) the presumed benefit to one part of the firm derived from certain overhead or indivisible expenses incurred by another part of the firm (for example the salary of the Chairman of the Board of the parent
corporation).
"3. The problem, how to arrive at a price for these within-firm transactions, is common to large national firms and to multinational firms."
Report prepared by the United Nations Secretariat on Establishing Transfer Prices in Allocation of Taxable Income among Countries, 4th September, 1973, P-3.
In its taxation legislation the Australian Parliament
has recognised this and expressly empowered the Commissioner of
Taxation to take account of it. (See Section 136 of Income Tax
Assessment Act) But for the concomitant purposes of price
control in Australia, no effective attempt seems to have been made to take account of the opportunity to shift the profit
offshore into a more attractive tax environment. Since it is well recognised that the profit centres of the international
oil companies have historically been outside Australia, usually located at the crude production level, it is extraordinary that in fixing price in Australia, regard has been had only to the profit of the Australian subsidiary company. To a substantial degree, where international oil companies are concerned the
49
price control system seems to have concentrated on the areas of
industry within Australia where sales (gallonage) sometimes
were as important a consideration as profit or, put another way,
where profits were not so important, and neglected the true
areas where profits were made - namely in offshore production
and international transportation. As Sleigh pointed out in its
submission, Exhibit 40, p.15 :-
"Marketers which have overseas affiliation and enjoy a profit in the production function of petroleum products can probably afford to ignore in at least a relative sense, the necessity for some profits in the
(Australian) market place."
8.12 The Taxation Approach to Price Transference
The Full Report of the Taxation Review Committee
31st January, 1975 (the Asprey Committee) states :-
"A non-resident subject to tax by assessment may be able to control the amount of his income liable to Australian tax by incurring inflated costs that will limit his net income from Australian sources. His
costs may involve payments to an associated person, who is a non-resident, for goods or services, for money borrowed or for the supply of information. As
at present interpreted, the general deduction section (Section 51) requires the Commissioner to allow deductions of the actual costs.
"A non-resident with a branch in Australia, where he manufactures or assembles goods, may sell those goods to an associated person in a foreign country at a price calculated to ensure that no profit arises from the branch operations. ...
"The Commissioner should, in the Committee's v i e w , have adequate general power to reconstruct the Australian-source income of a non-resident so as to bring to tax an amount of income that would have been derived had the non-resident's costs been incurred in
arm's length transactions and had his receipts been such as might have been expected on arm's length transactions.
"Section 136 of the Act is intended to give the Commissioner such power." (Paragraphs 17.78 to 17.81)
50
Theoretically, the international oil company's
Australian affiliate can obtain in Australia tax deductions in
respect of freight charges paid by it to an affiliate operating
in a tax haven country. Similarly in respect of landed prices
of crude the Australian affiliate can pay an affiliate in a
country where taxation on the profit element of the sale price
is low. Thus frequently it will suit a major oil company to
bear in Australia a high landed cost of product or freight
charges for carrying crude to Australia or the high cost of technical and other services payable to the overseas affiliate
by its Australian affiliate. The additional cost is charged
against income in Australia and reduces taxation. The effective
profit derived from the high charges is taken overseas by an
affiliate where the local laws on taxation are much less onerous
than here. The process is sometimes referred to as "global
tax minimisation". These practices are not, of course, confined to the oil industry. Any international company trading in
Australia may engage in them.
8.13 How is the True Price Determined?
Within reasonable range of acceptable prices, corpora
tions tend to maximise taxable profit in the country with the lower tax rate. Reported decisions such as Texas Company (Australasia) Limited v Federal Commissioner of Taxation 63
C.L.R. 383 in the High Court and Case No. N69 in the Board of
Review (1963) 13 T.B.R.D. 270, suggest that frequently, if not always, the Commissioner of Taxation assesses international oil companies on a basis which involves putting aside the feedstock,
product and service costs as shown in the company's invoices
and accounts and reaching behind them to find or estimate the true cost. To take one example, experience shows that the
posted price for crude oil from the Middle East has, since 1957,
rarely, if ever, represented the acquisition cost to the
producing company.
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8.14 The Contrast with Price Control Determinations
In contrast to the income tax legislation and its
application by the Commissioner of Taxation, the South Australian
Prices Commissioner, whose price fixing influenced prices
Australia-wide until 1974, historically accepted for the purpose
of fixing maximum product prices the apparent landed cost of
refined petroleum products on the Australian coast. The component
costs of landed costs include an f.o.b. price normally taken as the posted price at the Persian Gulf refinery ports of Bandar
Mah-shahr in Iran or Ras Tanura in Arabia. (Exhibit 320, pp.1-2)
In its first report on an oil industry application, that of 3rd
May, 1974 on the Shell application, the Prices Justification
Tribunal acknowledged that the posted prices for crude oil had
little relation to the market price and were merely a price
established for the purpose of calculating royalty and tax
payments. It noted that in the past, market prices were usually
well below the posted price and were spoken of as being at a
discount from the posted price, (p.28)
Both the South Australian Prices Commissioner and the Prices Justification Tribunal have been faced with the problem
of how effectively to monitor landed costs of crude oil and
products. During the 1960's the South Australian Prices Commissioner made some attempt to go behind the landed costs
reported by the companies but without success. In the Shell
application, the Prices Justification Tribunal stated in its decision that the genuineness or otherwise of the "transfer"
prices charged to the Australian companies was the subject of
several submissions (p.33) and went on to say that they did
not accept that they necessarily were the prices which the
company should have paid.
"We cannot say that the evidence furnished by the companies on international matters has completely quelled our doubts as to the reasonableness of the prices charged. We recognise that it may well be in the interests of the Australian community that a
52
secure supply of imported crude oil and refined products is available, even if the prices have not necessarily been established as being the lowest that should be obtainable."
These doubts were not mathematically resolved but were
taken into account by the Tribunal as a basis for reducing the
amount of increase approved. (p.86)
8.15 Why No Self-Service?
One remarkable thing about retail trading in Australia
has been the absence, until April 1976 , of any self-service outlets except for those coin operated outlets which are designed to service
after hours custom.
Australia is a high labour cost country and large
savings are possible in retailing cost if the self-serve concept can be satisfactorily established in the market. Self-serve is
common in the United States, the United Kingdom and some
European countries. In Sweden more than 80% of retail sales are
made from self-serve sites. In Boston, the Commission inspected
a self-serve service station sited at the approach to a traffic roundabout and intercepting a heavy traffic flow. It operated
a 24 hours service seven days a week and sold 250,000 U.S. gallons a month under the control at any one time of one person who
directed the operation sitting in a central console beside the forecourt.
The Commission noted that service station design was
quite different to that customarily met in Australia and that very considerable emphasis had been placed on architectural
features designed to facilitate the purchaser's convenience.
One notable feature of the marketing style was the elimination
of waiting time. Many pumps were available and each motorist pulled in where vacant and immediately commenced the filling process.
53
When spoken to, most motorists mentioned the ease of
filling, the absence of waiting time and the speed at which the
filling could be completed.
While in the United States the Commission visited a
number of self-service sites, including several which operated on
a "twin island" basis, that is sites where self-service product
was available from one island on the forecourt and customary
or "full" service available from the other. In discussions with
the management of these outlets the Commission found that the
buying public, left to a free choice, patronised both modes of
selling almost equally.
There is of course the problem of added investment in
sites which are designed to operate on a self-service basis. The
Commission considers that the delay in the introduction of self
service in Australia to date lay in the excessive investment in
the retailing area which made companies reluctant to invest in
new modes of retailing, however desirable they might be.
In evidence, Mr. J.D. Whittington, Retail Marketing
Manager of Shell was asked :-
"MR. FISHER, Q.C.: Does the typical self-serve station operate in the market below normal price?
"A. It has done so yes but the idea there (overseas) is to pass on the savings to the public: that is how it is possible."
It was put to Mr. Whittington that the order of savings
that could be passed on would be in the 3 to 4 cents a gallon raj j.. Mr. Whittington's opinion was "at the maximum closer to
2 to 3 cents than of that order". (Transcript, p.2651) The
Commission understands that at service stations which have recently commenced self-service operations, the price for
motor spirit is discounted by 2 cents a gallon.
54
Statements made on behalf of Shell suggest that there
are plans to convert approximately 60 of its company-owned
service stations around Australia to self-service in the next year.
The Commission considers that self-service in terms of
the Australian market is an appropriate innovation and that it
should be encouraged. It represents an opportunity for genuine
cost savings in retail operations which should be available to be passed on to the consumer. The amount of savings involved
may perhaps vary, but with full market acceptance of self-service
the Commission considers it could be approximately 3 cents a gallon.
8.16 CONCLUSIONS
(i) The conscious decision made initially by some
of the international companies marketing in
Australia and ultimately by all the companies so
marketing to introduce the solus system has in
large measure given the retail market the character it has today.
(ii) The transition to solus marketing constituted
a final step in the vertical integration of the international companies.
(iii) As a consequence since 1951 there has been a
marked decline in the influence of the independent
dealer either alone or collectively through his trade associations.
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(iv) Solus trading led directly to a vast in
vestment in retail outlets with the consequent
excessive overbuilding of service stations.
(v) Price competition was much less evident than
non-price competition which was promoted
essentially in terms of "brand image”.
(vi) In retail areas of trade, the companies flourished under an umbrella of prices fixed
without regard to the profits earned by the
vertically integrated group of affiliates.
(vii) The industry before 1951 had experience of
solus trading in other countries such as Canada
and must have known that the results which followed from its introduction were exactly as
the events have demonstrated them to be. The international companies which imported this system
into Australia to suit their marketing needs as
they saw them, bear the responsibility for its consequences.
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PART II
THE INDUSTRY TODAY
9. RETAIL OUTLETS
9.1 Outlets and Market Share
In 1975 retail sales of motor spirit totalled 2,000
million gallons, or about 72% of total motor spirit sales in
Australia. This volume was sold through about 16,300 retail
outlets. The resulting average volume per outlet was quite low, about 10,200 gallons a month. However, the retail market is far
from homogeneous. A greater understanding of the market can be
gained from a detailed analysis of the location, trading level and ownership of retail outlets. This analysis is summarised
in the tables forming part of Annexure "A", No. 2, appended to this Report.
As will be seen from this Annexure, there is a
noticeable correlation between the share of total outlets and
market share of sales in each State. For example, Victoria had 26% of Australia's outlets and 26% of retail sales. New
South Wales had 31% of outlets and 37% of retail sales, indicating higher than average sales per outlet in New South Wales. In
Queensland, the situation was just the opposite. There, 19% of the outlets sold only 14% of the national retail volume, indicating below average volumes per outlet. Indeed, Queensland
had the lowest average volume outlets in Australia.
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9.2 Outlets by Category: Ownership and Operation
Outlets can also be categorised by type of ownership
and operation. The three major categories are :-
(a) company "owned" and operated stations, generally
on a salary or commission basis,
(b) company "owned" stations leased or licensed to
dealers to operate,
and
(c) independent dealer owned and operated outlets.
The definition of "owned" especially in regard to
company stations includes those where the company owns the land
and those where the company leases the land. In either case,
the company controls the outlet and can either operate it
directly or lease it out to a dealer licensee.
The greatest number of Australian outlets, 57%, are
dealer-owned and operated. This percentage is slightly lower
in the more urban States of Victoria, 55%, and New South Wales,
53%. The percentage of dealer owned outlets is between 59% and 65% in the other States. The remaining outlets, 43% of the
national total, are company owned. A very small number of these,
about 2% of all Australian outlets, are company operated. The rest are leased to dealers. It should be noted, however, that the
57% of dealer-owned sites sell only about 28% of the motor spirit
sold from all retail sites.
9.3 Company Owned - Dealer Owned: Comparative Throughputs The average gallonage of all company-owned sites in Australia in 1975 , including those operated by the companies themselves, was about 17,700 per month. If the company operated
sites are excluded, that is sites run by company employees, it is estimated that the average gallonage of the licensee/lessee
58
operated sites would be slightly less, between 16,000 and 17,000
per month. In the same year, approximately 72% of motor spirit sold through retail outlets was sold through company-
owned outlets. The monthly average sales volume of dealer-owned
outlets in 1974 was only about 4,600 gallons. All of these
figures are on a national basis. Averages for each State and
for each company are shown in the table, Annexure "A", No. 2.3.
There are probably three reasons why the average monthly
sales volumes of the company-owned outlets are very significantly
higher than those of the dealer-owned outlets. First, many dealer-owned outlets are in rural areas which have much lower
average throughputs than metropolitan areas, where the bulk
of retail motor spirit sales in each State are made. Second,
many dealer-owned outlets are relatively older than company- owned outlets as the significant amounts of capital necessary
to build modern, urban, high-volume outlets have generally come from the companies. Third, many dealer-owned outlets are not
primarily motor spirit retailers but include this activity as an adjunct to other activities. Examples of these kinds of
outlets include garages, car dealers, repair shops and country
general stores.
The percentage of total outlets in a company's chain
which are licensed or leased by the company to the dealer
varies considerably from company to company. The percentage
of lessee operated Mobil sites is just over 30, the percentage of lessee operated Amoco sites is about 70.
9.4 The Lessee Dealer In December 1975, of 16,330 retail outlets operating
in Australia, over 6,900, or approximately 43%, were occupied by the proprietors under leases or licences from the major oil
companies. Some of these dealers attended and gave evidence before the Commission. Others submitted written material. The Commission has visited a number of sites in Melbourne, Geelong,
59
Adelaide, Perth, Brisbane and the Gold Coast, and had discussions
with the proprietors. Some were successful operators with
entrepreneurial flair and a sound grasp of business principles.
A service station business is complex. The dealer
markets not only a variety of petroleum products but also tyres,
batteries and general motor accessories, together with other
items ranging from confectionery to children's toys. He is
involved with appropriate stocktaking procedures. In addition,
he commonly runs a workshop and other repair facilities, involving
control of both material and labour. He probably employs several
persons. His monthly turnover is high. A typical Sydney dealer
with a throughput of 15,894 gallons a month has been shown in
evidence to have a total monthly sales revenue of $12,087. In
most cases, sales are cash sales.
9.5 What Every Good Dealer Needs
An efficient service station operator should have some
mechanical training but, more importantly, he needs managerial and business expertise, the ability to keep and understand
proper business records and an awareness of general industry
problems and how he can tackle them. The Commission has observed that many proprietors are not good businessmen and
incline to evaluate their businesses on a cash takings basis.
They seem unaware that in terms of real return for labour and capital involved, they are earning less than if they were employed and invested their capital in a savings bank account.
It is hard to see how a proprietor who had a proper perception
of the character of his business and its potential would ever
take on many of the poor and uneconomical service station
businesses currently operating.
60
Mr. J.D. Whittington, the Retail Marketing Manager of Shell, gave the following evidence
"MR. FISHER, Q.C.: Quite obviously there must have been, many dealers who would have been far better off as their own wages employee had they ever been able to employ one?
"A. This would be so in a good many sites. There are many dealers who would have been better off as an employee." (Transcript, p.2517)
An industry accountant dealing with a typical Sydney
dealer, with a throughput of 15,894 gallons, referred to earlier,
showed that after adjusting the net profit per month to take
account of rebates and deducting 20% per annum as a return on
the current capital employed of $12,309, there is left a
weekly return for each of two working partners of $108. By
comparison, the minimum wage rate for adult males (weighted
average of Federal and State Awards) in July 1975 was $113.77
a week and the average adult male wage $156.30 a week).
One witness, Mr. W.E. Rose, who has been in the business
for more than 20 years, both as an oil company dealer/merchandiser
and as a dealer, stated it as being his belief :-
"That most of the problems concerning the operation of service station by lessees or licensees of oil companies stem from the fact that there are too many service stations, which has enabled incompetent people to gain control of service stations. In my experience,
it is rare to find a man who is both a good mechanic and a good businessman. I believe that if the com panies owning these sites were to charge their lessees an economic rent, these problems would be largely
solved by weeding out those who cannot operate a site economically. In addition, my experience leads me to believe that oil companies do not exercise sufficient care in the selection of people who go into their
sites as lessees or licensees (as a dealer/merchandiser with Caltex, I personally interviewed many prospective licensees)." (Transcript p.4131, Exhibit 344)
61
Another witness, Mr. K.R. Craven, who had been in the
industry since 1957 as a company employed retail merchandiser
and retail representative, referring to uneconomic service
station sites in Victoria, said :-
"Some of the other companies" (that is, other than Amoco) "did put dealers into these "dog" sites which had no chance of achieving a "livable" sales volume while the price war continued. Some companies
adopted the attitude - "find a dealer, promise him anything, give him nothing" and then after two or three months, the dealer goes broke and he is replaced by someone of similar ilk." (Exhibit 344)
Most, if not all, of the companies provide dealer
training courses. Shell described in detail the types of course
it conducts, including a nine week dealer management course.
During the training period, which covers such subjects as motor car mechanics, finance management and business analysis, stock
control and planning and budgeting, the company pays a living
allowance which, in mid-1975, was about $85 a week. (Exhibit 230, p .17) Sleigh sends lessees selected for service station
sites to a training course before they occupy the site. If
the lease is terminated within 18 months, the lessee is debited
with part of the cost of training. (Exhibit 14, pp.32-34)
Mobil operates five service stations itself throughout Australia
as retail development centres for the training of its own staff
and prospective dealers. (Exhibit 29A, p .29) Caltex "counsels
and trains" dealers in service station operation. (Exhibit 42,
p.8 and Exhibit 228A, p .10) The Commission believes that
other companies provide similar training, although it has no
evidence on the matter.
9.6 Dealers in the United States During the course of its visit to the United States in
June 1975, the Commission talked on many occasions to operators on the forecourts of service stations chosen at random in or
near San Francisco, Washington and Boston. These service
station operators were articulate and appeared well versed in
62
business management, fully aware of the true profits and costs
of their businesses as a whole and also the various divisions
of their businesses, such as car wash and self-serve, and able
intelligently to discuss their own and industry problems. All
appeared to be successful, some outstandingly so. None seemed
subservient to oil companies. Some confidently expressed the
view that they were in a position to deal with their supplier
oil company on equal terms. The impression given by the operators
is reflected in the returns of their businesses. No operative
service station visited by the Commission was putting through
less than 60,000 gallons (U.S.) a month. The national average
is over 36,000 gallons (U.S.) a month. The Commission was
informed that in metropolitan areas, nobody would be interested
in opening a station unless an average gallonage of 60,000 a month was anticipated.
The Commission considers that, on the average, the American dealer is a better and more astute businessman than
his Australian counterpart and, indeed, both individually and grouped in his reseller associations, projects a far more
active and persuasive voice in community affairs.
The Commission also had discussions in the United States
with Mr. Charles Binstead, Executive Director of the National
Congress of Petroleum Retailers. This organisation has an impressive record of legislative successes, mostly in State
Legislatures, although a Bill was then pending in the United
States Congress. Protection against discriminatory pricing
practices, arbitrary dispossession and "dealer day in Court"
legislation had been achieved by the National Congress over wide
areas of the United States. Many of the principles of this
relatively recent United States legislation have found expression in various recommendations in this Report.
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9.7 Lessee Dealer Turnover: Rates and Reasons The annual rate of turnover of dealers on licensed
or leased sites has been high. The a verage varies from company
to company. From information supplied within the period 1968 to
1974 the rates of turnover varied from the lowest, 15.8% for
Amoco to the highest, 39.4% for Sleigh. The other companies were
spread in between.
TABLE 2
AVERAGE ANNUAL DEALER TURNOVER
Company Source No. of
Years
Average Annual Turnover (%)
Sleigh Exhibit 40 3 39.4
Esso Exhibit 43 5 27.3
Caltex Exhibit 42 5 27.0
Total Exhibit 44 1 29.0
Shell Exhibit 46 5 25.0
B.P. Exhibit 41 5 23.0
Mobil Exhibit 45 5 16.2
Amoco Exhibit 39 5 15.8
Ampol Exhibit 286 2 24.2
These very high turnover rates indicate the need for a
number of changes to improve the position of the dealer and his
relationship with his supplying oil company.
All companies were asked by the Commission to indicate
the reasons why there is a high turnover in dealers. Shell
gave the following evidence, which is not atypical, about the
matter:-"Shell is naturally concerned to ascertain reasons for turnover amongst the lessees of service stations owned or leased by it and also, in relation to each case to view the fact of a dealer's leaving or staying on in context of the operation of the particular service station. In some cases Shell does know for certain why a dealer has left and in many other cases it is fairly certain; but in quite a large number of
64
"cases it has only what the dealer himself may say to go on, and in the nature of things there will often be reasons which the dealer is not concerned to give or to elaborate on. It must also be true that in many cases
there is a collection of reasons operating which make it unreal to fasten on a reason as the critical one. Subject to those qualifications there are a number of categories which may be established as follows
(a) transfer (up grading) to larger service station;
(b) resignation due to ill-health;
(c) retirement;
(d) transfer of residence to another State or overseas;
(e) dissolution of partnership business;
(f) purchase by dealer of another business;
"(in 1972 the foregoing categories accounted for about 27% of the turnover; there were 37 cases in category (a) - leaving 417 in all other categories, and categories (b) to (f) accounted for about 21% of the
417)
(g) poor standards of operation;
(h) poor business management and control; .
" (those two categories are assessments by Shell and are distinct from categories (i), (j) and (k) below; categories (g) and (h) accounted for about 23% of the
417 cases referred to above and in most of the cases comprehended Shell would have made the initial move to terminate the tenancy. Shell cannot recall a
single instance of such separations in which dealer associations seeking to safeguard the interests of their members have considered that the company's action was unjustified to the point that they have
intervened legally on behalf of that member)
(i) dealer considered himself unsuitable for service station operation;
(j) dealer considered hours too long;
(k) dealer considered financial return insufficient in relation to his investment of time and money;
65
" (these three categories account for about 25% of the 417 cases referred to above)
(1) domestic or personal reasons or no stated reason;
"(that category accounts for about 31% of the 417 cases referred to)
"It should be added that there is a number of instances in almost every year where a "new" Shell service station dealer is a man who has been a Shell service station dealer some years previously but has in the interval followed another occupation."
(Exhibit 46g, pp.59-60)
The Commission believes from the evidence and from a
great many forecourt interviews that there is a profound, though
often inarticulate disenchantment by dealers with the disordered
state of the industry's market and that the high rate of turnover
basically represents a level of chronic discontentment.
10 . LESSEE DEALER COMPLAINTS
10.1 The range of complaints made by lessee dealers and their
representative organisations to the Commission has been consid erable and notably consistent. The various State Automobile
Chambers of Commerce presented submissions to the Commission as did the Australian Automobile Chamber of Commerce.
10.2 Dealer Complaint: Company Control There is a volume of complaints about the degree of
control over the licensee or lessee through the "ties" in their agreements, and through conditions dealing with such matters as
exclusivity of supply, trading hours, the mode and time of
delivery of product, payment for supplies, contribution to advertising and company sales promotions and accounting methods.
It is asserted that lessee dealers are not "independent businessmen" as the companies claim but have rather the status of an employee without the protection an employee normally
enjoys under industrial awards.
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"From all appearances, it would seem that the operator has no more freedom or independence than an employed manager without any of the advantages. The operator is still obliged to pay salaries to employees
as well as an occupancy charge and is charged with the cost of petrol and other merchandise for resale." (Victorian Automobile Chamber of Commerce (V.A.C.C.) submission, Appendix D to Exhibit 48, p.11)
"Currently, the methods and terms employed in the contracts between oil companies and the tied station operators are such that these operators enjoy a way of life and living and wage standards far below the most menial employee in the nation. ... It seems
certain that the dominant position of supplier over retailer has been used to create an employer/employee relationship without any of the duties and respons ibilities due to the employee from the employer under
our industrial laws." (Australian Automobile Chamber of Commerce (A.A.C.C.) submission, Exhibit 233, p .5)
Mr. D.F. Woodhouse, an independent dealer, who has been
in the industry since 1969, in his submission (Exhibit 299, p.2),
said :-
"To establish the lessee as an independent busin essman is essential. At the moment, many are serfs."
Mr. B.J. Hobbs, a Shell lessee service station dealer, said :- (Transcript p.4056)
"I think everyone here today would be aware that I can be removed from my service station for not cleaning one windscreen."
10.3 Dealer Complaint: Insecurity of Tenure Insecurity of tenure is a general complaint by lessee
dealers. They claim that they can be evicted at short notice from their site. Mr. and Mrs. J.K. Wright were evicted by
Shell from a station which they occupied for nearly ten years
on 30 days' notice. (Exhibit 346)
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Mr. R.L. Roney, the General Secretary of the Motor
Trade Association of Queensland Incorporated, said in evidence
(Exhibit 373, pp.20-21) :-
"At the present time many dealers in Queensland are operating without the benefit of a lease, even after repeated requests to the oil company seeking the answer to the question "Is my lease going to be renewed?" Generally the dealer cannot get a satis factory answer. He is "fobbed off" by his rep stating
"I will let you know". Dealers in this predicament are placed under undue and unnecessary mental stress. They do not know how long their tenancy will last. Usually it is until another dealer becomes available
and has the right amount of cash. This type of situation is not uncommon and rarely is it the poor type of dealer who is subjected to this stress. The poor type of dealer generally gets out after he fails financially."
Probably because of this insecurity, real or imagined,
many service station proprietors are reluctant to come into the
open with accounts about their relationship with their supplier.
The Commission has struck this attitude in written correspondence
and private interviews with service station dealers. As a result
a great deal of material never found its way into formal
evidence. Reseller associations and some individuals who did
come forward spoke of "bullying" or "standover" tactics exer cised by oil companies and their representatives on occasions.
The Service Station Association of New South Wales (Exhibit 293,
p.8) says :-
"Whilst it has already been stated that the com panies did not enforce the many restrictive clauses contained in their licence/lease agreements, there is no doubt, at representative level, innuendo and coercion is used with the aid of the penalty clauses in the agreements."
According to the V.A.C.C., some members terminating their leases described themselves as "sick of standover tactics".
(Exhibit 298, p.79)
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10.4 Dealer Complaint: Long Working Hours
There is general complaint about the need to work
longer hours. Seventy-seven hours a week is a common minimum
standard and, except in those areas where a rostering system
has been introduced, includes considerable time spent late at
night and on Saturdays, Sundays and holidays. Companies are
alleged to use their "dominant" position to force resellers to
trade longer, often unprofitable, hours. The V.A.C.C., in its submission (Exhibit 298, p.67) says
"The differing trading hours for freeholders and company lessees indicate that there was in fact pressure from the oil companies to extend trading hours, in excess of 77 hours per week.
"While many members have verbally complained of this practice they have been reluctant to object officially because of reliance upon oil companies for a continuous business venture in which they had a
capital investment and a financial tie of loan monies and mortgage."
10.5 Dealer Complaint: Too Many Service Stations It is a general complaint in the industry that there
are too many service stations. The dealer organisations and indeed the companies have acknowledged that this is so. The service station proprietors of the St. Ives area submitted a
particular complaint (Exhibit 300) which illustrates that the
problem is a continuing one. They refer to the establishment of a retail outlet in the northern St. Ives area "which will have limited trade potential but which could take a little of
the "cream" from our present operations and put some of our
current areas of trade into the unprofitable category". They
point out that the main St. Ives area is adequately catered for by five Category 1 type service stations, giving a com
plete and high standard of driveway and mechanical service, and one Esso corner site of limited service. Beside these,
there are a further six service stations on the perimeter which can adequately cope with those residents slightly outside
the actual area of influence.
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Service station proliferation is said to have resulted
in excessive competition in the trade, increased hardship for
resellers, misuse of labour, a waste of land and capital and an
unnecessary cost factor in the price of motor spirit. "It seems
to be merely a case of showing the flag". (Queensland Motor
Trade Association submission, Exhibit 373, p.3)
10.6 Dealer Complaint: Price Discrimination
Lessee dealers commonly complain that by their contract
they are required to purchase motor spirit at the company's full
list price and, in many areas, at the same time, to compete with depots and commercial and industrial pumps which obtain product
for less than the full list price.
"There is a multi-tiered price, as depots, agencies, industrial installations and residential users, can and do purchase at lower wholesale price than the service station. Consequently they can afford to sell cut price petrol to the public yet still retain approx
imately the same margin of profit as the service station." (Submission by the Motor Trades Association, Queensland, Exhibit 373, p .3)
Apart from these preferred purchasers, the Commission
has found many cases of companies selling to jobbers or inde
pendent service station operators at prices far below list
price. Dealers have complained of being forced to compete against service station operators who can discount by as much
as 12 cents a gallon and still keep for themselves the full
normal retail margin. Such price discrimination is particularly
rife in Victoria and is dealt with at length elsewhere in this
Report. It is part of a general complaint by operators against
discounting and price wars.
10.7 Dealer Complaint: Tyres, Batteries and Accessories
Historically, dealers had complained for many years
about provisions in their leases or licences whereby they were obliged by covenant to sell only tyres, batteries and other
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motor accessories supplied by companies nominated by the lessor
or licensor oil company (T.B.A. clauses).
Such items were sometimes supplied under the oil com
pany's own trade name but more commonly they came from other
manufacturers or suppliers, which had agreed to pay the lessor
or licensor oil company a commission on sales. For some time
now the oil companies have not sought to insert such clauses in
leases or licences or to enforce them where they currently apply.
Furthermore, Section 47 of the Trade Practices Act 1974 prohibits
this sort of exclusive dealing.
â¢10.8 Dealer Complaint: Disclosure to Company of Dealer's Financial Affairs
Operators complain about the monitoring of their
financial affairs by oil companies. Mr. F. Katczmarek, a Broken Hill service station lessee, complained that he was
threatened with eviction if he did not provide the company
representative with financial information. When he refused to
do so, the company obtained it through his T.B.A. supplier without
his knowledge or consent. (Exhibit 344, Transcript p.4096)
10.9 Dealer Complaint: Company Product Promotions Dealers have complained of being compelled to take part in company promotions and in some cases being required to con
tribute towards them. (See the evidence of Mr. W.F. Harry, the
Executive Director of the Western Australian Automobile Chamber
of Commerce, Transcript p.3735)
11. THE COMPANIES' ATTITUDE - THE "INDEPENDENT BUSINESSMAN"
11.1 Uniformly the oil companies maintain that their lessee dealers are "independent businessmen". Speaking of company controlled retail outlets, Shell claims its "policy is to lease its property to an operator who controls and operates the
business an an independent businessman". (Exhibit 230)
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Mr. W.A. McCarthy, the then Marketing Manager of Mobil,
in a written Proof of Evidence (Exhibit 229A, p.30) says :-
"Every Mobil dealer is recognised and treated by the company as an independent businessman."
Mobil publishes a booklet called "Dealer Relations
Policy", addressed to all Mobil dealers, which says :-
"The Company has chosen to retail a major portion of its automotive products through retail outlets operated by independent businessmen."
B.P., in one of its submissions (Exhibit 226, p.106)
says : -
"It has always been B.P.'s objective to establish and encourage dealers on company-owned outlets to operate as independent businessmen. It is for this reason that B.P. offers dealers a lease at reasonable terms as opposed to a licence which is used by some companies and has numerous restrictions imposed on the dealer."
Mr. A.F. Young, the General Manager, Marketing, of Total,
in his Proof of Evidence (Exhibit 232, p.11) says
"I agree that the relationship between the Company and its dealers should be such that the dealer is an independent businessman, as distinct from an employer/ employee relationship. However while there are undoubted economies particularly in productivity for outlets to be operated by businessmen as distinct from employees, the businessmen must expect to have to operate within certain guidelines laid down by the Companies for the mutual benefit of the Company and the dealer as well as for the protection of the investment of the oil company and the orderly market ing of its product.
"May I also say that I do not think that mere contractual relationships necessarily bring about an actual independence of a dealer nor do mere documents prevent this. The relationship is, to my mind, one
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"which is best achieved through personal relationships and must always vary according to the individual dealers concerned and the attitude of the oil companies and those who represent it from time to time."
Mr. Cornell, the Retail Marketing Manager of Australia
for Amoco, in his Proof of Evidence (Exhibit 224A) , in answer to Question 2(e), says :-
"All retailers selling under the Amoco brand are independent businessmen. Therefore, as far as Amoco is concerned, solus marketing has not had the effect, in any sense of capturing the retail marketing
industry for its benefit."
In information supplied by it to the Commission (Exhibit 228A, p .14), Esso states :-
"That where company-owned property, plant, equip ment and trade marks are involved, there should be constraints on their use as a medium for the marketing of competitive petroleum products. Subject to this
limitation and provision for the reasonable protection of company assets, the objective of Esso's agreements and leases is to establish the dealer or agent as an independent businessman trading in his own right.
... The service station operator buys at the wholesale rate and sells to his customers at the wholesale rate plus his retail margin."
In its submission, Ampol (Exhibit 255, p .14) says :-
"Firstly, as regards the dealer-owned outlet, the position is clearly that the dealer owner operates as an independent businessman. Secondly, as regards the licensed dealer, that is occupying a company-controlled
site under a licence agreement, he operates as an independent businessman but within the framework of the licence agreement which imposes obligations on both parties."
Mr. J.A. Landels, Director - Marketing of Caltex, in
his Proof of Evidence (Exhibit 227A, p .21), refers to maintaining the status of dealers as independent businessmen, guided by the
profit motive.
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Sleigh, in its evidence (Exhibit 231A, pp.20-21) states :-"It is not clear what is meant by "independent businessman". The relationship between a service
station operator and Sleigh, whether in respect of a company-owned or a sponsored site is essentially that of franchised buyer and seller.
"As a landlord and as a company sponsoring a privately owned site, Sleigh is primarily concerned with the marketing of its products. The best com pendious description in the relationship between Sleigh and all service station operators is that of a franchise relationship. Sleigh considers it essential that there be uniformity in the relationship between Sleigh and its service station operators. Sleigh is a nationwide distributor of petroleum products and the product and standard of service provided at one service station will be reflected by public demand at other service stations."
Sleigh adds that it :-
"is concerned to ensure that existence of a company/dealer relationship which will benefit both parties to the relationship. Sleigh considers it is axiomatic that its success as a marketer of petroleum products depends upon a strong dealer organisation.
It must be and remain attractive for persons to become and remain dealers. Sleigh repeats that this is not economic altruism on its part. Rather it is the implementation within the principles of the law and ethical business dealing of a plan to provide efficient and economical service to the consumer thereby rewarding the market and the dealer providing the service. .
"The network of agreements between Sleigh and its service station operators provides to the motorist a uniform standard of products and service throughout Australia. The operator who participates in these arrangements receives the benefits of dealing in a well and favourably known product and with a clientele produced at least to some extent by the general
reputation of Golden Fleece."
Sleigh "offers to any dealer either owner of his own station or lessee a valuable merchandise package with known brand and trademarks, quality products nationally advertised, product guarantees backed by
research, reliable supply ... and opportunity for
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training in his business. In return (Sleigh) expects the dealer to maintain reasonable standards of service to customers and to be an effective marketer.
"The agreements and leases Sleigh has with its operators are to achieve the purposes referred to above. The effect of the operation of the system Sleigh has with its operators is to make them successful and, within the context of the above, "independent business men". A businessman being a franchised buyer is
independent notwithstanding he is bound by relevant agreements. Sleigh does not assume that independence in this context means the operator of the service station ought to be able to disregard agreements duly entered into and, for instance, be careless as to where and from whom his product is purchased."
11.2 Is the Description Justified?
The expression "independent businessman" is quite imprecise. Any businessman is independent only to a degree.
Whether he can truly be said to be independent at all is a
matter of judgement and degree. The use of the expression by oil companies to indicate the status and rights of dealers must
be judged against the expressed terms of the contract under which the dealer occupies his site.
11.3 The Dealer/Company Contract: Lease and Licence Some dealers occupy company-owned sites pursuant to
leases and some pursuant to licences. In many cases the original
written agreement has not been renewed in writing and the dealer occupies pursuant to a holding over clause. The terms of leases
and licences are, for the most part, not prescribed or regulated
in any way by legislation. The exception is that in all States,
except Victoria, there are statutory provisions relating to
trading hours. These are referred to elsewhere in this Report.
If the dealer holds under a lease, the relationship of oil com pany and dealer is regulated by the normal State real property laws, including those relating to forfeiture.
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11.4 The Dealers' Terms
Universally the dealer has no rights with respect to
the business existing, carried on or built up by him at the
outlet beyond the right, within certain constraints, to exploit
it during the terms of his occupancy. Nor is he permitted to
sell the business, to remove it to another site or to let it
run down. He cannot close the business down.
All oil companies have furnished the Commission with
forms of licences and leases which have been or are currently
in use by them. In every case these involve standard company
forms. They vary from company to company. Some companies
grant only licences, some only leases, while others appear to
use both. The terms of the standard forms have varied over the
years and particularly in recent times with the impact of
Trade Practices legislation, and under pressure from dealer
associations.
In all cases, the oil company retains the right to
evict the dealer on short notice for any breach of his lease
or licence. Some companies retain the right to evict at will.
On the other hand, the lessee is frequently given no right to
terminate the agreement before the expiry of the terms. He can
of course just walk out. As he is normally penniless, when he
goes nobody bothers to follow him.
Annexure "A", No. 3, refers to leases and licences
put in evidence by the nine major oil companies and sets out
how the rent or licence fee is calculated and how they may be
terminated.
11.5 Lease Provisions The lease and licence documents of the companies usually, if not universally, deal with the following matters
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(a) Exclusivity of Supply
Lease and licence agreements contain a provision whereby
the service station· operator is obliged to purchase from the
lessor or licensor oil company or a nominated supplier at
the ruling market price all "petroleum products" required or
intended by the dealer for his own use or for resale at the
premises, and is prohibited from offering for sale or
storing at the premises petroleum products obtained from any other source.
(Amoco, Exhibit 224, Attachment 3A, clause 8 ; Ampol, Exhibit
225, Attachment 6 , clause 11; B.P., Exhibit 226A, p.37, clause
2 (xxviii); Caltex, Exhibit 227A, Annexure 1, Lease Agreement
clause 12, Licence clause 11; Esso, Exhibit 43A, clause 2;
Shell, Exhibit 230, Provisional and Main Leases, Third Schedule,
clause 19; Sleigh, Exhibit 231A, Schedule 5, clause 2 (xii);
Total, Exhibit 232, Licence clause 10, Lease clause 2(c))
In some cases, such a provision applies to other service station businesses operated by the dealer within a specified radius of the demised or licensed premises.
(B.P. Lease, clause 2 (xxviii))
(b) Dealer not to Dispose of the Business
All current lease and licence agreements examined prevent the dealer disposing of his business. The licence is
expressly made personal to the licensee and the agreements
examined provide that any purported assignment by the licensee of any or all of his contractual rights shall be
null and void and shall enable the licensor to revoke the licence forthwith.
(Amoco, clause 42; Ampol, clause 4; Caltex, Lease clause 5· Total, Licence clause 7)
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Similarly all leases contain provisions preventing the
lessee from assigning, transferring, mortgaging, pledging,
subletting or otherwise disposing or parting with possession
of the business or part thereof. Some leases prohibit such
assignment or subletting without the lessor's prior written
consent;
(B.P ., clause 2 (iii) ; Sleigh, clause 2 (xviii))
others prohibit it absolutely.
(Total, Lease clause 2 (w); Shell, Provisional and Main Leases,
Third Schedule, clause 15)
(c) Goodwill The dealer at the end of his term is precluded from
recovering any payment from a new incoming dealer for the
goodwill of the business. Lease and licence agreements
specifically either provide that he has no property in the
goodwill at the end of his term,
(Ampol, Licence clause 7)
or that the goodwill remains the property of the lessor
at all times and is leased to the dealer at a rent included
in the overall rent figure, the lease of the goodwill terminating immediately on termination of the main lease.
(Caltex, Lease clause 7)
(d) Conduct of the Business The manner in which the dealer conducts the business is controlled, often in great detail by the company, particu
larly in the following areas :-
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(i) Use of Premises
Leases and licence agreements provide that
the premises are to be used solely for the
business of a service station and garage and for no other purpose.
(Ampol, Licence clause 10; Caltex, Lease clause 11)
The business is to be conducted in "the
usual and proper business-like manner",
(or words to that effect).
(ii) Trading Hours
Some agreements make provision for the
company to specify the actual hours of
trading subject to law,
(Shell, Main Lease, Third Schedule, clause 21; Sleigh, Lease
clause 2 (vi); B.P., Lease clause 2 (xx); Total, Lease clause 2(h))
or require the dealer to keep the
premises open for business during maximum
lawful trading hours.
(Amoco, Licence clause 3; Ampol, Licence clause 3)
(iii) Uniforms, Driveway Service
The dealer is required to ensure that he and his employees wear uniforms as pre
scribed by the company, to be provided
at the dealer's expense.
(Amoco, Licence clause 34; Total, Licence clause 29 ; Shell,
Main Lease, Third Schedule, clause 29)
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He is also required to give prompt
courteous and efficient driveway service
to customers, some agreements specifying
the exact tasks he is to carry out. In a
B.P. Lease clause 2 (xxi) the lessee is
required to comply with its "Merchandising
Plan" , which in turn specifies over a
number of closely printed pages, the routine
to be carried out when servicing vehicles
on the driveway.
(Esso, Lease clause 7(b); Ampol, Licence clause 15; Shell,
Provisional and Main Leases, Third Schedule, clause 30)
(iv) Advertising, Merchandising
The dealer is required to use his best
endeavours to promote the sale of the company's products and those of nominated
suppliers.
(Amoco, Licence clause 10; Ampol, Licence clause 13)
He is required to display such advertising
and promotional material as is required by
the company and is prohibited from dis
playing any signs or advertisements not
authorised by the company.
(Amoco, Licence clause 12; Ampol, Licence clause 15; B.P.,
Lease clause 2 (xxiv); Caltex, Licence clause 13)
(v) Accounts Dealers are often subject to quite detailed direction by companies as to the systems
of accounting to be employed in the con
duct of the business. In some cases he is required to adopt a system nominated or
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approved by the company, or have his
accounting done by a nominated firm.
Whatever the system used, he is usually
required to produce his accounting
records to the company from time to
time or allow the company to inspect them.
(Amoco, Licence clause 33; Ampol, Licence clause 31; B.P.,
Lease clauses 2 (xxxi) - (xxxii); Esso, Lease clause 4; Shell,
Main Lease, Third Schedule, clause 22; Total, Lease clause 2(z);
Sleigh, clause 2 (xv))
(vi) Maintenance of Premises The dealer is prohibited from making
any alterations or additions to the leased
or licensed premises without the prior
consent of the company.
(Amoco, Licence clause 15; Ampol, Licence clause 14; B.P.,
Lease clause 2(vi); Caltex, Lease clause 13; Total, Lease
clause 2 (1 ))
He is obliged to keep the premises
(including lawns and gardens) clean and tidy, and arrange for the removal of all
rubbish at his own expense.
(Ampol, Licence clause 19)
The Total Lease clause 2 (m) provides for waste to be kept in containers of a specified size and removed by a con tractor nominated by Total.
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(vii) Insurance
Whilst the service station premises are
generally insured by the company at its
expense, some lessees and licensees are
required to effect Public Risk and other
insurance policies, to specified amounts
and to produce the policy and premium
receipts to the company.
(Amoco, Licence clause 30; Ampol, Licence clause 17; Esso,
clause 1 0)
He is not to do or permit any act whereby
the fire insurance premium payable in
respect of the buildings is increased.
(Amoco, clause 29; Ampol, Licence clause 17; B.P., clause 2 (iv);
Caltex, Lease clause 16)
(viii) Lighting The dealer is often required to keep the
premises and signs illuminated during
specified hours.
(Ampol, Licence clause 15; Total, Lease clause 2 (r))
(ix) Trading Restrictions Generally
The dealer is prohibited from selling or
displaying on the premises such items as
motor vehicles, boats, motor cycles,
lawn mowers, without the company's
consent.
(Ampol, Licence clause 29; B.P., Lease clause 2 (xxvi))
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He is also prohibited from carrying out
any "major" motor vehicle repair work on the premises.
(Sleigh, Lease clause 2 (xiv)
He is also prohibited from carrying on
a similar business within a defined
radius of the premises (usually one to
three miles) during the term of the
agreement and for a period after termina
tion of the agreement (usually one year).
(Total, Lease clause 2 (x) ; B.P., Lease clause 2 (xxviii))
(x) Right of Entry
Lease and licence agreements give the
company the right, with its employees and agents at all reasonable times, to enter
the premises and view the condition there
of, effect any alteration desired, carry out repairs.
(Caltex, Lease clause 8 ; Mobil, Lease clause 5(h))
(xi) Delivery and Payment for Product
The lessee or licensee is usually required to accept delivery of fuel at such times
and in such quantities as may be determined by the lessor and licensor. Often, the
dealer is required to accept deliveries in full tank loads. The method of pay
ment for product delivered is also deter
mined by the lessor or licensor, usually cash on delivery.
(Amoco, Licence clause 8 (b); Ampol, Licence clauses 10 and 11;
B.P., Lease clause 2 (xxviii); Shell, Provisional and Main
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Leases, Third Schedule, clause 20; Sleigh, clause 2 (xvii))
(xii) Business Name
The dealer is required to conduct service
station business under the business name
as specified by the lessor or licensor and
to abandon it in favour of the lessor or
licensor at the expiration of the term.
(Amoco, Licence clause 3; Ampol, Licence clause 6 ; B.P., Lease
clause 2 (xix); Caltex, Lease clause 6 ; Shell, Provisional
and Main Lease, Third Schedule, clause 27)
11.6 Oil Companies' Explanation of Terms of Lease As can be seen, the clauses used by various companies
differ, as do clauses in different documents used by the same
company. Undoubtedly, however, many of the clauses contained
in the documents produced to the Commission are harsh. In
evidence, the oil companies gave explanations about their use of the tendered leases and licences and the inclusion in them of
terms which, on a fair reading, were one-sided and largely
detracted from any suggestion that the licensee or lessee was
an independent businessman. It was suggested that the clauses
were not strictly enforced or enforced at all and that they were included merely as a consequence of over-cautious drafts
manship. Mr. J.B. Leslie, the Chairman of the Board and Managing Director of Mobil, gave the following evidence (Trans
cript, p.2734) :-
"MR. FISHER, Q.C.: Under this agreement you have required him to enter into this covenant:
"The lessee hereby covenants with the lessor as follows:
(m) to conduct on the premises the business of a service station in the usual and proper business like manner to the satisfaction of the lessor in all respects."
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"If he does not do that you appreciate that 5(a) operates, whereby in the terms of this document at any rate it is purported that you enter and determine a lease. Is that an independent businessman?
"A. It depends how we define independent. Again I think that is probably a clause, that as I said before, should not be there in my opinion, but it is not one that has been used to my knowledge at
any time. I think he is an independent businessman, the way he operates the station and the type of lease he has ..."
In his final submission, Senior Counsel for Shell
referred to the similarity of that company's leases to ordinary
commercial leases.(Transcript, p.4944) Elsewhere he said as
follows (Transcript, p.4948) :-
"We had a witness before the Trade Practices Commission who was asked about all these housekeeping clauses, whether he did not regard them as onerous and objectionable, and his response was to say, "Well,
everybody washes, don't they?" If there is an objection to be made to these clauses it is that they are specific. It may, as it were, be said to be faintly offensive to require people to behave in the manner which is stipulated there."
11.7 Shell Contracts: The Trade Practices Commission Determination On 9th December, 1975 the Trade Practices Commission made
a determination on applications by Shell and associated companies
for authorisation pursuant to Section 88(1) and 8 8 (6 ) of the Trade Practices Act 1974-75. By this determination, which was
directed to a number of Shell standard agreements, all of which
contained product exclusivity clauses, the applications for authorisation were dismissed. In the course of its reasoning,
the Commission stated that it did not accept the basic exclu sivity clauses, though it thought it appropriate for Shell to require that Shell branded pumps and Shell branded dispensing equipment for lubricants be used only to dispense Shell products.
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The Trade Practices Commission regards as reinforcing
the basic exclusivity clauses, those clauses that preclude com
petitive trading during or after agreement, and the clauses that
control advertising, uniforms and business name. The accounting
clauses are at least capable of having a reinforcing effect, in
so far as perusal of books of accounts would disclose arrangements
with other companies. (Paragraphs 50.1 and 50.2)
The Commission stated that it saw no present objection
to the following clauses
" (a) the current 3-year lease term;
(b) the calculation of rental on a gallonage basis, provided there is no exclusive dealing arrangement;
(c) requirements that premises be used for the purposes of a service station, and that in the case of company-owned premises they be not used otherwise;
(d) requirements that premises be kept open for business for stipulated hours; (this is probably based on the Company's desire to maximise goodwill and sales of its products; without contractual exclusive dealing, hours of trading might become more a matter of nego tiation and agreement, having regard to dealers' costs at times of low trading);
(e) requirements to provide services such as wind screen cleaning and checking tyres; (as with (d) above, this too might become negotiable in the absence of contractual exclusive dealing if market conditions produce different sorts of outlets);
(f) requirements as to "housekeeping" as the word is understood in the trade (for example keeping the premises and their services clean and attractive);
(g) provision against assignment without Company consent, provided that is not to be unreasonably withheld;
(h) requirements as to payment of cash on delivery of product or on laid down terms;" (Paragraph 51.1)
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11.8 Commission's Observations on Form of Lease
For some years there has been concern amongst dealers
about the burden imposed by conditions in their leaseholds,
particularly when these conditions are read in the context of a
clause which is always included in the leases entitling the
lessor to forfeit the lease and re-enter in the event of the
lessee's breach of a condition. On the face of it and looking
at the terms of the leasehold alone, such provisions empower the
lessor to evict the lessee and effectively cut him off from his
livelihood for breach of quite insignificant and minor conditions.
As has been pointed out by the oil companies in the course of
the hearings, the rigour of the terms of the lease is alleviated
by legislation applicable throughout the Commonwealth which
restricts their operation and provides for relief against for
feiture for breach of such conditions. (see for example Section 146 of the Victorian Property Law Act 1958 and Section
129 of the New South Wales Conveyancing Act 1919.) But even so, the situation is far from satisfactory. Such restrictions and
the rights to relief against forfeiture are rights known to
lawyers but not likely to be known by the dealer. He can be readily persuaded by a determined supervisor or representative
that if he steps out of line, he can in accordance with the
terms of the lease which he has signed, be immediately evicted
from the site. Furthermore, to obtain relief against forfeiture,
the dealer bears the burden of approaching the court with all the fears of costly and lengthy litigation against a powerful
opponent. It is hard to imagine that a solicitor would advise
a dealer to commence such litigation against an oil company determined to remove him for breach of a condition. This
explains the total absence of such cases from the law reports.
The necessity to call in aid such an archaic procedure to
protect the rights of a small businessman in a service station site demonstrates a need for reform.
In this context, the companies' explanation for the
inclusion of harsh terms is unsatisfactory. If they are not to be enforced, there is no valid reason for their retention. The
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fact that similar types of clauses may appear in other commercial
leases is not a yardstick for determining their desirability in
this industry. Most importantly of all, a dealer should be able,
as cheaply as possible, to arbitrate whether he is in breach of
his lease or licence and should only be subject to eviction where
he has committed substantial or repeated breaches and after the
matter has been looked at by some independent person. In due
course in this Report, the Commission will come to recommenda
tions as to the terms of occupancy and how disputes between oil
companies and their dealers should be resolved.
12. THE OWNER DEALER
12.1 Numbers and Gallonage In December 1975, of the 16,330 retail outlets
operating in Australia and referred to above, 9,359 or approx
imately 57% were owned other than by the marketing companies,
that is to say by the dealers or occasionally by some other
person who leased them to a dealer. On an Australia-wide basis,
the dealer-owned outlets sold a little less than 28% of the total
motor spirit sold through retail outlets. This low comparative
percentage is reflected in the large number of dealer-owned
service stations which do very low monthly gallonages. In 1975,
6,203 did less than 5,000 gallons a month. Only 440 did more
than 16,000 gallons a month.
The following table shows the numbers of retail outlets, both company-owned and dealer-owned, by level of sales, for the years 1973 and 1975. The tables forming Annexure "A" Nos. 2.4 and 2.5 contain a breakdown of these figures on an
individual company basis.
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TABLE 3
NUMBERS OF COMPANY-OWNED AND .DEALER-OWNED RETAIL OUTLETS ACCORDING TO LEVEL OF
MOTOR SPIRIT SALES
COMPANY-OWNED No.
1973
% No.
1975
%
(1000 gallons per
0 - 5,000
month)
349 4.9 281 4.0
5 - 10,000 1,812 24.9 1,179 17.2
10 - 16,000 2,199 30.2 2,380 34.8
16 - 20,000 1,141 15.6 1,022 15.0
20 - 30,000 1,207 16.6 1,267 18.5
30 - 40,000 319 4.5 389 5.7
40 - 60,000 179 2.6 247 3.6
60,000 and over 48 0.7 9.1 1.2
7,304 100.0 6,856 100.0
DEALER-OWNED No. % No. %
{'000 gallons per
0 - 5,000
month) 8,359 76.0 6,203 72.0
5 - 10,000 1,638 14.9 1,320 15.1
10 - 16,000 550 5.0 696 7.9
16 - 20,000 17 0 1.5 171 2.0
20 - 30,000 165 1.5 139 1.6
30 - 40,000 53 0.5 55 0.6
40 - 60,000 31 0.3 33 0.4
60,000 and over 31 0.3 42 0.4
10,997 100.0 8,659 100.0
The most remarkable feature of this table lies in the vast number of very small dealer-owned outlets in the sector
between 0 - 5,000 gallons a month. This means that the average gallonage is in the 2,500 to 3,000 gallons a month range - a
near minimal amount of trade. In 1975, no less than 72% of all dealer outlets are in this category and indeed 42% of all outlets
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in Australia are in the 0 - 5,000 gallons a month range. By 1975,
these percentages had reduced only slightly.
There can be little point in preserving this vast
number of minor outlets which have no hope of retailing motor
spirit economically.
12.2 Owner Dealer Service Stations: Standards
The standard of the dealer-owned service stations in
metropolitan areas varies greatly from State to State. In Perth,
they generally equate in standard with the company-owned sites.
In Melbourne, on the other hand, many occupy small areas,
frequently with buildings of poor standard designed for other
purposes, with two or three pumps on rough or unsealed forecourts,
in some cases on the kerbside. In country areas, they frequently
consist of a single pump, an adjunct to some other business such
as a store or post office.
Annexure "A" Nos. 2.6-2.14 shows a breakdown State by State of metropolitan and country dealer-owned and company-owned stations,
with further tables breaking these results down to percentages and giving some clues to different market strategies furnished
by the companies.
In Exhibit 296, Mr. W.E. Harry, the Executive Director
of the Western Australian Automobile Chamber of Commerce, provides
figures showing that in the Perth metropolitan area, 80.4% of service stations are company-owned or controlled and 19.6%
dealer-owned, whereas in West Australian country areas, not
including large towns or the north east of the State, only 32% are company-owned or controlled and 68% dealer-owned.
These figures do not take account of industrial or single pump sites. In ten main provincial towns, 50.9% of the
sites (83) were company-owned or controlled and 49.1% (80 sites)
dealer-owned.
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12.3 Owner Dealers: Contractual Arrangements with Companies
The relationship between the dealer who owns and
operates a service station and his supplying oil company is
governed by a wide range of contractual arrangements, containing
many restrictive terms and conditions similar to those found in
lease and licence agreements for company-owned service stations.
For example, he is required to have his premises painted in
colours approved by the supplying company, to display the
required advertising signs, to keep the service station open
for business during prescribed hours and to accept deliveries
of product at a time convenient to the supplier. In all cases
he is obliged to purchase his product exclusively from the
supplying company and is restricted in his ability to sell or
part with possession of the service station.
As with company-owned service stations, each major oil
company was asked to produce its forms of agreement relating to
dealer-owned service stations. The range of such agreements
is shown in Annexure "A", No. 4.
12.4 The Supply Agreement The main type of contractual document relating to dealer-owned service stations is the Supply Agreement (also
referred to as a "Reseller" or "Reseller Trading Agreement")
under which the dealer agrees to buy his requirements of petroleum products exclusively from the supplier for a specified
period (usually up to five years).
Common features of such agreements are :-(a) Supply and Delivery The dealer agrees to purchase his full requirements
of petroleum products for resale at the service station exclusively from the supplying company at the company's
usual list price. Deliveries are usually made at the supplying company's discretion, minimum quantities
sometimes being specified. Some agreements also stip ulate that a minimum quantity of petroleum products is
to be purchased in a given month.
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(b) Exclusive Dealing
The dealer is prohibited from selling or displaying
for sale any petroleum products not purchased from the
supplying company (lubricants are usually excepted).
Agreements contain the usual proviso whereby the dealer
may obtain alternative supplies if the supplying com
pany is unable to supply according to the terms of the
agreement.
(c) Advertising and Display
The supplying company is to be permitted to paint
the premises in its own colour and design and to affix
such signs and other advertising matter as it thinks
fit. The dealer is obliged to maintain the supplier's
brand names and signs and not to obstruct or remove
them or to display any sign not approved by the
supplying company.
(d) Conduct of Business The dealer is obliged to conduct the business as a
service station and garage in a proper and business
like manner. In many agreements he is obliged to use
his best endeavours to promote the sale of the
supplying company's products.
(e) Trading Hours Most agreements (although not all) require the
dealer to keep the service station open for business
during the maximum trading hours permitted by law.
(f) Cessation of Business The dealer is prohibited from ceasing to carry
on business during the term of the agreement without
the consent of the supplying company.
(g) Disposal of Business
The dealer is prohibited from assigning, demising
or parting with possession of the business during the
term of the agreement except in favour of an assignee
approved by the supplying company who agrees to be
bound by the terms of the agreement for the unexpired term thereof.
(h) Supplier's Right to Entry
Many agreements allow the supplying company and its representatives the right to enter the premises at
reasonable times for the purpose of inspection and
sampling of products.
(i) Other Provisions
Some individual contracts contain such provisions as: supplier to be permitted to enter and inspect
dealer's books of account; dealer to pay monetary
penalty if he fails to reach a set sales target; dealer wishing to assign the business required to offer
the business to the supplying company first.
(j) Rebates
All companies sell motor spirit to owner dealers at prices below the list price charged to the lessee/
licensee dealer. On the average the allowance is 2-3 cents a gallon below the list price, but the companies produced to the Commission evidence of
allowances as high as 10 cents a gallon, see table
Annexure "A", No. 2.15.
The oil companies claim that these discounts are
related to the capital cost of the service station site and premises provided by the dealer. However,
examination shows that the amount of the allowance is never related to the value of the particular site or premises but is determined, broadly speaking, by
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the negotiating strength and ability of the dealer.
A prominent owner dealer in Victoria, Mr. David
Woodhouse, gave evidence (Transcript, p.4144) that he
had a supply agreement with B.P. which gave him a
6.75 cent a gallon allowance below the ruling list
price. This agreement was tendered in evidence as
part of Exhibit 260. The recommended retail margin
for resellers in Victoria at this time was 12.2 cents.
Mr. Woodhouse was therefore receiving motor spirit at
18.95 cents below the ruling undiscounted pump price
to motorists. Since Mr. Woodhouse does not discount,
this was the retail margin per gallon he was receiving.
12.5 Loan Agreements Where an owner dealer agrees to effect improvements to
his service station involving capital expenditure, the supplying
company may agree to lend him money for that purpose. Such
loans are often made on a "non repayable", interest free basis,
repayments being set off against rebates given on motor spirit
purchased. The loans are normally secured by the dealer
executing a mortgage or bill of sale over his business premises
or assets in favour of the supplying company.
12.6 Equipment Loan or Hire Agreements Under these agreements the supplying company provides
the necessary pumps, underground tanks and pipes to the owner dealer for the purpose of storing and dispensing its products.
Such agreements usually take the form of a hire or licence
agreement and generally remain in force for the duration of the
main supply agreement. The owner dealer is required to use the equipment solely for the supplier's products, to keep it in good
order and condition and to allow the supplier the right to enter
the premises for the purpose of inspection and repair.
12.7 Lease and Lease-back This is used in some cases as the basis of the contrac
tual relationship between the supplier and the owner dealer,
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particularly where substantial alterations and improvements are
effected to the site at the company's expense. The supplying
company takes a lease from the owner (containing normal commercial
terms and conditions) then executes a sub-lease back to the
owner, the term of the sub-lease being the term of the head lease
less one day. The terms and conditions contained in the sub
lease are very similar in form to those contained in the lease
and licence agreement with the operators of company-owned service stations.
12.8 COMMISSION'S OBSERVATIONS ON OWNER DEALERS
The restrictions contained in the above agreements
impose severe limitations on the owner dealer's independence.
However, the owner dealer has an advantage in that he is at
liberty to change his supplier on the expiration or termination
of his supply agreement. In practical terms his position is
considerably better than that of the lessee dealer. It is
significant that of all submissions received from service station operators and their representative organisations, there
was none calling for a review of the terms of agreements relating to dealer-owned service stations. Calls for the reform of
leases and licence documents relating to company-owned sites
were numerous.
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PART III
"RENT" AND THE SERVICE STATION
13. CONCEPTS OF RENT
13.1 Broadly speaking, some concept of "rent" is found in
the industry in four situations :-
(a) what is described in the contract as "rent"
and paid as such by lessee dealers to oil companies;
(b) a charge buried in the wholesale price which,
added to the amount received from the lessee dealer
described as "rent" (referred to in (a) above), pro vides the return to the company for the investment
it has made in its retail chain;
(c) the "discount" owner dealers received from
the wholesale list price normally charged dealers by
companies for their products;
(d) the charges for the provision of pumps, tanks,
to small outlets.
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-13.2 The Amount described as "Rent" in Dealers' Accounts
This item, "rent", found entered in almost all lessee
dealers' accounts, usually runs at 1 - 2 cents a gallon and,
although the method of levying it varies, is normally charged
at a flat rate calculated on gallonage of motor spirit purchased.
Even where the "rent" is a fixed periodical amount, the amount
will have been determined by reference to anticipated gallonage.
This "rent" has only a slight and diffuse relationship
to a true rent. The very notion of a flat rate charged on gallon-
age means that it is common to find an expensive site which is
heavily developed and capitalised but doing a low gallonage,
paying very little rent. A low cost site doing a large gallonage
on the other hand, would pay a very much higher "rent". All
that can be said to justify the system is that in a general and
loose way, those sites that are bigger and more capitalised
tend to do more gallons than those that are not and therefore
may pay more rent. Unhappily, this is so frequently not the case that in no sense can it be said that there is a general
rational correlation.
Taking a typical average service station selling about
15,000 gallons a month and with premises and equipment capit
alised at about $100,000, the monthly rent calculated at 2 cents a gallon is about $300 a month or $3,600 a year. Such a return is unlikely to cover in full rates, land tax, recurrent mainten
ance , including repainting, and depreciation. It certainly
would not cover a reasonable return on capital invested which is
generally considered to be the main function of rent. Shell's
Retail Marketing Manager's evidence confirms this.
"All I can indicate is that our total rents at last estimation barely covered our rates, taxes, maintenance etc. and indeed on present costs this may have gone past that at this stage." (Mr. J.D. Whittington, Transcript, p .2480)
97
The amount described as "rent" therefore does not bear
the character of rent as generally understood. What it does
represent in approximate terms is a charge levifed on dealers to
cover at least a proportion of recurrent outgoings in the nature
of real estate cdsts.
It must also be noted that one of the common ways in
which the oil companies assist dealers who are unable to earn a
sufficient return from the business to make a living is to forego
this type of rent in whole or in part.
13.3 "Rent" as Part of the Wholesale Price - 'Buried' Rent
A remarkable feature of the industry is that the real
rent, that is the real return on the investment that oil companies
have made in retail outlets, is contained in the wholesale price. The actual figure is not dissected out and it is not easy to
establish. The amount has, of course, varied down the years and
still does, company by company. The Commission considers that at present this buried rental factor is the equivalent of about 6 - 8 cents a gallon. Mr. T.E. Young, the Marketing Manager of
Esso, estimated the amount at 6.78 cents a gallon, based on a 6% return on capital employed. (Transcript, p.3160) Mr. A.F.
Young, the General Manager - Marketing of Total, said that it
approximates 6.5 cents a gallon. (Transcript, p.3599)
In South Australia and Victoria, Esso has commenced to
charge its lessee dealers an economic rent based upon an inde
pendent valuation of the site concerned. As part of this scheme,
the company has reduced its wholesale list price of. motor spirit
across the board by 6 cents a gallon.
13.4 The Result of the Two Rents The average service station lessee referred to above on a service station with premises and equipment capitalised at
about $100,000 and selling 15,000 gallons a month, pays an identified rent of about 2 cents a gallon, that is to say about $300 a month or $3,600 a year. But in addition there is
98
incorporated in the wholesale price at which he buys motor spirit
from the supplier oil company a further 7 cents a gallon which is
not identified as a factor in the price. This means that he is
paying the oil company a further amount of approximately $12,600
a year, representing a return on its invested capital which,
with the amount described as "rent", is effectively the rent. On the postulated service station, the investment of $100,000 would
produce a net return before tax of about 1 2 .6% after allowing for
statutory outgoings. However, some service stations with
premises and equipment capitalised at $100,000 sell 80,000 gallons
a month. In such a case the 7 cents a gallon returns $67,000 a year and the 2 cents a gallon "rent" produces a further $19,000
a year, a total of $86,000. After allowing for statutory outgoings
this would produce a return in excess of 80% per annum before tax.
However wide the range, and the Commission considers it is quite wide, poorer sites are plainly being subsidised by
both types of flat rate per gallon rentals.
13.5 True Economics are Disguised
The effect of this method of charging "rent" is to
disguise the true economic performance of outlets in two essential
ways :-
(a) the poorer sites, with lower gallonage, pay
far less in rent than they ordinarily would be
required to pay to support their investment cost.
They are subsidised by the better sites.
Even when assessed on the basis that they pay no
more rent than 2 cents a gallon, many sites are economically hopeless and run at an unacceptably low return to the dealer. If they ever had to bear the
true cost of investment and pay a true rent, the
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economics of such outlets would be demonstrated to
be deplorable.
Yet service stations like this have been built
by the thousand, have remained open year after year,
and never have and never will make a rationally
calculated profit. The Australian consumer has met
the ultimate cost in overpriced commodities. The
companies in turn have been obliged to accept a low
rate of return.
(b) under this system, lessees in high gallonage
sites pay far more in true rent, that is both types
of rent combined, than they would under more
conventional systems of charging rent.
The following examples of service station economics
are derived from actual examples tendered in evidence in this Commission. The examples laid out in the table are shown
here to illustrate the argument put above. They have been
labelled "low", "medium", "benchmark" and "high". It should
be noted in the case of the low gallonage outlet that the
throughput of 9,963 gallons a month achieved by this outlet
in 1974 was virtually the same as the average achieved by
all retail outlets in Australia in that year.
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TABLE 4
COMPARATIVE SERVICE STATION ECONOMICS
"LOW" "MEDIUM" "BENCH
MARK"
"HIGH"
Gallons per month 9,963 15,500 33,876 42,459
Gross Profit (motor spirit and non motor spirit) ($ per month) 1,298 3,163 6,346 6,282
Less Expenses ($ per month)
Rent 180 330 576 520
Other 744 1,787 4,764 4,545
Net Profit ($ per month) 374 1,046 1,006 1,217
Adjustments:
Add: Additional gross profit from reduction in whole sale price
($ per month) 697 1,085 2,371 2,972
1,071 2,131 3,377 4,189
Deduct: Additional rent 1,212 1,212 1,212 1,270
Adjusted Net Profit ($ per month) (Loss) (141) 919 2,165 2,919
Percentage change in net profit -138% -12% +115% +140%
The numbers displayed down to the "net profit" row
simply record the actual results of these three company-owned
outlets during 1974, that is the low, medium and benchmark outlets and during 1973 for the high gallonage outlet. Any
rebates or other forms of profitability assistance paid to the
dealer have been excluded.
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Two adjustments have then been made to these net profit
figures. Firstly, additional gross profit has been added in,
calculated by multiplying the average monthly gallonage shown
by 7 cents a gallon which is the Commission's estimate of the
"buried" rental factor contained in wholesale price under the
existing pricing structure. This adjustment recognises the
fact that if rents were to be levied on an economic basis,
there would need to be a compensating reduction in wholesale
price which would no longer contain a rent element.
Secondly, an economic rental factor has to be added
in. This has been calculated by applying an 8% after income
tax return (Esso Exhibit 228A) on on-site investment which has
been assumed at $100,000 for each of the outlets. In 1974
it would have been necessary, on this basis, to charge an
additional rent to the dealers at the rate of 15% of $100,000
or $1,212 a month. It is assumed here that the present rent
paid is merely sufficient to cover statutory outgoings such as rates and taxes. (see 13.2)
Having made these adjustments the final two rows demon
strate what these four outlets would have been really worth to
the dealer if real economics were applied. They also demon
strate that the low and medium gallonage outlets are both being
effectively subsidised by the high gallonage outlet.
The extent and direction of the subsidisation is however completely masked by the existing position. Indeed,
in these four examples, the purported economics as represented
by the figures stated to the Commission suggests that the
"medium" gallonage outlet is actually more profitable than the
"benchmark" gallonage outlet. This conclusion by an innocent observer might be true in so far as it relates to the dealer's
currently assessed economics but it completely misrepresents the real position.
102
Once the true position is shown by means of the
adjustments outlined above, it is quite apparent that from the
dealer's point of view the "benchmark" and "high" gallonage
outlets should be the ones being shown as the most profitable.
From the dealer's point of view the true economics of the "low"
gallonage outlet are simply negative, in the absence of any cross subsidy from better sites.
Yet the "all outlets" Australian average gallonage in 1974 was 9,670 , and the "company-owned1 ’ 16,730 which are almost identical with the "low" and "medium" gallonage examples used.
13.6 The Owner Dealer Contribution to Rent
A further startling example of cross subsidy lies in
the price structure as it affects the dealer who owns his own
service station. Approximately 28% of motor spirit in Australia
is marketed by the owner dealer who, it is said, buys on the
average at a "discount" of about 2% cents a gallon.
This "discount" represents an allowance to him which,
it was said in evidence, was designed to recompense him for the
investment he has made in the service station he owns.
This is an extraordinary way to recognise the absence of a rental factor - and it may be said, an extraordinary
evaluation of it. A service station may have a low gallonage,
yet represent a large investment, in which case the "discount" is of little value, despite the size of the investment.
Alternatively, a service station may have a high gallonage and
a low investment in which case the "discount" may be quite
handsome.
In fact, the 2% cents is not a discount in any accepted sense. It is merely another way of saying that the oil company
sells at one price (the higher) to its own dealers occupying
its own sites, and at a significantly lower price to independent dealers.
103
Although the owner dealer buys more cheaply by 2h cents
a gallon, the discount is from a price which contains between
6 and 8 cents a gallon as a reflection of the investment cost or
rental of the company's own service station outlets. Therefore,
despite his price advantage of 2% cents, the owner dealer is sub sidising the rent of his supplier's company-owned outlets at a
rate between 3% and 5% cents a gallon.
13.7 Dealers' Incremental Economics are Opposed to Companies' Incremental Economics
One undesirable effect this method of levying rentals
has upon the oil companies' relationships with dealers is that it
gives the oil company landlord a substantial incentive to achieve
incremental sales though its outlets. The lessor companies'
major source of income from the service station investment is
through motor spirit sales. Every gallon sold returns as rental about 7 cents. It does not matter how or when it is sold, as
long as the gallonage flows through, the 7 cents a gallon is recovered. Gallons sold late at night, on weekends and at other
unfavourable times when the cost of penalty rates, lighting and
other overheads are high and the volume of sales low, are profitable to the lessor company, but unprofitable to the dealer.
The dealer's aim is to make profitable sales. To
achieve profitable sales the dealer tends to limit his hours to
those most favourable in the locality where he operates. This
may involve a reduced throughput. In short for the dealer increased volume does not necessarily mean increased profit.
The Commission has received very many complaints from
dealers that companies bring pressure to bear to persuade dealers to operate through longer hours. Leases have often
contained clauses such as :-
"To carry on and conduct on the demised premises ... business or businesses ... during the
business hours prescribed for such business ... in the ... First Schedule or if the hours pre scribed in the said First Schedule shall be or become
104
unlawful hours for the conduct of the said business or businesses or if the permissible trading hours prescribed by law shall be changed in any manner what soever then during such of the hours prescribed in the
said First Schedule and as shall continue to be law ful all such other reasonable hours as the Landlord may (without infringing any law for the time being in force) from time to time stipulate in writing to the
Tenant PROVIDED THAT if the Tenant does not agree with any change in business hours so stipulated by the Landlord, the Tenant may within seven days of receiv ing written notice thereof from the Landlord terminate
this lease by giving to the Landlord thirty days written notice of termination."
(Shell Main Service Station Lease, Second Schedule, clause 21(a), part of Exhibit 230)
The dealers' incremental economics are essentially
opposed to those of the supply company and this has led to much friction and dissatisfaction in the industry.
13.8 The Owner Dealer's "Discount" The same supplying company can be selling to owner
dealers where it has a minimum of investment by way of equipment
on loan and perhaps some credit. Because the company's investment
is low and real estate costs do not have to be recovered, the
supplying company is able to reduce the price to these owners of
service stations to meet competitive pressures. Thus, although
the average discount is 2h cents, in more competitive situations,
the supplying company gives much larger discounts.
The net result is that owner dealers are able to mount
price cutting operations because they have effectively a much
bigger retail margin with which to generate substantial incre
mental sales. In such a case, the incremental economics of the
owner dealer and the supplying company are more closely aligned than in the case of the company-owned service station. The lessee dealer cannot compete effectively because he has less margin to play with. Even when he has the better site and the
more efficient operation, he cannot realise on the true volume potential that his site and abilities give him. Thus, in the
105
form of "rental", another form of unfair price discrimination
flourishes. The owner dealer is able to compete successfully
against lessee dealers in price-cutting competition, sometimes
with the same brand of product. This adds a further element to
the price war situation.
But it does not stop there. Success in exploiting this
advantage in buying price from the supplying oil companies has
enabled a small number of owner dealers, sometimes with quite
inadequate sites, by price-cutting, to develop sales
in the 1 million to 3 million gallons a year range.
In turn, this has led directly to the supplying oil
companies, intent on their marginal economics, bidding compet itively either to retain or secure from rival companies the
market represented by the owner dealers' outlet and volume of
custom. So deals were struck upon terms even more favourable
to the owner dealer, enabling deeper and deeper price cuts by him
and heavier and heavier marginal trading by supplying oil companies.
Some of the deals so struck are referred to amongst
the examples of price-cutting included in the description of the
Victorian market which follows. The most remarkable were the
supply contracts Mobil entered into in 1972 and 1973 with the Solo Group of Companies and which enabled those companies, in
May 1975, to acquire motor spirit at 12.53 cents a gallon below
Mobil's wholesale list price, charged to its lessee dealers.
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PART IV
DEPOT TRADING
14. ORIGIN OF DEPOTS
14.1 The organisation of the major oil companies incorporates at country and sometimes near city areas a number of depots
whose original function appears mainly to have been to act as
intermediate supply points between the major terminals in the
capital cities and the outlets in country towns and rural areas.
With the increased efficiency of the distribution of products,
this intermediate function has largely been dropped and today, broadly speaking, and in most situations, the product is delivered
directly from the city terminal to the country or rural outlet.
However, the depots continue to function in an area of trade that might accurately be called bulk retailing. The depot sells in bulk to business enterprises, rural consumers and the like in
provincial towns and country areas. Often the premises are fairly centrally placed and there is no essential physical reason
why an ordinary motorist cannot drive in, pull up at a pump, if one is available, and purchase on a retail basis. In any case the sales involved can be as little as a gallon at a time so that it is clear that there is an area of potential conflict between
depot traders and service station proprietors, some of whose trade is to commercial enterprises and rural clients and, of
course, retailing at the pump.
107
Annexure "A", No.2.16 shows the depot sales of each
company, State by State, and as a percentage of each company's
State motor spirit sales. All companies' depot sales approximate
85% of all non-metered sales.
14.2 Retail Trading from Depots
Retail trading from depot sites has been a cause of
complaint to many dealers. Mr. R.L. Roney, the General Secretary
of the Motor Trade Association of Queensland, submitted the
following evidence in Exhibit 373 :-
"The third source of cut price petrol supply is the company or agency operated bulk fuel depot. Bulk depots were originally established as a wholesale supply point for primary producers, industrial concerns and service
stations. They normally made a large proportion of their sales in drums. However, for many years now, depots have been installing retail type computer head pumps and selling direct to the public, often at a price
lower than which the service station can buy. This type of operation is evident right through Queensland and even exists in Brisbane.
"The depot enters into competition with the service station trade on the most advantageous terms. It is common for a depot to cut into its own brand service station trade, although the cheapest price is generally offered by the depot not having retail service station representation in the district. The depot is generally nothing more than a bare building, often a shed, fenced around the perimeters by high, chain-wire mesh, and one gate to provide inlet and exit. The area contains stocks of drum petrol, generally an overhead tank and often at least one retail type petrol pump. Depots have undoubtedly been sited to take advantage of what could only be termed retail potential, as it is common to see bulk depots within town limits and often amongst residential housing. It is one way for an Oil Company to enter the cut price petrol market without ostensibly doing so.
"The bulk depot operates far more cheaply than a service station. Generally there is no facility for anything other than fuel supply. It does not have to conform to the same building code requirements as does a service station. It opens for restricted hours, generally from 7.00 a.m. to 5.00 p.m., being closed on Saturday and Sunday. Generally there is no driveway facilities and consequently no driveway service."
108
In August 1975 the Association employed a firm of
independent private investigators who kept several premises,
including the Shell terminal at Roland Street, Slacks Hill,
under observation. After watching over a period of several days
vehicles, some apparently private, but the majority commercial,
as for example trucks and vans, being filled from a petrol bowser
on the premises, the investigator himself drove in on 18th August, 1975 in a car and was, without question, served with 5h gallons
of motor spirit at 58.5 cents a gallon from a bowser which
appeared to be for premium grade motor spirit. The normal
undiscounted retail service station price for premium grade
motor spirit in Queensland at that time was just over 64 cents
a gallon.
In his Proof of Evidence on behalf of the Victorian
Petroleum Agents & Distributors Association (Exhibit 257), Mr. Alan L. Hore, the Executive Officer, said
"One major item for consideration during this current hearing is the use of depot pumps by Agents and Distributors. It is currently being stated by many groups that the use of these pumps by members of this Association is greatly abusing the reason for having
depot pumps on the Agent's premises, that is they sell widely to the retail market.
"We acknowledge that there is a wide use of depot pumps but we claim that the volume of products sold is of such insignificant proportions that it does not significantly generate significant competition with
retail outlets. We maintain that the use of depot pumps has been accepted policy by Oil Companies, and the financial return gained therefrom is considered a
part of the Agent's profitability.
"The pumps are basically used for four specific reasons :-(a) for the servicing of the agent's own vehicles;
(b) established Commercial Accounts;
(c) established Industrial Accounts;
(d) Contracted Government Accounts.
109
"It is not always possible to instal an electric pump on the premises of a customer who has an established account, and the Agent and Distributor is often faced with no other option, when servicing Industrial and
Commercial Accounts or Government Department Accounts to supply fuel from the depot in addition to supplying other equipment on the premises of the wholesale Account, as the means of adequately servicing the customer's requirements. Our stipulation is that from a wholesale source, it is essential that the Agent and Distributor have the facility adequately to service his account. Any variation of marketing practice in this field,
should it be advocated by Oil Companies or other Employer Groups, could prevent the wholesale account from pur chasing all his petroleum products at the most appropriate most competitive price."
14.3 Complaints about Retail Trading from Depots in Queensland
In response to a request from the Queensland Motor
Trade Association, the Commission visited Queensland in December
1975 and inspected service stations in Brisbane, Toowoomba, on
the Ipswich Highway and on the Gold Coast. Various dealers
complained about the consequences of depot trading. A Mr. W.H.
Burton, a Caltex dealer at Whinstanes, near Brisbane, attributed
a drop in gallonage he had suffered to direct selling by depots. (Transcript p.5187) In particular, he complained of a Caltex
depot on land adjoining his service station. Replying on these complaints, Caltex, in a letter dated 21st January, 1976 to the
Commission, said :-
"The Brisbane terminal does not retail to the general public, although private buyers, such as transport operators and several construction customers, did pick up drums for transport to their work areas - the present daily rate being three drums. The terminal also delivers 20 drums per day on a truck routing system to various metropolitan buyers and nearby country areas - mainly small primary producers - but all are located some considerable distance from the service station. The pumps installed at our Brisbane terminal are for the use of our own truck fleet and even terminal staff do not buy from these pumps."
110
Opposite Mr. Burton's service station was a Golden
Fleece depot. By letter of 4th February, 1976 to the Commission, Sleigh formally denied that this depot, in fact its Brisbane
terminal, was retailing to the public through its bowsers.
Mr. Hart, a B.P. dealer at Tweed Heads, stated that he had always had problems with depot trading.
"I would say that the public would be receiving their fuel at a better margin than we were - better than 10.9 cents off." (Transcript, p.5227)
He claims that on occasions he would visit the depot to
pick up goods and would find the public lined up at a pump that had been installed there.
"I objected to it. They said that the reason they put the pump in there was because of the activities of other depots."
B.P. commented on this evidence in a letter to the
Commission dated 22nd January, 1976. They wrote :-
"Depot trading in the Murwillumbah/Tweed Heads area goes back beyond 15 years and while it started at a rebate of 5 cents a gallon, it progressively increased. We do not dispute our involvement which came about due
to the competitive forces. As a policy and as we have previously indicated, we do not favour depot trading as such and obviously this did affect the retail trade.
The margins of retail discounting plus the added services available has diminished, but not limited depot trade.
"We do not agree that the B.P. depot was the main cause for discounting. The private sales represent a minimum of the total pump sales at the depot."
14.4 Queensland Government Legislation The Queensland Government in late 1975 introduced a
Bill amending the Factories and Shops Act 1960-73 and designed
to prevent retail sales from depots and industrial pumps. The Bill became law on 9th October, 1975. The method of control is
111
to issue permits to sell petrol by retail and to require that all
retail outlets obtain permits if they wish to continue in the
retail motor spirit trade.
The solution is inevitably a "stop gap" one, and already
the Queensland Automobile Chamber of Commerce has complained to
the Minister that the oil companies are attempting to evade the
purpose and spirit of it. (Exhibit 487) The Q.A.C.C. itself
states in a letter to the Commission on 26th September, 1975
that whilst it is grateful for the alleviation given by the legislation, it in no way alters "our attitude that some form of
nationwide control would be the best solution." (Exhibit 426)
This history illustrates the difficulty that any State
government faces in attempting by itself to deal with many
problems of the industry. The Queensland Government found itself
faced with a method of trading which was undermining many small
businesses in the State and sought to alleviate the set backs that
those small businessmen were facing. The problem is however, as
this Report will demonstrate, one that can only effectively be
dealt with on a national basis by a restructuring of the industry pricing system and the elimination or modification of some tiers
of prices. Clearly one State government acting alone cannot
undertake such a remedy.
14.5 Complaints from Victoria Similar complaints have been received with respect to
the industry in Victoria. The Victorian Automobile Chamber of
Commerce records that negotiations with oil companies had been
going on since 1951 in an attempt to eliminate retail sales from
wholesale country depots. (Exhibit 298, p.44) The Chamber's
efforts have been without success. The normal oil company reply
has been that they will eliminate retail sales "only providing
that other petrol marketers are prepared to act likewise".
112
The Chamber lists 24 large towns where depot trading has been a major problem
Ballarat
Bairnsdale
Benalla
Bendigo
Bright Camperdown
Co lac Echuca
Geelong
Hamilton
Horsham
Maryborough Mildura Moe
Morwell
Seymour
Shepparton
Stawell
Swan Hill
Traralgon Wangaratta
Warragul
Warrnambool
Wodonga
The Chamber also furnished the Commission with a docu ment showing an assessment of trade through depot pumps in
Victorian geographical areas in 1969. The table gives comparative
figures for gallonage which can be considered as legitimate
depot sales and gallonage that should, in the opinion of the
trade, be going through retail outlets. It was estimated that
some 9 million gallons were by-passing service station proprietors each year.
14.6 Complaints from Other States
Although most of the evidence concerning depot trading has come from Queensland and Victoria, the problems of competing with depots, and with other outlets enjoying much preferred
wholesale prices, have been felt in all States. The bulk and volume of the complaints have obliged a number of oil companies
to declare that they oppose depots trading in competition with service station outlets. Sometimes this pressure has led to the
removal of retail pumps. Some companies, notably Esso, have declined to adopt a policy of restricting trading at depot sites and have freely permitted it, even where the trading has been in direct competition with Esso's own service stations in the
same district.
113
14.7 Bulk Purchasing in New Zealand
In New Zealand, the Motor Spirits Prices Regulations,
1970, provide that bulk consumers of motor spirits are only able
to purchase at a reduced price if they meet a number of criteria.
Furthermore the reduced price available under the Regulations in
1974 was only N.Z.3.3 cents a gallon for standard grade and
N.Z.3.4 cents a gallon for premium grade below retail price.
The motor spirit must be for use in the purchaser's own business
or businesses and not for resale and he must satisfy the
Minister of Trade and Industry that during any part of the year
ending 31st December, he has bought an average for the period
of 400 imperial gallons of motor spirit a month and that during
the next year from 1st January to 31st December, it is probable
that he will buy not less than 4,800 gallons of motor spirit
for use in his own business or businesses and not for purposes
of resale. (Submissions by the Motor Trade Association (Incor
porated) to the Commission of Inquiry into the Distribution of
Motor Spirits and Ancilliary Products, 1974, p.95) The New
Zealand service station proprietor is therefore obtaining motor spirit at a price less than the commercial or industrial user.
The substantial effect of the different methods of marketing is that in New Zealand the price range is "compressed",
that is the difference in price level to bulk consumers and retail consumers is relatively small and for this reason alone
(and the system does provide other reasons) there is little
incentive to turn product purchased at one price level or tier
back into the supply purchased at another price level, nor
indeed seeing the price levels are so close would it matter a
great deal if it was so turned back.
14.8 THE COMMISSION'S OBSERVATIONS ON DEPOT TRADING There is nothing wrong in depots competing with service
stations in the retail trade provided the depot trader is not
unfairly preferred to the service station in terms of the price
at which he can obtain product. Clearly in many cases, at the
moment, he is.
114
The effective cost of a depot trader handling retail
sales should closely resemble the cost of a reseller at a
service station handling sales of the same product to the similar
customer through the same equipment. Today, depots buy in
product at prices which range from marginally above the wholesale
list price down to approximately 6 cents a gallon below the price
at which product is sold to the tied service station dealer. In such cases the service station cannot compete effectively.
This situation is aggravated where the depot proprietor
has an interest in a service station reselling outlet in the
same town. In such circumstances he can divert part of his
supply into a "legitimate" reselling outlet at a price, which
even allowing for any difference in handling costs still enables
him to retail with comparable margins at many cents below the
ordinary service station reseller. But if the price paid by the depot trader reflects the true economics of delivery to him and
where he sells on a retail basis is the same price as his compet
itors in a service station, there seems no reason why the depot,
with one pump on, for example, a cheaply located site at the edge
of a town and offering no other service, should not be able to
sell at a lower price than a service station on an expensive
block in the centre of the town. If the public wants to take
advantage of the supply of motor spirit without service, it should
be able to do so. But the competition should not be based on discriminatory pricing of the supply.
Elsewhere in this Report the Commission discusses the
need to restructure the wholesale price of motor spirit, so as
to narrow the difference between the price paid by service station proprietors, after taking out any ingredient on account of "rent", and the discounted retail prices available to bulk consumers.
The Commission believes that if its proposals are adopted, the depot will be put in a position where if it wishes to sell direct to the public it can do so and probably at a price slightly below
the normal service station pump price but the difference will be one which reflects the atmosphere of fair and not discriminatory
competition.
115
PART V
THE AUSTRALIAN MARKETS
15. GEOGRAPHY AND REFINERY SITING
15.1 The major Australian markets are metropolitan markets
centring on the respective capitals of each State. Because these are distant from one another, refining capacity evolved on a
capital city by capital city basis, serving metropolitan and country areas which broadly correspond to State boundaries. For
obvious geographic reasons, Brisbane refineries supply northern
New South Wales and Melbourne refineries part cf the Riverina. Tasmania has no refinery and is supplied mostly from Victoria.
It was never economically possible for each individual
oil company to have its own refinery in each State market. Each
company tended to build a refinery either in its major market
or where an opportunity presented itself and it had a considerable
market.
Capital by capital, the refinery situation can be
summarised : -
Perth B.P.
Adelaide Petroleum Refineries (Australia) Pty. Limited (Mobil and Esso)
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Melbourne Shell, Petroleum Refineries (Australia) Pty. Limited, B.P.
Sydney Shell, Australian Oil Refining Pty. Limited (Caltex) and formerly Total Brisbane Ampol, Amoco
15.2 Product Exchanges
The refining-marketing relationship implied from such
a pattern would suggest a large interstate cross traffic in prpduct. For instance, in default of other arrangements, all
except B.P. would send product to Perth, while B.P. would
send product to the eastern States to supplement its Melbourne
refinery. However by a process of rationalisation all refining
and marketing companies have, in order to minimise interstate
cross traffic, entered into "borrow and loan" or exchange
arrangements of some complexity. So in Perth, B.P. makes
available product from its refinery to all other marketers.
They in turn make product available in other markets to B.P.
Each party to the transaction shares the savings in trans portation cost. In practice, the exchanges are frequently
much more complex but the principles of reciprocity in supply and s h a r e d savings lie at the basis of all arrangements.
Each company markets the product from whatever refinery it be
drawn, as its own. Some use an additive package, sometimes said to differentiate that product from the rest.
15.3 State Representation and Market Share Of the nine major oil marketers operating in Australia,
only five market in all States.
117
No. of States * Served
7
6
5 4
3
2
Companies
Shell, B.P., Mobil, Caltex, Ampol
Sleigh (except N.T.)
Esso (except N.T. and Tas.)
Amoco (except N.T., Tas. and W.A.)
Total (except N.T., Tas., W.A., and S.A.)
Miscellaneous independent marketers.
* for purposes of this summary, the Northern Territory has been
defined as a State. All statistics for the Australian Capital
Territory have been included in New South Wales.
Each company's market share on a national basis for
1965 and 1975 is shown in Table 1 of this Report. Their share
on a State by State basis for 1974 on the latest figures available
to the Commission, were :-
TABLE 5
PERCENTAGE COMPANY MOTOR SPIRIT
MARKET SHARES BY STATE : 1974
N.S.W. VIC. QLD. SA/NT W.A. TAS.
AMOCO 4.5 4.6 6.5 6.2 - -
AMPOL 9.9 9.4 11.5 7.8 11.8 16.9
B.P. 18.6 17.7 16.3 19.4 17.2 18.7
CALTEX 14.1 11.7 12.7 11.0 14.0 13.4
ESSO 8.6 9.0 7.8 4.8 4.9 -
MOBIL 11.2 13.2 14.3 16.8 16.5 12.7
SHELL 18.3 20.2 (a) 23.7 27.5 29.4 29.1
SLEIGH 8.3 10.8 6.1 6.5 6.2 9.2
TOTAL 6.0 2.0 1.1 - - -
OTHER 0.5 1.4 - - - -
ALL COMPANIES 100.0 100.0 100.0 100.0 100.0 100.0 (a) Commission's estimates in absence of a breakdown by Shell of sales in Victoria and Tasmania. Market shares of individual
companies in these two States is therefore an approximation.
118
Non Australian-based oil companies supply almost 82%
of the total motor spirit market. The market is fairly highly
concentrated with the top three marketers, Shell, B.P. and Mobil,
having a combined 1975 market share of 53%. There is a very
close correlation between share of the total motor spirit market
and share of outlets, which indicates that the primary method of
expanding and competing for market share has been through the
construction or acquisition of new outlets. The correlation
between outlets and market share is shown in the following table :-
TABLE 6
OUTLET AND MARKET SHARES BY COMPANY
Company % of Total
Outlets (1975) Rank % of Total
Motor Spirit
Rank
Market (1975)
SHELL 21.2 1 21.8 1
B.P. 19.2 2 18.1 2
MOBIL 14.0 3 13.2 3
CALTEX 11.5 4 13.0 4
AMPOL 11.4 5 9.8 5
SLEIGH 9.9 6 8.1 6
ESSO 7.7 7 7.7 7
AMOCO 2.9 8 4.6 8
TOTAL 2.2 9 3.2 9
The independent companies are not included in this
table.
An analysis of the data in these tables, together with
the company submissions, gives some indication of the strategies followed and results obtained by each company.
As already stated earlier in the Report, Shell has the largest market share in every State, with the exception of New South Wales, where B.P. is 0.3% higher.
119
Caltex has a higher average volume for company-owned
leased dealer and dealer-owned and operated outlets than the
other "pre solus" international companies. In the post solus
scramble, Caltex was able to acquire and has retained better
quality dealer-owned sites than its other non-Australian com
petitors. The company does not place any particular emphasis on
company-owned and operated stations and the concept of elaborate
"Taj Mahal" service stations.
Esso has the second highest percentage of dealer-owned
and operated outlets and the lowest average sales volumes for dealer-owned and operated and company-owned, leased dealer service
stations among the established refiner/marketers (especially in
New South Wales, South Australia and Western Australia). Esso
openly acknowledged that there were throughout the industry too
many service stations. Esso has relatively more low volume sites and potential divestment locations than its competitors and would
greatly benefit from an industry-wide reduction of sites. Esso does have high volume company-owned and operated operations,
along with Mobil and Shell.
Both Amoco and Total were late entrants into the market.
Their marketing strategy in Australia has been significantly
different from the rest of their competitors with a reversed
ratio of company-owned to dealer-owned outlets. In 1975, 70% and
64% respectively of their outlet chains were company-owned outlets,
percentages significantly higher than those of the other major
marketers.
Amoco has the highest motor spirit sales for dealer-owned
operated outlets. Its late entry into the market necessitated
both a competitive and selective policy of acquiring dealer-
owned branded outlets. Amoco did not have any significant dealer-owned outlet residue from the "solus conversion" of the
early 1950's.
120
As indicated in Table 3, there are in Australia a large
number of low volume retail outlets. In 1975, 281 company-owned
outlets and 6,203 dealer-owned outlets sold less than 5,000
gallons of motor spirit a month. The total of these represent nearly 42% of all outlets then operating.
The evidence shows that in 1974 28% of the motor spirit
market was represented by non-retail sales. On a national basis,
17% of total motor spirit sales were to commercial and industrial
accounts, 2% to taxi accounts. Lately, and especially in
Victoria, some of these volumes have found their way back to the
retail market in the metropolitan areas. Some taxi and indus
trial consumer purchasers have taken advantage of the large
discounts, at which they are able to buy motor spirit, to resell
some of this volume profitably to the general public. Some
country agents have also found it profitable to resell motor
spirit to the retail market. The companies claim that they have very little control over the ultimate disposition of sales
volumes to this type of accounts.
15.4 State Markets have Separate Histories
Although interdependent, each State market has had its
own separate development. Most State governments have, from time to time, sought to introduce policies to remedy some of the
more obvious marketing deficiencies within their own State boundaries.
The problems of this industry however cannot be
successfully managed on a local basis and the majority of State
government interventions have ended in partial or complete
failure.
Of all the State markets, the Victorian market has been
the most volatile. Though there has been some ebb and flow the
Victorian marketing scene has been subject to a "price war" on and off since 1965. Much of the great deal that is wrong with
marketing in Australia is readily to be observed in Victoria and
121
the Commission received a large volume of evidence about the
excesses and disasters of this market. Submissions were received
from all the major oil companies, the Victorian Automobile Chamber
of Commerce and a number of smaller organisations and individuals.
The Commission also travelled extensively through the Melbourne
metropolitan area and Geelong and interviewed a considerable
number of operators upon their own service stations.
Although requested, neither the Government of Victoria
nor any of its Departments made any submission to the Commission.
15.5 The Nature of Price Wars
"Price wars" have been a regularly recurring feature of
marketing in many countries over many years. The conditions for
their emergence have been well studied. The Victorian market is
therefore no isolated aberration. The advent and continuance of
price war was predetermined by the nature of marketing in that
State and indeed in Australia as a whole.
As was put by Mr. J.B. Leslie, Managing Director of
Mobil Oil (Australia) Limited (Transcript, p.2690)
"MR. FISHER, Q.C.: ... there is as we know a
gap between the cost of product at the refinery gate, ... and the price of the product on the pump; I
want to put to you that if that gap ever becomes too wide you are certain to have price cutting?
"A. I think it is too wide now.
"Q. I note that, but as a broad proposition?
"A. This is very true, I thoroughly agree.
"Q. ... if that gap is too wide you will have
people moving inside it?
"A. Unless you control it in some way.
"Q. Where it (the gap) is too wide competitors can come in and cut price and may be doing a public service by so doing?
"A. Indeed I think they are. Certainly that is what free enterprise intentions are."
122
15.6 Essential Preconditions of Price Wars
(i) Retail (and very likely wholesale) margins must be
too high. This is true of Victoria, where resellers have
not been able to maintain the retail margins recommended
by the Victorian Automobile Chamber of Commerce. If
margins are low and prices are keenly competitive there is
simply not room for a price cutter to move so significantly
below the common ruling price as to attract large volumes
of sales and consequent economies of scale.
(ii) Refining capacity is often found in surplus. Where
a refinery has been operating in a market at say 80% of
capacity, labour costs, return on investment and overheads
are all being met. An increase in production to say 85% of
capacity does not incur any significant added cost except
for the additional crude, and that cost is minor. The additional product, the "incremental barrel" as it is known
in the industry, can therefore be marketed at well below
average cost - provided that the particular market in
which it is released is not one in which it competes with
normally costed product from the same source.
Product so produced can be marketed in two ways :-
(a) by aggressive marketers at large discounts;
(b) by defensive marketers who seek to maintain market
share in the face of competition from aggressive marketers. The technique is basically to match
price.
(iii) Characteristically competition between oil companies
in the retail area has been non-price competition, that is to say competition in the number of outlets, advertising, forecourt service, additives and gimmicks, rather than price competition. Because the behaviour is basically oligopolis
tic, despite overlarge retail and wholesale margins the price
123
will not "break". But when the price does "break" then the
market becomes quite unstable and unpredictable.
In Victoria, the price "break" occurred in 1966 when
Daylube and XL purchased overseas relatively cheap marginally
produced motor spirit which they imported by backloading it in chemical tankers.
For the purpose of illustrating the point just made, an
examination of the history of price war in Victoria follows. But
this does no more than illustrate the particular dynamics opera
ting in one market area. The dynamics are the same in all
Australian markets and the conditions of each market basically
similar. Given the same conditions, the same results can be
expected. The remedies for the causes and the solutions to the
resulting problems are inter-locked and to be effective must be
applied on a national basis. Thus steps must be taken throughout
Australia to modify the price structure and reduce excessive
margins. But that is only practicable if, amongst other things,
the number of service stations is drastically reduced and the
tendency for one sector of the market to cross subsidise another
eliminated.
15.7 History of Price-Cutting in Victoria During 1966, two companies, XL Petroleum Limited and
Daylube Oil Company secured supplies of motor spirit mostly in
Korea and Japan and were able to import and land it in Australia
at prices substantially below those ruling in local markets.
Later, further cheap distress cargoes were imported from overseas.
Both chains had considerable success. The initial major
impact was in the Geelong area. The major oil companies reacted
defensively by attempting to ring each price-cutting outlet by
cutting prices through their own outlets.
124
Evidence presented by the V.A.C.C. suggests that by
March 1967 Amoco was subsidising its outlets by 7.2 cents a
gallon; Ampol by 4 cents; B.P. by 3 cents; Sleigh by 6.6 cents.
The position fluctuated widely, with at times other companies
also paying subsidies to enable their dealers to cut price.
The amounts continually varied as the market fluctuated.
Daylube did not survive long and sold out to Shell. XL, however, despite supply difficulties, continued to operate as an
"independent", discounting mostly in the 5 cents to 7 cents range.
In December 1969 I.O.C. Australia Pty. Limited began
trading as an independent, again on the basis of product imported,
mostly from Japan. By May 1971 I.O.C. was supplying more than
seventy outlets in four States. "Phantom" tankers (tankers selling
unbranded motor spirit at the road side) made their appearance
and the number of price boards offering discounts steadily grew.
The following table is reproduced from page 30 of the V.A.C.C. submission :-
TABLE 7
1970 - NUMBERS OF DISCOUNT PRICE BOARDS
DISPLAYED THROUGHOUT VICTORIA
Early February 426 April 29 417
February 9 447 May 5 437
February 16 426 June 6 610
February 19 332 June 15 654
March 18 358 June 18 754
April 3 382 June 30 930
April 4 399 July 15 1,350
By November 1971, no less than 3,005 outlets
displaying price boards.
125
The success of price-cutters brought a host of imitators
and successively companies such as J.A.P. Gas, Geisha, Kookaburra,
entered the market. Despite the Japanese-sounding names, J.A.P.
Gas was supplied by Mobil and Geisha by Esso. Kookaburra was
supplied by Sleigh. These companies operated in direct compet
ition with the supplying oil company's own chain of outlets.
Additionally, it became obvious that individual operators
or small companies controlled by them were able to secure supply
cheaper than that ordinarily made available to most operators.
Sporadic attempts were made by groups of dealers to
organise agreements to withdraw discount boards. Deputations
visited recalcitrant dealers and persuaded them of the virtues of
non-competitive prices. Sometimes pickets were organised and
occasionally there were attempts at intimidation.
The V.A.C.C. reaction predictably was to oppose price
cutting. In September 1969 the V.A.C.C. put its policy in the
following terms
"The V.A.C.C. policy is, and always has teen, the establishment and support of a stable marketing policy based on costs of operation and a fair and just return to the retailer consistent with capital invest ment and labour contributed. The Chamber sets its
face firmly against price-cutting of the nature which is currently apparent." (Exhibit 298, p.33)
A special emergency meeting of resellers held by the
V.A.C.C. in January 1970 carried the following resolution :-
"That this meeting, representing Victorian petrol resellers at the retail marketing level, agrees collectively that whether owner/proprietors or lessee/ licensees of reseller sites that the current increase in trading pattern of the use of price-cut boards must cease to enable a return to trading sanity. Further, that to bring this stabilised marketing condition to reality, all oil companies be asked by the Victorian Automobile Chamber of Commerce to remove price-cut
boards placed on reseller sites under their direct
126
control by 7.00 a.m. on Friday, 30th January, 1970. Further, that the price-cut boards appearing on the reseller sites operated by lessees and/or owner/ proprietors be removed by the same date and time.
"That this meeting, representing Victorian petrol resellers at the retail marketing level, recommends to the Executive Board of the Victorian Automobile Chamber of Commerce that it takes all reasonable steps to obtain a State or Federal Government instigated
inquiry into all facets of the marketing of petrol in Victoria and/or Australia. In the event of the efforts of the Executive Board being unsuccessful, that a further general meeting of members of V.A.C.C.
and other petrol resellers be called to further deal with the matter." (Exhibit 298, p.34)
Some oil companies supported the general terms of these efforts.
In particular, Sleigh, in response to the V.A.C.C.
initiative, circularised all dealers on 30th January, 1970, saying :-
"We are sure that you do know but because of prevailing circumstances we wish to confirm that as a Company, we subscribe wholeheartedly to the policy of orderly marketing and, accordingly, have been most disturbed with the rapid
expansion of petrol price-cutting in Victoria over recent time.
"You can De assured that we have consistently, within the last two years in particular, attempted in various ways to halt the "mad scramble" that has occurred and restore sanity but, unfortunately, any success gained was
shortlived. Complete and sustained success can be achieved only by every interested party contributing towards that success.
"The decision of a mass meeting of Petrol Resellers called by the Victorian Automobile Chamber of Commerce to remove price-cut boards from service stations as from 7 a.m. today, has the full support of this Company. The action of the V.A.C.C. in calling this meeting and
the overwhelming response of all members in attendance, clearly indicates the great and urgent need for Resellers to return to stable trading and removal of the price-cut
boards is a very essential step towards this goal.
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"We will do our utmost to assist you and your fellow Golden Fleece Resellers in any practical fashion and our field staff will discuss the price-cutting question with you on the next visit or immediately upon request.
"The Reseller who has been involved in price-cutting may have to 'date gained additional profit at the expense of his colleagues, but with more and more outlets competing there will be a considerable reduction of profit and it is unarguable that losses will be incurred by a great number if the ridiculous price-cutting situa tion is allowed to continue. In cold hard facts, it means that to obtain the same profit result as that
applicable prior to price-cutting, more than double the gallonage will have to be sold through each service station and, of course, if every outlet becomes involved this is just not practicable because the public will still buy the same overall quantity of petrol regardless of price.
"This morning, with the co-operation of the Resellers concerned, we removed the price-cut boards from all our Company-owned service stations, and are currently requesting all Golden Fleece service stations, which are privately owned, to follow this lead. Positive action by each Reseller to act in concert with other Resellers
in his local area to influence those Resellers still displaying price-cut boards will be the most effective way of terminating this utterly absurd price war. We urge you.strongly to consider this point.
"We believe that, in view of all the circumstances, you are entitled to have confirmation of our Company policy in this matter, which is of such vital concern to your future." (Exhibit 298, pp.35-36)
This reaction however was by no means unanimous and the
attempt to restore non-price competitive stability to the market
did not succeed. Although the number of boards did drop, they
did so only to rise once more.
During 1971 service station closures became fairly
frequent. In July 1971, V.A.C.C. in an effort to influence
public opinion, published a circular entitled "Petrol News" and circulated it to all oil companies and members of parliament.
The circular is understandably long on assertions but it does at times identify causes. The Editorial reads :-
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VICTORIA IN THE GRIP OF 'VICIOUS' PRICE WAR
"Victoria is in the grip of the most vicious petrol price cutting war ever experienced. While price wars are not new, the current battle sweeping the State is more widespread, has bigger price cuts and is doing more harm to the community than the previous outburst.
"Why are there price wars? Who starts them? What effect do they have on motorists, resellers and oil companies? Why do oil companies order service station proprietors to cut retail prices on one hand and ask
for a higher wholesale price on the other? Why can only some members of the community purchase petrol at 22 cents off a gallon?
"We answer these and other questions in this special issue of "PETROL NEWS". We want to stir up public interest in the petrol pricing situation which we believe is costing the community millions
of dollars annually.
"We want action at Government level to clear up a situation which is extremely confusing and damaging to the Australian economy." (Exhibit 298, Appendix III)
The argumentative material in "Petrol News" however goes to the question that lies at the bottom of the essential
marketing problem - that of supply and its cost.
"... the terms of reference for establishing the official wholesale price, set by the South Australian Prices Commissioner based on evidence from oil companies, are a complete mystery.
"However, we and any other reader of the Government Gazette know that oil companies can afford to give "preferred" buyers petrol discounts of up to 22 cents a gallon. These preferred buyers fall into the category of Government and semi-Government organisations or
industrial concerns which are sold highly-discounted petrol because oil companies state they are bulk buyers and so deserve cheaper petrol.
"THE BIGGEST BULK BUYER OF FUEL IN THE STATE IS THE MOTORING COMMUNITY. YET YOU, THE MOTORIST, ARE PAYING THE HIGHEST PRICE FOR YOUR FUEL. WHY?
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"Oil companies control a large proportion of service stations - they have a captive market - so they sell petrol to the public at whatever price they want.
"It doesn't make sense does it?
"So whether or not you buy petrol at discount prices or at the recommended retail prices you are losing because you are paying too much and suffering the con sequences of dealing with an unhappy, unsettled, unfair industry. ...
"We have all seen deserted service stations. There are hundreds of them throughout Victoria. The majority of these were built by oil companies and the majority of the lessees went broke because of price cutting wars of one sort or another and the overbuilding of service
station sites.
"Price wars do nobody any good. The root of the problem is not discount boards but that THE WHOLESALE PRICE OF PETROL, WHETHER IT IS DISCOUNTED OR NOT, IS TOO HIGH.
"One way or another, the majority of motorists are subsidising substantial price reductions to commercial fleet-owners, Government departments, ordinary motorists, well located geographically in the worst price-cutting pockets and many others with no real claims to price advantage.
"It's time all motorists benefited equally from an across-the-board reduction in the wholesale price." (Exhibit 298, Appendix III)
During 1973 there was a marked falling away of the
number of discount boards, mostly due to concerted action by oil companies and the V.A.C.C. and the initiatives of Mr. David
L. Woodhouse, a Melbourne businessman, referred to earlier in
this Report, who owns three service station outlets.
In June 1973 Mr. Woodhouse circularised the industry in
the following terms :-
"The Major Oil Companies have two points of distri bution for Petrol, their own brand Stations and the price cutting outlets. The wholesale price differential between these outlets is 9 cents a gallon in favour of the independent price cutter.
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"These independent outlets are promoted as part of the war between the Companies to obtain a greater share of the local market. Three of these Independents have in turn established their own chain of Stations. This has resulted
in the two groups, who receive supplies from the same Company, fighting each other in the market place. An Independent will put out a 10 cent price cut board and the
next retailer on a Company owned Station selling the same brand of Petrol is forced to follow the lead.
"The irony of this competition is that the Company owned Operator is obliged to contribute to the rebate given to the public from the margin per gallon he had before price cutting started.
"For public relations all Companies condemn price cutting. They console their Company owned Operators by telling them they must sacrifice themselves for the common good. No Company admits it is playing both ends against the middle.
"Unless the Retailers insist that Companies pull down the price cutting boards and restore their former operating margin per gallon, they face diminishing returns and longer hours before the inevitable trip to
the Bankruptcy Court.
"The independents who receive the 15 cents a gallon should assist their fellow workers by reducing their price cutting to reasonable proportions or ceasing such operations." (Exhibit 299, p.2)
A meeting of Independent Dealers was held in the V.A.C.C.
office on 5th July, 1973. Mr. Woodhouse was deputised to approach
the major oil companies with a request that price cutting be phased out. Mr. Woodhouse saw each company separately.
The nature of these interesting conversations remains
obscure. The results of them are not. To quote Mr. Woodhouse
in his submission to the Commission (Exhibit 299, p. 3)
"On the 16th July, 1973, and subsequent days, the majority of price cut boards disappeared from the stations."
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The results were set out in a further leaflet circula
ted by Mr. Woodhouse during August 1973 :-
"Our first Bulletin called for specific action by the Petrol Retailers to persuade the Oil Company they work for to remove their price cut boards. A dramatic improve ment in the financial situation of most Retailers followed
the success of this action.
"New methods, in addition to the old, are now being introduced by the Companies who are striving to continue price cutting. Dealers are being encouraged by Company representatives to price cut without a Board out. The Companies concerned subsidise these activities. Taxi and other Company Depots are increasing their sales to private motorists at 8 cents off.
"The stepping up of free car washes with so many gallons of Petrol purchased is another gimmick. Such Companies are quite prepared to put their own Operators on nearby Company owned Stations out of business, in addition to provoking a flare up of price cutting around such outlets.
"All Retailers owe it to themselves and the Industry to spike the guns of the greedy few. Dealing with Companies, whose only motto is "gain a greater percentage of the market" irrespective of the welfare of the workers and their families dependent upon a fair return, is the major problem in the next few weeks.
"Action that can be taken includes the formation of deputations of Dealers to the Retailer of any Company or other Station where underhand practices are occurring. Explain to the offending Retailer the difference between giving away Petrol at a small margin and operating a Station on a business basis. Once he realises he is being used by a Company to boost their share of the market, to the detriment of the majority of Dealers,
any sane Operator will co-operate.
"This action exposes the Company concerned, as invariably the Offender will say he was told to do this by his Company representative. Exposure is the last thing these Companies want as they are all busy pointing the finger at some other party for continuing the war.
"The understanding between the Dealers operating Company owned Stations, and the Independent Owner of a Station, of a 3 cent differential in price for Petrol is now operating successfully in Victoria and other States. Independents who price cut beyond this margin, as a consequence of a hefty subsidy from a Major Company
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will ultimately find they are expendable. If irresponsible Companies and Dealers expose themselves to the Royal Commission on Petrol Marketing, for dumping cheap Petrol on a stable market, to promote "gallonage" only, the
consequences must be borne by themselves." (Exhibit 299 , pp.3-4)
By October 1973 the Secretary of the V.A.C.C. Service
Station Division was able to report to his organisation in the following terms :-
"The past twelve months saw a marked de-escalation in the number of discount boards and the amount of discount offered by petrol retailers in Victoria.
"From a high of 3,000 boards, 1,940 in the metro politan area and 1,060 in the country, the number in October stands at 840 - 240 metropolitan and 600 country. During the period discounts ranged from 4
to 12 cents a gallon.
"The reduction in boards occurred in Melbourne in July last, and was led by freeholders. Oil companies grasped the opportunity to follow so that now we find that there are few price boards displayed on company
sites in the metropolitan area.
"Country retailers have been loath to remove boards being concerned primarily that gallonage would flow to depots.
"A state of flux exists with Melbourne freeholders in that while the number of boards remains fairly constant, a number have increased the amount of dis count from the generally accepted 3 cents a gallon."
(Exhibit 298, pp.40-41).
The period during which non-price competitive market
stability was maintained was relatively short.
It is in the nature of price wars that they at times flare up and at others die down. Equally it is part of this nature that unless positive and effective action is taken to correct the structure of the market, the general tendency is
for the fluctuations to become more extreme. The Victorian market has behaved in this way. It will continue so to behave
until something is done about it.
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So in 1974 the number of boards and the amounts offered
as discount began to increase once again. By September 1974,
291 outlets or 32% of the whole displayed price boards. This
trend has increased during 1975 to a level where discounts of
15 cents and 16 cents "off" the recommended price were not
uncommon and price-cutting could be truly said to be widespread.
In mid-1975, the level of price-cutting below the then recommended
price ranged from 4 cents to 16 cents off with several above that
at 17 cents and one at 20 cents at Moe.
A further development involved the entry of the Solo
group into marketing and later ACTU-Solo. An account of some of
these activities is to be found in the Commission's Third Report.
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PART VI
THE VICTORIAN MARKET TODAY
16. CONFUSION, PRICE DISCRIMINATION, AND UNFAIR PRACTICES
16.1 The marketing scene today in Victoria presents a
confusing and at times even chaotic picture. It is an unbalanced
market but one which on the positive side, does bring some of
the benefits of price competition to some areas of the market.
But much, though not all, of the price competition it exhibits
is based on price discrimination and unfair practices.
Perhaps the best starting point is that made by the V.A.C.C. in its circular - "Petrol News" - published in July
1971 and referred to in 15.7, that price discrimination lay at
the basis of the type of competition occurring in the Victorian market.
The Commission's terms include a sub-paragraph 2(c)
which, amongst other things poses the question of whether the prices of petroleum fuels are excessive and to the extent to
which ... the granting of secret or other discounts and the maintenance of a multi-tiered price structure by refiners and wholesalers of such fuels are contributing to ... excessive
prices.
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-16.2 Price Discrimination in Victoria
Put bluntly, there is in Victoria in the motor spirit
market widespread price discrimination which exists, and has
existed for many years, as a permanent feature of marketing
practice. The complaints made by the V.A.C.C. and many other
dealers amount to this - that in Victoria the highest price
(on a wholesale basis) paid by any tier in the industry is paid
by the service station proprietor. Many other classes of buyer
are able to purchase far more advantageously. Amongst these
classes are government and semi-government purchasers, large
commercial firms buying directly under contract, depots and
distribution agents, a number of discount firms engaged in
retailing motor spirit in competition with company outlets and
supplied by the companies, and a number of specialised outlets
owned by taxi companies and others which are able to purchase
at preferred prices, often quite substantially below the price
which the service station proprietor has to pay. There are a
considerable number of instances where those supplied in this
way have been able to market to the public at a retail price
less than the wholesale price the ordinary service station reseller has to pay his supplying oil company. Little wonder
he complains.
Furthermore, the service station lessee in this
situation was not a free agent. He has historically been bound
by a "tie" condition in his supply contract or lease, to pur
chase from his supplier all his requirements at the supplier's
wholesale list price.
In theory, the Trade Practices Commission Determination
on the Applications by Shell for authorisations pursuant to Section 88(1) and 88(6) of the Trade Practices Act 1974-5 (see
discussion at 11.7 of this Report) frees the lessee from the
"tie".
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In fact this freedom seems likely to avail him not at
all. What a dealer needs is the practical ability to buy product
in at competitive prices should his supply company decline to
supply him at the price, that is he needs the ability to defend
himself by buying in an alternative supply. The Trade Practices
Commission has said that it "thinks it appropriate for Shell to
require that Shell branded pumps be used only to dispense Shell product".
On storage, The Trade Practices Commission thought that "the dealer himself should have the right to buy the tanks".
In practical terms the position of the dealer who decides
to defend himself in a price-cutting situation by buying in
alternative supply is precarious, as it seems he must :-
(a) remove and then instal different pumps;
(b) buy the service station's storage tanks;
(c) operate under a lease which by its terms can have him expelled from the site for a wide variety of breaches (see 11.4).
Effectively, the Commission considers that he is bound
as securely as if he were still tied.
16.3 New Zealand Comparison
In New Zealand the Motor Spirit (Regulation of Prices)
Act of 1933 ensures that the reseller service station proprietor purchases at the lowest price that product is made available to
bulk consumers within the New Zealand system. This enables him to compete effectively and at a profit. There is no danger that anyone can buy supply at a lower price and by turning it on to
the retail market unfairly undercut him.
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16.4 The Service Station does Buy in Bulk
The service station proprietor normally purchases his requirements in bulk drops of 6,000 gallons a time. He purchases
at regular intervals and standard delivery systems are available
to supply him. The servicing of such a client buying on an annual
basis very substantial volumes of product in large packages,
should be amongst the cheapest wholesale operations and accordingly
the price paid the lowest instead of the highest.
16.5 "Buried" Rent
One reason why the bulk purchase by lessee dealers is so
expensive is that as described elsewhere in this Report, the
wholesale price contains a "buried" rent factor assessed at
approximately 7 cents a gallon. (see Part III) This factor
makes the lessee dealer uncompetitive with any dealer who is able
to purchase motor spirit at a price which does not include this
rent factor.
16.6 Price Tiers: Turning Product Back into Another Tier
Some of the different price tiers historically enjoyed
in Victoria by various classes of customers are not immediately
important in terms of retail prices. For instance, it is customary for governments, both state and federal, and their
agencies, to secure, by bulk purchases, supplies of product at
markedly reduced prices. Indeed in this area, the industry is,
in an effective way, price competitive. But there are a number
of other tiers, some known publicly but others in the language
of the Terms of Reference, involving the grant of "secret
discounts". Frequently, purchasers in Victoria able to purchase
ostensibly for industrial purposes on a bulk basis at a price well under the price charged to service station proprietors, turn the
product so purchased back into the retail market. More recently
groups of dealers such as the Southern Cross Group and others such as ACTU-Solo have been able to purchase at discounts in the
7 to 8 cents range. If the price at different tiers was rationally related, such a turning back of product would have
little, if any, advantage. Ordinarily the price difference would
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not cover the additional handling involved or would be so
marginal as to be unattractive. When however agencies were, as
the Commission discovered, diverting back into the retail market product delivered to them at prices up to 12.5 cents below the
price at which the service station proprietor could purchase it
in bulk, such price discrimination provided the opportunity for
extraordinarily profitable retailing.
16.7 Major Areas of Price Discrimination
In the latter half of 1975, the Commission spent some
weeks in Melbourne investigating, inter alia, price discrimination in Victoria.
The Commission collected a considerable number of
contracts between oil companies and the operators of price
cutting outlets. Commonly these outlets were competing not only
with the outlets selling other brands, but also with outlets selling the supplying company's brand.
At a time when oil companies were selling at up to 12.5
cents a gallon below the wholesale list price charged to their
own lessee dealers, the dealers were bound by their lease in terms which are represented by the following example extracted
from the form of dealer licence used by Ampol as licensor :-
"Clause 10: ... The Licensee shall take delivery of petrol from time to time required to be delivered by the Licensor in full tank loads at a time convenient to the Licensor, its servants or agents in that behalf.
"Clause 11: The Licensor agrees to supply to the Licensee and the Licensee agrees to purchase from the Licensor at ruling market prices and at such place or places as shall be nominated in writing by the Licensor
his total requirements of petroleum products ..."
Such a clause gives a dealer no ability to bargain for a cheaper supply. Unless his company supports him with a
discount, or "temporary assistance" as it is called, he has no
prospect of competing at significant discount levels.
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There is no assurance that he will receive such assistance.
Ampol at the time of the Commission's investigations gave no
such assistance to its dealers.
Many of the contracts sighted by the Commission and
tendered by the companies were tendered on a confidential basis.
Others were tendered openly. Confidentiality was claimed on the
basis that public disclosure could damage the competitive position
of the oil companies concerned.
The Commission itself, of course, must finally determine
the use to which information is put.
Section 6D of the Royal Commissions Act 1902, as amended,
provides so far as here material :-
"6D. (1) Nothing in this Act shall make it compulsory for any witness before a Royal Commission to disclose to the Commission any secret process of manufacture.
"(2) If any witness before a Royal Commission requests that his evidence relating to a particular subject be taken in private on the ground that the evidence relates to the profits or financial position of any person, and that the taking of the evidence in public would be unfairly prejudicial to the interests of that person, the Commission may, if it thinks proper, take that evidence in private, and no person who is not expressly authorised by the Commission to be present shall be present during the taking of that evidence.
"(3) The Commission may direct that any evidence given before it, or the contents of any documents, books or writings produced at the inquiry, shall not be published."
The Commission is satisfied that the instant material does not fall within the scope of Section 6D (2).
The Commission feels strongly that the nature of these
contracts some of which it found to be quite remarkable, should
be known. It seems absurd that the Commission which is asked
to inquire into secret discounts should in fact keep the details
secret. Nevertheless in view of the sensitivity of the oil
140
companies, the Commission has decided to select a number of
examples which serve to illustrate the variety and extent of
the arrangements involved. The Commission will publish details
of no more than two examples of the many contracts of each
company which it holds, and in respect of which confidentiality
is claimed. In addition, the Commission will add examples
from material that is not confidential.
Example I
Company: Shell
Purchaser: Associated Taxi Services Pty. Limited
of 547 Spencer Street, West Melbourne.
This company operates seven outlets from which it sells
motor spirit to the public. The documentary arrangements between
the parties include a ten year tenancy agreement terminating in 1981 and a Sales and Purchase Agreement.
Six of the outlets concerned were :-
1. Corner Victoria and Swanston Streets, Melbourne and
known as "La Ronde Service Station" 2. Corner Sydney Road and Gaffney Street, Coburg and known
as "Hellas Service Station"
3. 592 Mt. Alexander Road, Moonee Ponds and known as
"St. Helens Auto-Port" 4. Corner Dandenong and Williams Roads, Windsor and known
as "Nassa Auto-Port"
5. 460 Racecourse Road, Newmarket and known as "Newmarket
Service Station" 6. 547 Spencer Street, West Melbourne, together with adjoining car park and known as "Associated Taxi
Services Pty. Limited"
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Shell owned the sites and leased them to Associated
Taxi Services Pty. Limited. When examined by the Commission,
the rents were found to be very low, mostly in the $300 to $400
a month range.
The documents showed that Shell had lent Associated
Taxi Services what was described as a Working Capital Loan of
$80,000, part of which appears to carry interest at 6.3/4% with
provision for variation by reference to Commonwealth Trading
Bank interest and repayable by instalments over ten years, and
part interest at 8%, similarly variable, and repayable by
instalments over seven years.
In addition, by another undocumented arrangement, Shell
pays the taxi company a lump sum calculated monthly after review
of monthly profit of approximately $15,000 a month.
The Commission has received many complaints about the
so-called "taxi" outlets. These outlets also sell extensively to
the public. They all occupy inner city or suburban locations
and discount heavily under the Shell brand name. These outlets
compete directly with Shell outlets which, unless heavily
assisted by Shell, must be gravely disadvantaged by such price
discrimination against them.
Example II
Company: Shell
Purchaser: E.A.C. Russell Ferntree Gully Pty.
Limited, trading as Russell's Driveway.
The documents disclose a Sales and Purchase Agreement
for an eight year term until 1979 , whereby E.A.C. Russell Pty.
Limited agreed, in consideration of a documented lump sum
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payment by Shell of $10,000, to purchase its supply of motor
spirit, lubricants and other petroleum products exclusively
from Shell. In addition, Shell has agreed to pay to E.A.C.
Russell Pty. Limited undocumented lump sum payments of $2,500 a month approximately.
This outlet is situated at Ferntree Gully in an area well known for price-cutting. The outlet competes against other
brand outlets and Shell outlets.
Shell effectively underpins this dealer's capacity
to discount at levels of 16 to 18 cents "off" the standard price.
Example III
Company: Mobil
Purchasers: U-Save (Kolet Trading), 317 Hawthorn
Road, Caulfied.
D . Goldberger-Ditta (U-Save), 1 Beach
Road, Brighton Beach
These two contracts between Mobil and members of the
Solo Group of Companies gave the dealer operator in May 1975
an effective discount of 12.55 cents a gallon below the dealer
tankwagon price, that is the wholesale price paid by Mobil's lessee dealers.
This meant that in approximate terms the purchasers
could and did discount in the 12 to 13 cent range "off" the recommended retail price and still received the full V.A.C.C. margin of 12.2 cents a gallon.
Both sites were relatively poor. The transcript des
cription of the Hawthorn Road site is "an old small and
unattractive site" with a small forecourt. On the occasion the
Commission visited the area of the site, vehicles were queueing across the pavement and along Hawthorn Road, a busy street used by tram cars.
143
The Beach Road site was better but small and limited.
Capital investment at both sites would be low.
Against a national average gallonage of 10,200 gallons
a month, the Hawthorn Road site in early 1975 was selling 226,000
gallons a month. The effect of its activities on competitors,
including two Mobil lessee dealers on substantial nearby sites,
was devastating. One Mobil dealer about a half a mile away on
the same side of the same street was averaging 3,000 gallons a
month.
The Beach Road site was selling no less than 315,000
gallons a month. This sales level produced on a small site
serves to illustrate the gross under-utilisation of assets
represented by the thousands of very much more substantial and expensive outlets. Victorian company-owned sites averaged about
14,000 gallons a month. On a yearly basis, this poor site, in
terms of gross margin on sales, was taking approximately
$450,000. Its ratios of labour cost and investment costs would,
under the circumstances, be very favourable indeed.
The transactions illustrate what occurs when supply secured at a preferred and discriminatory price is turned back
into the retail market and the profit to be made when the margin
of 12.2 cents, designed to bolster the failing economics of
small volume stations, is applied to large volume sales. It is true that a section of the public buys motor spirit more cheaply
from these outlets, but only because the ordinary dealer, who carries the industry in good sites and bad, is unable to compete
since he is obliged by his contract to purchase at the full
wholesale price.
The inability of other dealers to compete on price
allows the preferred dealer an excessive profit. This is not a criticism of the price-cutter, who is an entrepreneur with a
duty to shareholders to maximise profits, but a criticism of the
system which permits this to happen.
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In fairness to Mobil it should be recorded that they
did not renew the contracts and expressed firm regret at having entered into them in the first place.
Although these Solo contracts provide a spectacular
example of market disorder, many of the other contracts and
arrangements which the Commission gathered demonstrated in varying degree the same market inequities.
Such market disorder and inequity is not appropriate
for the retailing to the Australian public of a staple commodity.
A system that produces such contrasting situations for dealers in
the same market based solely on discriminatory pricing practices
cannot be justified.
Example IV
Company: Mobil
Purchaser: Wes Smith Motors, 302 Aberdeen Street, Geelong.
Geelong has been the venue since 1966 of constant price
cutting activity. Many service stations have closed, some have been redeveloped for other purposes. Some however have prospered.
In early 1975, Wes Smith Motors was selling 75,000 gallons a month from a well sited and well managed outlet, displaying a
price board offering an 8 cent discount. Under the terms of the supply arrangement the proprietor was receiving 2.5 cents a
gallon off the wholesale list price (this is a fairly standard figure), plus an additional 3.2 cents a gallon noted as "temporary
dealer assistance rebate".
This meant that the proprietor bought at 5.7 cents less
than the price available to Mobil's lessees and had to add another 2.3 cents from the recommended margin of 12.2 cents to
trade at 8 cents off,
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The basic economies of 75,000 gallons a month outlet at
an effective gross margin of around 10 cents are very good indeed.
They stand in direct contrast to many past and present outlets
which, though variously managed and positioned, have as their
principal category of differentiation the simple fact that they
were unable to arrange a supply at a preferred price. These
include Mobil outlets.
Wes Smith Motors was selling at the sort of price that
ought to be charged to the motorist at all service stations in a
more rational market. As an owner dealer, it was paying a
wholesale price which has extracted from it an amount approxima
ting the factor included to support the company-owned chain of
outlets. (See 13.6) Further, his large volume throughput enables
him to reduce his retail margin. But in current market circum
stances he must be considered to enjoy a preferred price which
discriminates against those owner dealers who have to pay the
rent factor as part of their wholesale price and lessee dealers
on low capital sites whose real rent may be excessive.
Example V
Company: B .P .
Purchaser: James Alan Hurst and David Francis
Woodhouse, with respect to a service station at
the corner of Nepean Highway and Stewart Street,
Mount Eliza (Victoria), known as "Kunyong Auto
Port", and with respect to a service station at
the corner of Calder Highway and Fosters Road,
East Keilor, known as "Jetport Auto Service".
These contracts provide that the company (B.P.) "under
takes to allow the Owners a commission of 6.75 cents for every
gallon of motor spirit purchased from the company for sale through the said service station(s)", so that effectively B.P.
sells to Mr. Woodhouse's outlets at a price of 6.75 cents a gallon cheaper than that price at which it sells to its own lessee
dealers.
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Mr. Woodhouse, who gave evidence, said that he did not
discount. Indeed he is the Mr. Woodhouse who organised a
temporary market withdrawal from discounting in mid-1973 . (See
15.7) Thus, he has a gross margin on sales of 18.95 cents a
gallon, that is the V.A.C.C. recommended margin of 12.2 cents plus
the "discount" of 6.75 cents a gallon.
This effective retail margin of 18.95 cents off an ex tax price of 43.1 cents seems extraordinarily high.
Example VI * *
Company: B.P.
Purchaser: Two Roads Motors Pty. Limited of 37-41
Wellington Street, Windsor, carrying on business
at the corner of Charman and Balcombe Roads, Mentone.
The documents and the evidence disclose that the parties
entered into a supply agreement which, taken in conjunction with
other arrangements, provided the purchasers or associates with
* a loan of $45,000
* a 5.0 cents a gallon "rebate" on motor spirit, of which
2.0 cents a gallon was to be credited to the loan account;
* further assistance, not documented, of 1.0 cents a
gallon "rebate".
Thus, leaving aside the load of $45,000, the purchasers obtained motor spirit at a price 6 cents below the wholesale list
price at which B.P. sold to its own lessee dealers.
At the time the evidence was presented, the site at
Mentone was displaying a 12 cents a gallon "off" price board.
147
According to material furnished by it, in mid-1975
B.P. was supporting price-cutting at 123 individual company-owned
sites throughout Melbourne and Geelong. The discounts ranged from
a low of 3 cents to a high of 12 cents. The usual pattern
involved "support" to the extent of approximately half the amount
displayed on the price board. The largest number of outlets was
at the 8 cents "off" level with the company normally providing
4 cents by way of support and the dealer cutting his 12.2 cents
margin by 4 cents.
Example VII
Company: Esso
Purchaser: John George, Georges Jet Gas Pty. Limited
and Fina Petroleum Pty. Limited.
In this case Esso entered into a supply agreement whereby
the Fina price-cutting outlets received motor spirit at a price
approximately 8 cents a gallon lower than the price appearing in
the "Esso Master Price Record as Applying to Service Stations",
that is the price then paid by Esso lessee dealers for their
supply from Esso.
"Fina" has about 40 outlets in Melbourne, some of which
are leased from Esso and has been a prominent price-cutter. These
outlets compete directly with company-owned outlets, including those owned by Esso.
Esso espoused a different marketing philosophy to most
other companies. Mr. T.E. Young, Marketing Manager of Esso Australia, said in evidence (Transcript, p.3080) that Esso welcomed the opportunity to sell to jobbers if it was profitable
business and elsewhere in evidence said that all the business under review (which would include the Fina contract) was profit
able to his company.
148
At p.3152 (Transcript), Mr. Young gave as his opinion that there were :-
"many parcels of business in the market that were profitable to (oil) companies at discounts of 6 cents to 9 cents a gallon and that as long as that is the case I believe that sort of business will continue to be available in the market place."
In respect of the Fina contract, Mr. Young said (Trans cript, p .3152) : -
"It is identical to industrial and commercial contracts to us. In other words, the types of consid eration involved are very similar. There is very little investment."
What this arrangement reveals is that the tiers of price,
of which the price to company service station lessees is the highest, are so widely spaced that motor spirit sold under
commercial and industrial contracts can be turned back into the
retail market at a profit to the middle man or jobber. The oil
company still makes a profit as Mr. Young deposed. The burden falls upon the lessee dealer who is bound by his lease to buy at the full list price when and where his company dictates and
who cannot therefore effectively compete.
Example VIII
Company: Caltex
Caltex has affirmed to the Commission (Exhibit 281) that :-
"Caltex does not supply any jobbers or wholesalers who consistently cut price of motor spirit (either branded or unbranded) ..."
"Rebates may be granted to dealer owned sites as a specific consideration for tenure arrangements. Such rebates do not constitute part of a normal lease
149
"Rebates are not granted to licensees of company- owned sites."
An inspection of the lists of discounts offered owner
dealers and lessee dealers suggests a pattern of defensive
marketing with most of the dealers on price-cutting sites
receiving temporary assistance at up to 5.1 cents a gallon off
the wholesale list price. The average rate of assistance is
much lower. For the most part, in early 1975, these sites were
selling modest gallonages reflecting perhaps the defensive
position. Exceptions to this were :-
Brunswick Tyre (R.B. Pain Pty. Limited) of 405
Brunswick Road, Brunswick, which received a
"trading consideration" of 4.0 cents and "temporary
assistance" of 1 cent. This dealer attained an
average monthly gallonage in 1975 of 222,268 which is very large indeed.
L. & M. Dean of Manninghan and Bridge Streets,
Buileen, on a company-owned site, received "temporary assistance" of 5.0 cents. In early
1975 this site averaged 112,700 gallons a month.
Example IX
Company: Sleigh
Sleigh deposed (Exhibit 231A (3), p.3) that :-
"Sleigh has always had the view that price-cutting wars are abhorrent to the profitability and stability of the industry and the public interest generally. When it was permissible to do so Sleigh counselled service
station operators against initiating or engaging in price-cutting wars unless it became essential as a matter of practical survival. Sleigh will, within the limits of relevant legislation, continue to so counsel
its operators ..."
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The company did, however, offer "temporary assistance"
to help its dealers in price war situations.
Further, Sleigh has a distributor's agreement with a
partnership trading as Mobbs and Company of 13 Knox Street,
Daylesford, Victoria, under the brand name "Kookaburra". Mobbs
and Company supply 15 service stations including five service
stations owned by the business, together with approximately 300
primary producer and industrial accounts in the Daylesford district.
The prices contained in the contract provided for a
"rebate" of 8.1 cents so that Mobbs and Company buys motor spirit
at 8.1 cents a gallon below the wholesale price paid by Sleigh's lessee dealers.
A Mr. M. Morrison, an Ampol dealer who owns his own site
on the Nepean Highway, Mornington, gave evidence about a "Kookaburra" outlet supplied under the Mobbs and Company agreement,
which competes with him. This outlet in August 1973 (Transcript,
p .3401) was displaying a price board offering 16 cents "off".
Other Kookaburra outlets are noted as price-cutting outlets.
Sixteen cents "off" is amongst the highest discount levels
observed by the Commission. The Transcript at page 2390, record
ing an inspection of outlets being conducted by the Commission in
the Ferntree Gully area states of a Kookaburra site in Bayswater Drive :-
"This is one of the worst cut price sites in the area and has been like this for quite a few years now. It was originally a tyre service with a couple of pumps out the front. I could not guess what gallonage this
site is doing - it could be doing up to 150,000 200,000 gallons a month"
The discount board was at 13 cents "off".
151
It is obvious that Mobbs and Company have a traditional
distributors business to bulk clients in the rural district of
Daylesford which is about 100 kins. north west of Melbourne,
broadly in the direction of Ballarat. Ferntree Gully is due east
of Melbourne and Mornington is due south of Melbourne. Both areas are urban areas on the fringe of metropolitan Melbourne. Motor
spirit supplied under this contract at a "discount" designed to
facilitate bulk sales to rural clients is turned back in to the
retail market in urban areas.
So while Sleigh "abhors" price-cutting and counsels its
dealers against it, tankers carrying the Sleigh emblem supply
metropolitan sites with Sleigh's product to be sold in competition
with Sleigh's own company dealers at a discount of up to 16 cents
a gallon.
Example X
Company: Amoco Purchaser: P.A. Blanes Investment Pty. Limited
Like most companies, Amoco sometimes pays special late trading subsidies to encourage dealers to operate over extensive
hours. (see 13.7) This example shows that in additional assistance the dealer received 6.0 cents a gallon plus a late
trading subsidy of 1.3 cents a gallon and a refund of licence
fee of 1.1 cents, making a total rebate of 8.4 cents.
Example XI
Company: Total Purchaser: ACTU-Solo Enterprises Pty. Limited
ACTU-Solo is a distributor and reseller operating in
Victoria, New South Wales and the Australian Capital Territory Total has contracted to give a substantial supply to ACTU-Solo
on 1st March, 1976. The level of discount is not known to the
152
Commission but is estimated at about 8 cents.
This supply will of course compete with Total's own
outlets, many of which are supplied by Total at list price. Such
outlets have no prospect of competing successfully against the
supply that Total gives to ACTU-Solo. The circumstances exhibit
yet another example of product being purchased as if for bulk
dealings but with the purchasing company effectively operating as an intermediary which turns supply back on to the retail market
at a preferred price. It seems likely that the ACTU-Solo group
could compete on a fair competitive basis as well as on a
price discriminatory basis in that high gallonages and low capital
costs would enable the chain to cut margins to a quite significant
degree, even if the price of supply were similar.
Under the Commission's proposals discussed later in this
Report, ACTU-Solo would not qualify as a jobber and would be
expected to buy at the posted price of whichever company it chose
to deal with, for supply to retail outlets.
Mr. A.F. Young, General Manager - Marketing of Total
Australia Limited gave evidence in 1975 at p .3590 in the following
terms :-
"MR. FISHER, Q.C.: The impact that it (deep price cutting at one retail site) has, is to diminish the effective sales and consequently the profitibility of any other station within a certain range of influence
of the discount?
"A. Yes, it may be so.
"Q. Have you ever considered the feelings of a dealer holding one of your licences or leases who is subject to that form of competition, that is, a form of competition from his own company?
"A. If the dealer approaches us under the circum stances you have just related for some sort of support, he is always favourably considered to compensate for that situation if it in fact arises.
153
"Q. So your policy recognises that he has some cause to feel aggrieved which you meet by helping him?
"A. Yes, this is so, I guess it is one of the aspects of a free market society, is it not?
"Q. I would hope not, but it may be. One other aspect of the free market society is that it might insist on rules about fair competition and they would almost certainly involve the proposition that you shall not prefer, in terms of price, persons of the same class?
"A. We do not attempt to in any way control the selling prices of the various resellers."
In its submission, Exhibit 232 at p .4, Total added
"The Company does not regard it as desirable for discounters to compete with its normal service station outlets. Not only is the Company concerned with the price discrimination aspects of the Trade Practices
legislation, but with the economic health of all its customers. It would not be in the Company's interests for its service station dealers to suffer because of the activities of another marketer being supplied by the Company, however the Company's hands are tied since it is bound by its supply agreements and has no control over the prices being charged by its customers."
And later at p .5
"It is my belief that in the long term the interests of the consumer will be better served if the gallonages of the conventional service stations, which provide full service to the public, are not filched by the price- cutters who in general offer no such services."
Example XII
Company: Ampol
Purchaser: Southern Cross Petroleum Pty. Limited
Southern Cross is a registered company incorporated to provide various services (primarily bulk buying of petroleum
products). All of the present 28 members of the company are owner dealers of outlets in Victoria. Southern Cross has a
154
contract with Ampol for the supply of motor spirit. The supply
is not limited in volume or by the number of members who may participate in the contract.
The Commission is not aware of the precise discount but
estimates from its knowledge of the Victorian market that the
discount would be in the 7 cents to 8 cents range.
Southern Cross told the Trade Practices Commission that
it expects to build its shareholding to at least 50 outlets in the
six months ending August 1976.
The Trade Practices Commission considered that "the group
performs a quasi-jobber function" and saw a potential for
Southern Cross as "a powerful market force in bargaining negotiations
between suppliers".
Ampol has a well developed and indeed over-capitalised
chain of outlets which it owns itself in the Victorian market.
Many of its dealers get no price support at all though some do get a "price matching" type of assistance. The Commission con
siders it very likely that the Ampol chain in Victoria is doing
very little business indeed. It is certainly going to do even less when an additional large number of stations are able to price-cut extensively with Ampol's discounted supply while Ampol dealers pay
full list price and presumably just look on.
The Commission has noted a number of not dissimilar arrangements made by Ampol. Ampol is XL's principal supplier
at discounted prices and in New South Wales Ampol supplies
Ensign Tyres, Target and Sungas. It is not too much to say that Ampol seems to be leading the field in discounting to rival
distribution chains in competition with company, including its
own, outlets.
155
This commercial activity stands in some contrast to its
submission to the Commission. In answer to the question :-
"How may future proliferation of service stations be controlled? Who should make decisions restricting future numbers, and upon what criteria should the decision be made?
- Ampol answered :-
"It will be seen that there is in existence industrial agreement between participants in the oil industry in Australia and at least two State Governments which is aimed at rationalising the retail sector of the industry. Ampol recognises that the activities of the industry in
this sector affect matters of public interest; for example the necessity or desirability of the provision of an outlet; the siting of a proposed outlet; the commercial efficiency of the oil industry to ensure that the public is not asked to bear the burden of financial misplanning; the economic welfare of persons engaged
in the business of selling the retail products and we would add the preservation of substantial Australian participation in the industry.
"Ideally, this balance of reasonable and fair com petitive activities in the interests of the participants in the oil industry on the one hand and the public interest on the other hand should be effected by the industry itself acting responsibly and in consultation with authorities.
"We believe that is precisely what Ampol has put into effect. Unless all companies adhere to this philo sophy, that is of voluntary rationalisation, there will not be economic rationalisation without strong supervisory control.
"Such legislation can be accomplished by:
1. Freezing, at a date, the total numbers of service stations in Australia. This would be a matter of examining individual company statistics and contracts that may have been let by companies to builders for service stations not yet on stream to determine base numbers. 2
2. The introduction of mandatory reduction, company by company, by appropriate site classification. It would be necessary to examine the way each company did business. It is the policy of some companies
to have major sites that are company owned or leased - others rather prefer to limit company ownership
156
and concentrate on third party deals for major sites. The mandatory reduction could be introduced for a period of time (12 months/24 r->nths) to be
reviewed by a Board.
3. The introduction of a system of licensing of service stations.
4. The introduction of a maximum/minimum pricing of products." (Exhibit 38, pp.40-41)
In addition Ampol seems to have evolved a policy of
shedding some of its company-owned sites to these alternative chains.
At p.3366 of the transcript in relation to the proposed
Sungas chain in New South Wales , which was to take over some
Ampol sites, Mr. R.B. Apin, General Manager, Marketing for Ampol was asked :-
"MR. FISHER, Q.C.: Are you picking out, not to put too great a gloss on it, the dog sites? Is this part of an operation to remove at least by one stage from your self the sites that have been basically uneconomic?
"A. I think that answer would be partially true. I am trying to place all the sites that are involved. I can think of a number of them. A number I think I have described as marginal sites. Some might be dog
sites, but they would not be the most productive sites.
"Q. You see, the Victorian pattern at least in part, where you have either concubine companies or companies with marketing arrangements lying between the oil company and the marketing company, fairly often conforms
to the pattern that the site would be a failure if it was owned by a company and suddenly blossoms out as a discount site operated by a dealer. You appreciate that?
"A. Yes.
"Q. Without wishing to equate the two situations, that plan or policy is involved in your thinking, is it?
"A. To some degree but I think I used the word "partial" to describe it. What I would have to do to answer your question fully would be to look at it site by site.
157
"Q. It really goes back to determining whether your true strategy is a true marketing one or a defensive one, and you are putting it as a defensive one, clearly?
"A. That is true.
"Q. In your expressions of policy, the only little difficulty we are having at the moment is, who are you defending yourself against in Sydney?
"A. I do not find that remark quite as funny as some other people here do. I would think we are defending ourselves in terms of some 280 price boards, or 250 price boards that are currently proliferating in the Sydney metropolitan area. To the best of our field knowledge a tremendous amount of discounting is of course going on, which we know is going on and about which your people have made inquiries and found it has happened."
To round out Ampol's expressed view on discounting the Commission cites material in Ampol's submission (Exhibit 225,
pp.2-4) :-
"The principal reason why the price-cutting spread was because most, if not all, Oil Companies faced the situation of either subsidising their dealers to remain competitive and in business or let a large number of them go broke.
"The alternative course - that being of not subsidising - would have meant a substantial loss of market to the Oil Company and would have created severe economic hardship for dealers and their families who went out of business.
* * * * * *
"It should be highlighted that, during the peak of subsidisation we sold at substantial losses in the Melbourne area.
* * * * * *
"Late in 1973 Ampol largely withdrew its price support to dealers in Company-owned sites - with the exception of a few sites in Geelong and Victorian country areas. Ampol took this action for two reasons:
(a) the cost of price support became unbearable.
(b) it considered it could withdraw price support without losing too great a volume of sales."
158
The account Ampol tenders of its own position can
be summed up as follows.
Ampol believes in orderly marketing and rationalisation
by way of disinvestment. It does have however a number of con
tractual arrangements which seem to be expanding by which it
supplies a considerable part of the price-cutting market despite the presence of its own considerable chain. Ampol represents
its conduct as being defensive and points to its trading problems
in Victoria under the impact of price competition in 1973 and 1974.
No party or government has asked the Commission to review
the present indigenous crude allocation system. It seems likely
however that one of the unintended effects of the allocation system in its present form is to place pressure against oil com
panies to ensure that market share is maintained even at high commercial cost in order to maintain access to the much cheaper
indigenous crude and avoid the added cost of laying down any
additional inventory of imported crude. This may be particularly
important for a company which has refining limitations such as Ampol has.
This particular pressure to maintain market share may well explain some of the more unusual manoeuvres in the Victorian and other markets.
159
PART VII
INDIVIDUAL STATE MARKETS TODAY
17. THE NEW SOUTH WALES MARKET
17.1 State Government Initiatives The undesirable features in the Victorian market, which
the Commission has reported on, are found in New South Wales,
though they are not manifested in exactly the same way or to the same extent. This is due in part to historical accident. For
example price-cutting in Victoria was triggered by the ability
of importers of cheap product in 1965 and 1966 to obtain local
bulk storage. This was unavailable in New South Wales. But a
striking contrast is that whilst the Victorian Government has
attempted nothing to remedy the ills of the industry in that State, the New South Wales Government has acted in the areas of
controlling retail margins, investigating trading hours, closing
down service stations and providing a facility for conciliation
between oil companies and dealers. *
17.2 Proliferation of Retail Outlets Following the introduction of solus marketing, New South
Wales, along with all other States, suffered severely in the
1950's and 1960's from the over-building of service stations.
The Service Station Association of New South Wales reports that
160
in 1959 the retail motor trade made a strong case to the New South
Wales Government for licensing of the building of new service station outlets as a means of improving trading conditions,
stabilising motor spirit prices and providing a better service to
the motoring public. Initially the licence proposal was favourably
received but the Government eventually decided not to pursue it
after receiving an undertaking from the oil companies that they
would "rationalise" their building programs. This "rationalisation"
however did not take place. (Exhibit 293, p.10) By 31st
January, 1960 there were 6,886 operative reseller outlets in New
South Wales (Oil and Australia 1962). Although this overall
number, which included single pump sites, did not increase greatly
over the next few years, many new and larger outlets were built
at the same time as smaller ones were closed. By 31st January, 1973 the overall number was still 6,024.
17.3 A Rationalisation Program
In March 1973, the Minister for Labour and Industry
called together representatives of the major oil companies to discuss, among other things, the proliferation of service stations. As a result, the oil companies subsequently agreed to
implement a "rationalisation" program to reduce the number of service stations in New South Wales. The expressed objective
of the scheme was to contribute to the efficiency of distribu
tion resources and assist dealers to achieve or maintain
reasonable financial returns. The scheme was outlined by the New South Wales Department of Labour and Industry in a submission
to the Commission dated 23rd May, 1975 (Exhibit 291, p .2) as
follows :-
"4. Basically the first stage of the program was designed to achieve a reduction of 10% within the twelve months ended 30th June, 1974, which represented a closure of some 600 reseller outlets. Details of
the program are set out hereunder :-(a) Ampol, B.P., Caltex, Esso, Mobil, Sleigh, Shell closure of 7^% of company-owned outlets in metropolitan
161
"New South Wales
7%% of company-owned outlets in country New South Wales
12%% of dealer-owned outlets in metropolitan New South Wales 12%% of dealer-owned outlets in country New South Wales
where metropolitan New South Wales is defined as Sydney, Newcastle and Wollongong.
in the period from 1st July, 1973 to 30th June, 1974. The base figure against which the reduction applied was the number of service stations supplied by the company in New South Wales on 1st January, 1973.
(b) Total
3.3/4% of company-owned outlets in metropolitan New South Wales 3.3/4% of company-owned outlets in country New South Wales
6%% of dealer-owned outlets in metropolitan New South Wales 6%% of dealer-owned outlets in country New South Wales
(c) Amoco No increase in numbers in any category between 1st January, 1973 and 30th June, 1975.
"It was agreed that the Department of Labour and Industry should monitor the scheme and to this end the oil companies provided the following information:-(i) Lists by individual companies of company
branded or supplied outlets as at 1st January, 1973 .
(ii) On 1st November, 1973 and on a quarterly basis thereafter the addresses of outlets which have been closed in the previous period.
"This data was made available to all the companies concerned.
"5. The industry met its closure targets at the end of June, 1974 and at a further meeting with the Minister in September 1974 the companies agreed to continue the rationalisation scheme on the following basis :-
162
"During the year ended 30th June, 1975 each company was to reduce service station numbers by the following percentages of the outlets supplied as at 1st January, 1973 :-
Companies other than Total Australia Limited and Amoco Australia Pty. Limited â
3% of company-owned outlets in New South Wales
3% of dealer-owned outlets in New South Wales
Total Australia Limited
Half the foregoing percentages
Amoco Australia Pty. Limited
The company was to freeze until 30th June, 1975 the number of service stations supplied as at 1st January , 1973 ."
The rationalisation scheme was abandoned on 31st December, 1974 when the oil companies withdrew from all arrangements and understandings which had been made under the plan because, so they
said, of the impending introduction on 1st February, 1975 of
certain provisions of the Trade Practices Act, 1974.
17.4 Did Rationalisation Succeed?
In terms of the number of service stations closed, the
scheme had achieved its numerical objective. As at 30th June,
1974 the number of operative reseller outlets was reduced to 5,435.
However, the scheme at its best only touched the surface of the problem. The agreed percentage of closures represented the
maximum to which the most conservative company would agree. The remaining companies were not willing to commit themselves further
unilaterally. Additionally the stations closed under the scheme
were small gallonage uneconomic outlets which the companies them selves must have closed sooner or later. Redistribution of gallonage (the only true means of measuring the success of such
a scheme) was small. The Service Station Association of New
South Wales expressed the view that :-
"the actual stations closed under the scheme to date represent only marginal outlets in the oil companies' networks and the gallonage benefit to the remaining
163
"outlets would be less than one half of 1%. It is obvious that these sites would have been closed by the oil companies during the year in accordance with their policy of disposing of outlets which fail to meet their standards of petrol throughput and profitability. The retail trade strongly objects to the "rationalisation" scheme being cited as the answer to the problems of service station operators."
(Exhibit 293, p.11)
Mr. T.E. Young, Esso's Marketing Manager gave evidence
about the difficulties involved in the scheme. He stated that
companies agreed to the scheme because :-
"everybody had a basis for disinvestment which said that at the end of one year they would have 12%% less dealer-owned outlets than at the beginning of the year. This meant that if another supplier took over the dealer- owned site from which we had withdrawn supply he then had another penalty; he had to find another one to disinvest."
Mr. Young agreed that redistribution of gallonage was essential
to rationalisation and little was achieved in this regard by
closing down very small sites of which there are a considerable
number, but "you have to start somewhere". (Transcript, pp.
3146-3147)
It was put to Mr. Young that the 12%% reduction of dealer-owned sites was not going to have any effect on gallonage
and that one would need to get up to 60% to have any significant
effect. Mr. Young replied :-
"I have made the same point to Mr. Hewitt at the time, but that is what the New South Wales Government found acceptable at this point. I agree that greater disinvestment would be desirable but it is not my scheme, it is Mr. Hewitt's. ... In discussions with Mr. Hewitt I advocated higher levels of disin vestment." (Transcript, p.3146)
Mr. Young also agreed that the New South Wales closure
ratios (12%% for dealer-owned sites, 7%% for company-
owned) suggest a quite unequal reduction in the amount of gallonage when comparing privately-owned outlets with company-164
owned outlets - "the ratio should have been the other way
around". (Transcript, pp.3147-3148)
Mr. A.J. Parker, Vice-President of the Service Station Association of New South Wales commented (Transcript, p.3894) :-
"... 3% would have to my knowledge only constituted a very minor number of sites in the industry and certainly again, as we had emphasised with the original 10%, would not be effective and certainly would not throw
a lot of gallons back on the market.
"We see a major problem here, and we have discussed it at length and it is a natural one, that if there are five sites in an area all trading unprofitably any company would be loath to be first out, they would all
like to be the last one in. That is our feeling as to how or why they would not operate or work successfully."
Mr. D.F. Holstock, Executive Director, Motor Traders' Association of New South Wales commented (Transcript, p.3830):-
"... there appeared a tendency, which we said we did not favour, to close sites on the basis that part of the agreement was that they would only open up a new site if they closed one, and therefore we got to the
stage where we found, for instance, that people who were very small in business - what I think would in some cases come into the Category the Commission has learned to call non-sites - were in fact closed and
others were being opened. What I am pointing out is I do not believe there was any attempt made to do other than close retail outlets. Certainly no cognizance given to the likelihood that there would be an equalisa
tion, for instance. "
"... I do not really think there was any govern ment supervision at all once the agreement had been reached in the first instance. I think it was quite clearly a voluntary scheme from the oil companies' point
of view taken after the Minister had drawn their attention to the problems within the industry and the obvious need for a rationalisation scheme, but I do not think that the government itself tried to supervise in
the sense that there was no consultation upon which sites would be closed." (Transcript, p.3831)
165
By recording these comments, the Commission is not
criticising the New South Wales Government. Only South Australia
and New South Wales have attempted programs to require companies
to close stations. Their failure to achieve a meaningful result
was due to the constraints placed on closures by at least some
of the companies, and the inherent improbability of successfully carrying out such a scheme at a local rather than a national
level.
Any administrative scheme to succeed must be reinforced
by economic and market pressures.
17.5 Price Control in New South Wales
Legislation for the control of prices in New South
Wales is provided under the Prices Regulation Act enacted in
1948. In accordance with the administrative policy written into
the Act, price control was, after the enactment, progressively
reduced. Petroleum products were suspended from price control
in April 1955. The reseller margin, however, was re-controlled
in May 1959. Under price control the reseller margin has always
been set by the New South Wales Prices Commissioner as a fixed
monetary amount. The current reseller margin has since 10th
February, 1976 been fixed at 11.8 cents a gallon for both grades
of motor spirit.
Applications for a variation in the reseller margin are
made jointly by the Service Station Association of New South
Wales and the Motor Traders' Association of New South Wales.
The variations granted have been restricted to the recovery of additional costs with approved increases added to the margins
which existed at the time of re-control. Several applications
have been refused. It appears that the view has been taken that the marketing of motor spirit is a growth industry which
should be able to absorb some of the cost increases which it
incurs.
166
It has been the custom for determinations by the Prices
Commissioner in South Australia on the wholesale price of motor
spirit to be applied uniformly by the oil industry in the other
States. Notwithstanding this practice, a supervisory oversight
was maintained on wholesale motor spirit prices by the New South
Wales Prices Branch. Since its creation, the Prices Justifica tion Tribunal has, however, been recognised as the authority for
determining wholesale prices for motor spirit in New South Wales. (Exhibit 292 - Submission by the New South Wales Department of Labour and Industry)
17.6 Price War in New South Wales
New South Wales has in recent years experienced price
cutting wars, although not to the same extent as Victoria. XL and I.O.C., two of the pioneers of the Victorian price war,
began operating in New South Wales in the late 1960's and price
cutting occurred around those sites in the Sydney metropolitan
area. At first it did not become widespread. The Service
Station Association of New South Wales claims to have been
successful in urging its dealers not to join the discount war.
(Exhibit 293, p.4) In 1975, however, discounting in New South
Wales reached a new high, particularly in the Sydney metropolitan
area. Photographic surveys of discount areas in Sydney conducted
by the Commission in conjunction with the Service Station Association of New South Wales revealed widespread discount
activity particularly in the southern and western suburbs of Sydney. The Commission saw price boards offering up to 8 cents a gallon discount. (Exhibit 295A to 295F)
In the Ryde area, 20 out of 35 sites and, along the Hume Highway from Enfield to Liverpool 31 out of 57 sites, were
displaying discount signs when inspected in July 1975. Immed iately before the price war came to an abrupt end in August 1975, it was estimated that well over 200 service stations in the
Sydney metropolitan area were offering discounts.
167
The reseller associations in New South Wales consider
that the main cause of the escalation in discounting in 1975
was the enactment in 1974 of the Business Franchise Licence
(Petroleum) Act 1974. This Act provided that on and after 2nd
March, 1975 a person should not carry on the business of selling
petroleum products unless he was the holder of a licence in
respect of a specified place of business. So far as service
station proprietors were concerned, the licence fee, in addition
to a fixed amount, was originally assessed at the rate of 5.3
cents a gallon on the quantity of petroleum products sold by
the licensee during the period of one year ended on the 30th
June that last preceded the date on and from which the licence
was to be in force. The Act provided that licences were in force
on and from the date of commencement until the first day of March
next following that date. The Act also provided for the licence
fees to be paid quarterly in advance. So as to enable service station proprietors to pay the first quarterly instalment due on
2nd March, 1975, an increase of 5.3 cents a gallon in the dealer's
retail margin was granted from 1st December, 1974 (Prices
Regulation Order No. 718). The licence fee was increased from 2nd March, 1976 to 9.6 cents a gallon. Again, in order to
provide for this, the retail margin was increased as from 1st
December, 1975 (Prices Regulation No, 736).
One consequence of the assessment being based on the period ended 30th June last preceding the date from which the
licence ran was that the service station proprietor who could
increase his gallonage, would not be liable to account for this
increase in terms of his licence fee until as much as 18 months
later. Since the licence was personal to him there was an incentive to increase gallonage by discounting the amount of the allowance for the licence fee and then vacating the site
before the licence was due for renewal. The legislation ceased
to operate from 1st April, 1976.
168
The relationship between this Act and the upsurge in discounting was outlined by the Service Station Association of
New South Wales in Exhibit 293, p.2
"If a service station operator starts discounting he may greatly increase his turnover compared with the year on which his liability is being assessed. However, he will only be paying the fee on the amount of sales made in the base year. In the meantime, on the increased
turnover he is collecting an additional 5.3 cents on each gallon. If he vacates his site prior to the next assessment date, he will be able to leave the business with additional profit still in his hands and it will be
up to the incoming proprietor to pay the licence fee based on the increased gallonage. In our view certain operators are taking advantage of this additional profit which is available in order to discount the price of
petrol and thus increase turnover. This forces adjoining operators to compete against their will or be forced to trade unprofitably."
The Motor Traders' Association of New South Wales
commented in Exhibit 294, p .2 :-
"Service station operators who plan ahead can make considerable sums of money by manipulation of the licence fee arrangements for their own benefits. Service station operators who display discount boards of approximately 6 cents a gallon whereas they collect
5.3 cents a gallon from the public for each gallon of petrol sold would allow the operator with fore-thought to continue to pay tax at the retrospective base of twelve months and therefore enable a profit provided that
the gallonage at discount rates increases.
"There is no doubt that such gallonage sold with discount will increase up to five fold if the discount station is not shadowed by its immediate neighbours at the similar rate of discount."
This is, in the Commission's judgement, the source of the effective "break" in prices which precipitated a "price war" situation in a market which had a substantial potentiality for
price cutting due to excessive retail and wholesale margins.
169
The "price war" on the Victorian pattern in Sydney came
to an abrupt end in August 1975 when the Transport Workers'
Union of Australia (New South Wales Branch) imposed a ban on
deliveries of motor spirit to service stations displaying discount
signs on the ground that the development of a price war situation
would threaten the employment of union members by forcing the
closure of many service stations. Some operators tried to
circumvent the ban by more subtle forms of discount advertising
(for example, signs displaying the word "Yes" or "Open 1_ days a
week") but this too was blocked by the T.W.U. move. As a result
open price cutting in New South Wales has now stopped, although
under the canopy discounting at some sites is obviously contin
uing. Recent press reports however indicated that the lifting
of the T.W.U. ban mav be imminent. No government or party has asked the Commission to investigate the nature of these bans
and consequently the Commission does not comment on their
propriety or origin. They have however clearly meant dearer
motor spirit for the New South Wales motorist and represent an
undesirable method of determining price levels.
17.7 Trading Hours
In New South Wales until 1970 trading hours of service
stations were restricted by the Factories, Shops and Industries Act. In 1970 however, following upon the findings of the 1969
Report of Mr. Justice Cook, Section 90A was inserted into the
Act. This Section provides that service stations may remain
open at any time, but that dealers cannot be required by any lease or other agreement to remain open outside prescribed hours,
which are 7.00 a.m. to 6.30 p.m. Monday to Saturday and 7.00 a.m.
to 1.00 p.m. on Sundays and public holidays, but do not include
any part of Christmas Day, Good Friday or Anzac Day.
New South Wales has never applied the roster system of
service station trading. Proposals for rostering were considered and rejected by Mr. Justice Cook in his Report. Support for such
a system at that time was small. (Exhibit 222, pp.57-63) There
is at present in New South Wales no noticeable agitation for such
170
a system although reseller associations have no objections to
rostering in principle. Mr. D.F. Holstock, Executive Director
of the Motor Traders' Association of New South Wales stated that
his members were generally satisfied with the trading hours
implemented as a result of the Cook Report, (Transcript, p.3837)
but the Association would be prepared to consider a rostering
system if there was a proper government authority to administer
it. The present policy of the Association is that operators have the right to open when they regard it as economical to do so.
(Transcript, pp.3860-3861) The Service Station Association of
New South Wales is in favour of rostering and has suggested a
system to be adopted. (Exhibit 293, letter to the Commission
dated 5th August, 1975) Mr.A.J. Parker, Vice-President of the
Service Station Association of New South Wales confirmed the
Association's support for rostering and stated that he was
certain that rostered stations could adequately handle weekend
trade in Sydney. (Transcript, p.3884)
The Commission considers that reduced hours of trading
can produce economies in service station operation which benefit the public by reducing cost. Adequate service to the public can
be maintained as has been done in Western Australia.
17.8 Effects of Multi-tiered Price Structure
The Service Station Association of New South Wales
stated :-
"Various other consumers have been and continue to be supplied with petrol by the major oil companies at prices more favourable than prices at which petrol is supplied to company-owned or leased service station
sites." (Exhibit 293, p.2)
"We can quote innumerable examples of industrial accounts, taxi outlets, etc., that purchase at much lower price than the average reseller and who in turn pass this on to employees, employees' friends and
employees' friend of friends in the form of discounts. This has led to instability and unprofitability of retailing in many areas. The country areas particularly have been affected by retailing of motor spirit through
country depots." (Exhibit 293, p .17)
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In New South Wales, no legislative action has been taken
to curb retail sales from industrial and depot pumps, but the
companies have agreed to implement policies aimed at reducing
the incidence of these problems.
"Industrial Pumps
10. The oil industry has agreed to implement a program of reducing industrial pumps in line with the following principles -(a) No new installations of motor gasolene pumps
at customer's premises if the monthly usage of motor gasolene to be dispensed from that pump is less than 1,500 gallons.
(b) The withdrawal of petrol pumps dispensing less than 750 gallons a month from industrial locations, as permitted by contractual relations with customers, and where no other bulk fuels
are supplied by the company to the customer.
"Depot Trading
11. The oil companies have adopted the following policy in regard to the operation of country depots -(a) Country depots to be permitted to supply
(i) petrol for their own use;
(ii) petrol for Government vehicles purchased on Government order;
and
(iii) petrol under contracted commercial accounts and confined to tray tops and articulated vehicles but excluding cars, utilities, station sedans and vans.
(b) Computers if existing to be removed progres sively and a sign "Petrol not Available to the General Public" to be exhibited at the depots." (Exhibit 291, Submission by New South Wales Department of Labour and Industry, pp.4-5)
17.9 New South Wales Petrol Resellers Committee Following representations from organisations representing
motor spirit resellers, the Minister for Labour and Industry
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obtained the agreement of the companies and motor spirit
resellers to establish a Petrol Resellers Committee.
The Committee was established in November 1974 to conciliate in disputes between individual oil companies and individual
motor spirit resellers.
Details of the constitution and terms of reference of the Committee are as follows :-
" (i) (a) The Committee shall consist of three members.
(b) Of the members of the Committee -(i) one shall be the Director of Administration and Co-ordination of the Department of Labour and Industry who shall also be
Chairman of the Committee,
(ii) one shall represent the oil company concerned in the dispute,
(iii) one shall be the reseller or a representative of the reseller, who shall be an official of the Service Station Association of New South Wales or the Motor Traders' Association of New South Wales.
" Cii) The Committee shall have power to conciliate only and shall not be vested with any arbitral authority.
"(iii) The Commitee shall not hear a dispute unless the parties have first attempted to resolve it between themselves.
"(iv) The Committee shall have power to conciliate only in those disputes involving an individual oil company and an individual reseller.
" (v) The Committee shall not have power to hear dis putes relating to financial arrangements between oil companies and resellers, except in special cir cumstances as determined by the Chairman."
(Exhibit 291, pp.6-7)
173
Since the formation of the Petrol Resellers Committee
no reseller has taken a dispute before the Committee. In fact,
to the present time it has never sat. The reseller associations
in New South Wales have expressed disappointment at the Committee's
limited terms of reference. Both the Service Station Association
and the Motor Traders' Association have pressed for the estab
lishment of a tribunal similar to the one recommended in the
Cook Report with power to make determinations on all matters in
dispute concerning service station leases. They consider that
the Petrol Resellers Committee· falls far short of this in that its powers are conciliatory only, it cannot hear disputes involving
rent or of a "commercial" nature and cannot hear a dispute unless
the parties have attempted to resolve it themselves.
Unfortunately the leases and licences (if any) govern
ing the dealer's tenure are subject to all the disabilities
described in 11.3 to 11.5 - namely that a dealer can be dis
possessed at any time for any one of many reasons. Until
dealers have some real security of tenure, or put another way,
some real independence it is unlikely that admirable schemes such
as the present one in New South Wales will really work.
17.10 COMMISSION'S OBSERVATIONS ON MARKETING IN NEW SOUTH WALES In New South Wales governments of all parties have
recognised the need for administrative intervention in this
industry. The interventions have been aimed at problems that
the Commission can identify as being present in the industry in
all the Australian markets.
Despite this intervention, there are in New South
Wales too many service stations and there is no program to reduce the numbers; the price of motor spirit is still too high
and there are still dealers operating over long hours for poor returns. In short, all the problems remain. This suggests that
real solutions have yet to be found.
174
The 1975 average throughput for all New South Wales
retail outlets was only 12,300 gallons a month and company-owned
service stations 20,700 gallons a month. These averages are far
too low. The economies of scale which would benefit
both dealers and the community if the station throughputs
were lifted to an average of 35,000 gallons a month are described
later in this Report. (28.7, 30.6)
The fear that industry rationalisation is impeded by a
Federal Act of Parliament demonstrates the"need for coherent
national policy rather than competing State and Federal policies.
Price control is ineffective if it has to take account of the
needs of dealers on uneconomic sites, as this leads to a high retail margin which keeps uneconomic sites going only at the
expense of excessive charges at the high gallonage sites.
A dealer is unlikely to resort to conciliation if he
fears he can legally be evicted for the slightest breach of the
licence under which he occupies.
A study of the New South Wales market leads inevitably
to the conclusion that reform of the industry requires reassess ment of its general nationwide structure rather than piecemeal attempts to control local manifestations.
18. THE WESTERN AUSTRALIAN MARKET 18.1 Characteristics
The Western Australian market is isolated from other
Australian markets and, in the area south of Carnarvon, is served
almost entirely from the B.P. refinery at Kwinana, south of Fremantle. Some product is shipped into areas in the northern
part of the State from Singapore.
The motor spirit market in Western Australia has several
striking features. There has, until recently, been no significant price-cutting, despite high margins and a proliferation of out lets. This is in part due to the presence of a strong dealer
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organisation in the Western Australian Automobile Chamber of
Commerce, which has maintained a policy against price-cutting.
Since 1963 a rostering system, organised by the Western Australian
Automobile Chamber of Commerce and backed by State Government legislation has been operating in Western Australia.
18.2 Historical Background
In January 1956 , the Western Australian Government
appointed an Honorary Royal Commission to inquire into matters
relating to the Retailing of Motor Spirits and Accessories. The
report of the Honorary Royal Commission was published in 1956 and
is in evidence. The Commission has referred extensively to this
report. Mr. W.F. Harry, in 1956 the Secretary and now the
Executive Director of the W.A.A.C.C., gave evidence both before
the Honorary Royal Commission and this Commission. His evidence
was quoted in the report in support of several findings. Many
of the recommendations of the Honorary Royal Commission are
appropriate today as recommendations for the reform of the industry
throughout Australia. The recommendations were expressed with reference to a proposed new legislative Bill. Some of them are
summarised as follows :-
"Recommendation 1:
That in the said Bill a clause be inserted to provide for the appointment of a responsible person as a control authority ...
"Recommendation 2 : That in the said Bill a clause be inserted to provide that as from the coming into operation of the Act no wholesaler or retailer, as defined in the said Bill, shall
carry on business in the metropolitan area in Western Australia without his obtaining a certificate or regis tration from the control authority.
"Recommendation 5: That in the said Bill a clause be inserted to provide for the issue of certificates of registration to all service stations built, or commenced to be built, on or before 31st July, 1956, and to all non-trade sites,
industrial pumps and drum depots existing or installed as at that date.
176
"Recommendation 11; That in the said Bill a clause be inserted to provide that all wholesalers and retailers shall furnish to the control authority such statistical information as may
from time to time be required, and that such collated information on an industry basis be made available upon application ...
"Recommendation 12: That in the said Bill a clause be inserted to provide that no certificate of registration shall issue for any service station site on which a service station is erected or about to be erected unless and until such
time as the operator has been granted a lease for a minimum of three years ..."
The Honorary Royal Commission also proposed that
maximum permissible trading hours be established.
Except for the introduction of limited trading hours
and a rostering system, the Western Australian Government did
not implement the recommendations of the Honorary Royal Commission.
Mr. W.F. Harry gave evidence as follows (Transcript,
pp.3729-3730) :-
"... shortly after the Western Australian Royal Commission, we negotiated with the oil industry and achieved what I think could be called a freeze on service station building for 2h years. But how fruit
less that type of negotiation was is seen by the fact the overbuilding scene in Perth is just as bad as it is anywhere else in Australia and that is because the moment the freeze was lifted the companies went in and
established service stations at an increased tempo: so that the net effect of the 2\ years cessation of building really did not achieve anything."
In December 1975 there were 1,488 reseller outlets in
Western Australia. Of these, 74% were company-owned in the
metropolitan area and 26% dealer-owned. In the country, 21%
were company-owned and 79% dealer-owned.
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The Commission visited Western Australia in November
1975 and found that the general layout and appearance of service
stations in the Perth metropolitan area was good. So far as
could be observed, the standard of dealer-owned service stations
generally approached the standard of company-owned stations.
18.3 Rostering
The rostering system operates pursuant to the Factories
and Shops Act 1963, Section 92, and defines ordinary trading
hours as being from 7.00 a.m. to 7.00 p.m. on weekdays and 7.00
a.m. to 1.00 p.m. on Saturdays and all other hours as being
extraordinary trading hours. Within prescribed zones, which
include the Perth metropolitan area and several provincial
cities, all stations except rostered stations must be closed during extraordinary trading hours. The roster system is extended
to larger provincial cities at the request of the local service
station proprietors. Rostered stations trade during weekdays
from 7.00 p.m. to midnight and on weekends from 1.00 p.m. to
midnight on Saturdays and 7.00 a.m. to midnight on Sundays. In
addition, within Perth, there is one service station rostered to
remain open from midnight to 7.00 a.m. every night of the week. This station is permitted to charge a premium of 2 cents a gallon
for motor spirit. Outside the prescribed zones, trading hours
are not restricted. The W.A.A.C.C. is responsible for preparing
the roster and submitting it to the Department of Labour and Industry .for approval by the Minister.
This contrasts with the rostering system in Queensland where the
roster is wholly prepared and administered by the Department of
Labour and Industry.
Discussions the Commission has had with the dealer representatives, dealers on their sites and officers of various
companies indicate that the industry in Western Australia is
strongly in favour of the rostering system. From the dealers'
point of view it has reduced costs, brought stability to the
market, greatly improved his lifestyle and enabled him, when rostered to trade at weekends, to trade very profitably.
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Ninety percent of service stations in the prescribed areas
participate in the scheme. Participation is not compulsory.
18.4 Supply Companies
Of the nine major marketers trading in Australia, seven
only trade in Western Australia. The two companies absent are Amoco and Total.
At the time of the Commission's visit to Western Australia in November 1975, the market appeared to be fairly stable. B.P.
representatives were of the opinion that the restrictions on
trading hours and local government control of service station building have resulted in profitable business for service station
operators as a whole. Lessee dealer turnover is low.
18.5 Price-Cutting
In November 1975 price-cutting was beginning to appear in
some country and provincial areas, particularly Albany. The
existence of high margins, comparable to those in the rest of Australia suggested that the market was ripe for price-cutting.
To some extent its appearance was inhibited by the fact, according
to B.P., that the maximum discount available to owner dealers is
only 2.5 cents a gallon. Thus the owner dealer has, when compared
with say his Victorian counterpart, a comparatively small margin within which to discount. In fact of course he is, as in other States, subsidising the lessees of company-owned sites. (13.6)
In a submission made to the Commission, the State Energy
Commission of Western Australia stated that :-
"The Victorian price war has drawn attention to the possibility that motor spirit prices may be excessive."
From information currently available to the Commission, it appears that price-cutting is growing in Western Australia.
Since February 1976 in the Albany area nearly 20 outlets have
been offering up to 11 cents a gallon discount.
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The Commission considers that it is only a matter of
time before this spreads and, if steps are not taken to reform
the pricing system, it will result in a full scale price war in
the Perth metropolitan area.
18.6 Disinvestment
In its submission (Exhibit 437, pp.15 and 29), the
State Energy Commission of Western Australia refers to the fact
that there is no disinvestment scheme operative in Western
Australia and says
"The reasons for this are ... fear of losing a
degree of market share in a fiercely competitive market place and because of the unusually high original prices paid for the sites, it is not economically viable to dispose of sites unless a large portion of the original capital outlay is recouped. ... Hitherto, service stations which have not succeeded in attracting sufficient customers were protected to a degree by retail price setting mechanisms which averaged the costs and throughputs. This practice may have saved some marginal operators but at the same time it enhanced the profitability of high throughput stations. With the present system of retailing petrol, outlets' economic viability cannot be divorced from car servicing and associated sales activities."
The A.A.C.C. informed the Commission that
"In regard to service station numerical development no rationalisation plans exist in Western Australia .. the continued expansion of the already overbuilt market in the metropolitan area of Perth is indicative of the need for legislative control and also shows that local government and town planning controls are of little or no effect." (A.A.C.C. Submission, Exhibit 296)
Mr. W.F. Harry told the Commission that
"Probably we could get by with one-fifth, one- quarter, one-half of the number of service stations but they are there now and I think we have to apply a more rational approach to rationalisation."
(Transcript, p.3810)
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In Western Australia there has been an attempt to control
the building of service stations by giving local government
authorities power by by-law to take into account the need for
service stations in their locality. This has apparently been unsuccessful.
18.7 THE COMMISSION'S OBSERVATIONS OF THE WESTERN AUSTRALIAN MARKET
Western Australia typifies a market currently stable, satisfactory to both the motor spirit wholesale and retail
industry but expensive, in terms of motor spirit prices to the community.
Not far beneath the surface are powerful forces likely to
contribute to instability, such as service station proliferation
coupled with .high wholesale and retail margins. A price war situation will inevitably develop in Western Australia if present
parameters are maintained. In these areas in this State, as in
other States, there is need for reform under the control and
guidance of an administrative authority.
On the other hand, a successful rostering system has been introduced which has benefited both the industry and the
community. While the Commission does not wish it to be inferred that any other State could "pick up" the Western Australian rostering system and uncritically transfer it, nevertheless the
rostering system contains features well worth emulating in other
States.
19. THE SOUTH AUSTRALIAN MARKET
19.1 General Background The South Australian Government, of all Australian
Governments, has the longest and most comprehensive history of interaction with this part of the oil industry.
From the discontinuance of price control by the Commonwealth in 1948 and until the constitution of the Prices
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Justification Tribunal in 1974, the South Australian Prices
Commission maintained a system for controlling the price of a
number of petroleum products, including motor spirit. The methods
adopted and the effect of this price control on the industry in
Australia are described in the Report when the Commission comes
to deal with price control generally. (32.1 to 32.7)
The need for rationalisation of service stations has
been recognised at parliamentary level in South Australia for
many years. In 1954 Mr. Don Dunstan introduced a Private Members
Bill into the South Australian Legislature which proposed restric
tions on the proliferation of service stations. During that year
the distributing companies in South Australia undertook to limit
the construction of new sites but this agreement soon broke down,
it is said, because of competitive pressures. Thereafter, the
matter remained unattended on a State basis for nearly 16 years.
19.2 Legislative Innovations in South Australia
In August 1970 in response to representations by the South Australian Government, the companies undertook, inter alia,
that no further new outlets, either company-owned or dealer-
owned, would be opened in the Adelaide metropolitan free delivery
area (housing tuust areas included) from 1st January, 1969 with out closing a company-owned site. The undertaking was to operate
for a minimum of three years, commencing 1st August, 1970. There after, it was to remain evergreen but subject to reviews and
twelve months' written notice of termination. Amoco and Esso
outlets opened after 1st January, 1969 were excluded from the arrangement. Esso was permitted to establish one company-owned
site per annum, without penalty, to a maximum of three sites. (Appendix C to Appendix C A.A.C.C. Submission, Exhibit 48.
See also page 11 of the Submission) Other undertakings dealt with the installation of industrial pumps, sales through depot
pumps and the establishment of a "petrol marketing committee"
to ensure compliance.
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Following the report of an interdepartmental committee
set up by the South Australian Government after the refinery strike
in July and August 1972, the Premier announced new arrangements
dealing with relations between service station proprietors and
the oil industry. These included the establishment of an Arbitration
and Fair Practices Committee to provide every new dealer with
certain basic rights. The Premier indicated that the Government would require a controlled reduction in the number of service
station outlets in South Australia in order to improve the gallon-
age of the average dealer and to phase out uneconomic marketing practices. .
Because of the entry of I.O.C. into the South Australian
market place, oil companies did not proceed with the controlled reduction in the number of service stations. In March 1973
legislation was drafted to give effect to proposals to control
motor spirit retailing in South Australia. In the face of these
impending legislative controls, all oil companies indicated to
the Government that they were in a position to agree on voluntary
arrangements. On 27th July, 1973 the Government advised of the criteria for acceptance by it of the proposed voluntary retail
outlet disinvestment scheme to be submitted to the South Australian
Government by the oil industry. It also advised that Parliament would pass the proposed control legislation but that it would not
be proclaimed while agreement on the voluntary arrangements con tinued. The Motor Fuel Distribution Act was passed through
Parliament in November 1973. Following a further strike by refinery workers in October and November 1973, which resulted in
severe hardship to retailers, the Premier advised a deputation of motor spirit retailers that the Government would proceed with the enactment of the Motor Fuel Distribution Act. This was proclaimed on 1st July, 1974.
The 1973 undertaking given by the oil companies involved
an agreement whereby basically all oil companies, except I.O.C. and Amoco, for which special dispensation was given, would close
10% of the number of motor spirit retail outlets in existence
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at 1st January, 1973. With the overall reduction, there was to
be a 10% reduction of the company-owned outlets within the metro
politan area also as at 1st January, 19 73. (Exhibit 320 , Retail
Marketing of Motor Fuel in South Australia, p .8) In the course
of the 18 month period, terminating on 30th June, 1974, the
number of motor spirit outlets was reduced by 235 from 2,034 to
1,799.
At a further meeting of oil company representatives
called by the Department of Labour and Industry on 23rd September,
1974 agreement was reached for an additional 5% reduction in the
number of outlets in the twelve months period commencing 1st
October, 1974. The 5% closure was calculated under two categories
(company controlled outlets and others) in both metropolitan and
country areas, and was based on the number of operational outlets
as at 30th June, 1974. Credits were allowed for closures and
penalties imposed for re-opening after that date. An allowance
was made for over-closures achieved during the original scheme.
For the industry as a whole in South Australia under
the scheme which terminated on 30th September, 1975 , target closures of 70 outlets, 28 company controlled and 42 dealer-owned,
Were achieved. The South Australian Government has not pressed
for further closures since that date. Some outlets closed by
the major companies have been re-opened by operators not parties
to the scheme. Similar actions have been reported in New South
Wales. Undoubtedly a disinvestment scheme needs to be designed
so that closed sites cannot be re-opened. The answer lies in licensing, with the cancellation of licences upon closure of a
station under the scheme.
19.3 South Australian Licensing System The basic purpose of the Motor Distribution Act 1973 was to retain the status quo at 1st January, 1973. This was to
be done first by granting licences or permits in respect of all premises from which the retail sale of motor spirit to the public generally had been carried on during and continuously from
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December 1972 to the date upon which applications for licences
or permits were received, and second, to prevent any subsequent
proliferation of retail outlets of motor spirit, by requiring
the Motor Fuel Licensing Board when considering applications for
licences or permits for new retail outlets, to have regard to
certain criteria relating, inter alia, to the suitability of
premises, the number of existing retail outlets already holding
licences or permits, facilities for the repair and maintenance
of motor vehicles, the interests of retail customers and the extent
to which fair and reasonable competition within the retail motor
spirit industry would be affected.
19.4 Trading Hours in South Australia
Section 221(1) of the Industrial Code Amendment Act 1970 prescribes closing times for all shops, a word defined as
including service stations, at 5.30 p.m. on weekdays and 12.30 p.m.
on Saturdays. The Section does not apply in respect of public holidays. Section 222(2) requires all shops to be kept closed on
Sundays and public holidays. However Section 226(1) provides that
the Minister may, upon the application of a service station proprietor, grant a licence permitting him to sell motor spirit
and lubricants spare parts and accessories for motor vehicles
on any day after closing time and on Sundays and public holidays.
Regulation 55(2) of the Regulations under the Industrial Code
provides that such a licence may be granted within an area
broadly describing the inner metropolitan area of Adelaide, until
6.00 p.m. on Mondays to Fridays (not being public holidays), until 2.00 p.m. on Saturdays (not being public holidays) and until
1.00 p.m. on public holidays (other than Christmas Day, Good
Friday and Anzac Day). Accordingly, within inner Adelaide, service stations are closed after 6.00 p.m. on weekdays, 2.00 p.m. on Saturdays and all day Sunday. However, licences granted in respect of service stations outside these areas, may permit the sales of
motor spirit and lubricants, spare parts and accessories for a motor vehicle at any time. Within the restricted area a cooperat ive company known as the South Australian Petrol Resellers Cooperative Limited has a franchise to instal and operate self
185
service coin-operated pumps at 21 locations during the normal
hours of closing.
One consequence of these restrictions on trading hours is
that on the fringe of the controlled hours zone, large numbers of
service stations, open for long hours and until recently discoun
ting heavily, flourished. The '(golden mile" at Darlington is '
notorious. Nine service stations sit side by side on either side
of the road competing for custom. Indicative of the market chaos
is the presence of a Shell station abutting a station trading
under the name of the Shell subsidiary - Neptune.
19.5 Price-Cutting in South Australia
Price-cutting has occurred in the motor spirit market
in South Australia intermittently over a number of years.
In 1973, I.O.C. commenced to trade in the South Australian market.
It obtained its supplies of motor spirit from Mobil at a price
about 5 cents below wholesale list price. In the market, service stations supplied by I.O.C. were able to reduce their retail
price by 5 cents a gallon with a resultant lift in the level of price-cutting as retaliatory action was taken by other companies.
At about the same time Mobil took over and operated six
major service stations within the Adelaide metropolitan area through its wholly owned subsidiary, Euphoric Pty. Limited. Price cuts of 5 cents were freely available at these locations. In
addition, Mobil supplied a number of outlets operated by Scotts
Transport Industries, which also discounted. Most oil companies
were also operating through taxi company service stations. These
taxi companies retailed to the public at reduced prices. Shell supplied Black and White and St. Georges- Ampol - St. James, Varneys and Glenelg Radio Cabs; Amoco - Yellow Cabs; Mobil -
United and Centrals; B.P. - Suburban Taxis and Esso - Enfield Taxis.
186
On 6th November, 1973 the South Australian Automobile
Chamber of Commerce wrote to the Premier of South Australia
expressing its extreme concern at what it described as the
escalation of price discrimination at the wholesale level which
had occurred over recent months.
It is unnecessary to go in great detail into price
cutting in South Australia. As in Victoria, the basic causes
are to be found in excessive wholesale and retail margins
in turn brought on by high margins necessary to support excessive
numbers of service stations. The causes and remedies for such
problems in South Australia are the same as for the rest of
the Australian market. However, anyone who doubts that the
industry needs reform or is unaware of the absurd ugliness
that can be brought about by excessive service stations in a small area striving to compete for a limited market should
visit the "golden mile" at Darlington.
In South Australia, the Government in 1974 introduced
a Business Franchise (Petroleum) Act for the purpose of raising
revenue. As in New South Wales, this Act, while it continued
in force, contributed to the ability of retailers to discount by using money available to them from tax collected from
motorists and not immediately remitted to the Government. The
tax added 5.3 cents to the price of a gallon of motor spirit.
The Government ceased to levy it after September 1975 and the
legislation was repealed on 24th December, 1975.
Elsewhere in this Report, the initiative taken by
Esso in the South Australian market by valuing its leased
service station sites, charging the lessee dealers an economic rent and reducing the wholesale list price to all dealers by 6 cents a gallon is described. (13.3)
187
19.6
AUSTRALIA
OBSERVATIONS BY THE COMMISSION ON MARKETING IN SOUTH
South Australia has led all other Australian States in
the degree of its involvement in efforts to reform that section
of the industry within its borders. Once again, the lesson to be
drawn is that the problems which give rise to the search for
remedies are nationwide.
The South Australian Government's efforts in the field
of price control are dealt with elsewhere in this Report. (32.3)
Presently, there is no disinvestment scheme in operation
and the usual indicia of a disordered market - price-cutting,
price discrimination, low gallonages, high margins and failed
outlets - are to be found in South Australia to a degree only exceeded by that in Victoria.
20. THE QUEENSLAND MARKET
20.1 Characteristics of Queensland Market
The Queensland market illustrates many of the problems
of the Australian market as a whole. Too many service stations
have been built; motor spirit is sold to the public at substantial
discount from depots and industrial pumps and other retail
outlets which enjoy preferential pricing. Amongst considerable complaints from Queensland dealers and their trade associations,
discriminatory pricing and its effects are foremost. The Queensland Government has legislated to restrict trading hours in
accordance with a rostering scheme and, more recently, to dis courage trading from industrial pumps and depots. At the request
of the Motor Trade Association of Queensland, the Commission visited Queensland in December 1975 and met oil companies' and
trade associations' representatives, and individual service station operators in the Brisbane, Toowoomba and Gold Coast areas.
20.2 Price War in Queensland
Cut price motor spirit has for some years been available
in many parts of Queensland from the following sources :-
188
(1) Industrial installations with tanks installed and
supplied for use by the industry's own vehicles, ie. bulk
road tanker, at prices less than the ruling wholesale price.
(2) Bulk depots and agencies which retail to the
general public in competition with service stations and
at a considerable discount.
(3) Discount service stations.
In addition, the companies supply motor spirit in drums
or by bulk tanker to rural users and residences, often at less
than the ruling wholesale price.
Cut price retailing at service stations is of relatively
recent origin. Chief amongst the promoters of discount motor
spirit are sites operated by taxi cooperatives (Blue and White
Cabs, Yellow Cabs) and tyre companies (Ensign, Target).
In interviews with dealers in the Whinstanes, Hamilton and Mount Gravatt areas, all claimed to be losing substantial
gallonage to discount sites. Mr. R. Memmott, a Shell licensee of Hamilton, claimed to have dropped from 13,000 - 14,000 gallons a month to 9,800 gallons a month as a result of the activities
of an Ensign Tyres Service Station (supplied by Ampol) across the road, said to be discounting "under the canopy" at 5 cents a
gallon. (Transcript, p.5192) Shell, his supplying company, has offered 2% cents a gallon assistance to meet the competition, but the proprietor has declined to accept. (Transcript, p.5194)
A Blue and White Cab site, supplied by Esso, at Everton Park is
alleged to be discounting "under the canopy" at 5 to 6 cents a gallon, and service station proprietors in the locality claimed
to be severely affected. Mr. K. Matheson (Golden Fleece proprietor) reported a drop of 14,000 - 15,000 to 9,000 gallons a month, (Transcript, p.5197) and Mr. D . Reynolds (Caltex) a
drop from 18,000 to 13,000 gallons a month. (Transcript, p.5201) These two dealers offer no discount and receive no subsidy from
their supplying companies.
189
Two Mt. Gravatt proprietors, Messrs. G.W. Jeffries
(Golden Fleece) and A.N. Edwards (Amoco) complain of the operations
of an Esso-supplied Blue and White Cab outlet offering 5 cents a
gallon "under the canopy" discount plus a free car wash with a
$5.00 purchase, and a Yellow Cab site supplied by Ampol offering
5 cents "under the canopy". (Transcript, pp.5207 and 5211) Both
claim substantial gallonage drops. Neither offers discounts,
although Mr. Edwards offers a car wash for $1.00 with every five
gallon purchase. (Transcript, p.5212) â Mr. Jeffries received half
a cent a gallon subsidy from Golden Fleece in excess of 8,000
gallons a month, (Transcript, p.5207) Mr. Edwards receives none
at all. (Transcript, p .5212) A nearby Caltex site is claimed to
offer 5 to 7 cents a gallon discount "under the canopy". (Trans
cript, p.5212)
It is significant that each of the above proprietors
depends on his workshop to earn a proper living. (Transcript, pp.5188A, 5193, 5198, 5202, 5208 and 5214) All sites were well
appointed and capable of turning over very much higher gallonages,
Mr. Edwards estimating that his site had the capacity to sell 150,000 to 200,000 gallons a month. (Transcript, p.5213)
The transcript record of these and other interviews
was forwarded to each of the nine major oil companies for their
comment. All replied, but Ampol had no comment to make. Amoco
stated that its policy was "to grant assistance to dealers to match competitive price-cutting if such assistance is requested and is considered by the company to be necessary in sustaining
both the Dealer's and Amoco's market share". Amoco claimed, however, that effective retail margins in Brisbane ranged from
13.8 cents a gallon to 16.5 cents a gallon, giving dealers such
as Mr. Edwards ample opportunity to be price competitive without assistance. (Letter to Commission dated 30th January, 1976)
Esso's comments disclosed that Esso-owned sites operated
by Blue and White Cabs at Everton Park and Dutton Park have been
leased by Esso to Blue and White for a number of years. Other
190
Blue and White sites at Mt. Gravatt, Clayfield and Buranda were
let in mid-1975. These agreements provided for supply of motor
spirit at a substantial discount. Esso claimed that the prices
at which Blue and White resell and their mode of operation are
determined solely by Blue and White.
20.3 Use of Price Boards
Apart from a brief incident in April 1972, described
by the Motor Trade Association of Queensland as a "bogus price
war" (Exhibit 373, p.3) overt discounting at retail outlets with
price boards of the "Victorian" style has not been a feature of retail marketing in Brisbane. Nevertheless it is clear that for
some time a substantial transference of gallonage has been taking
place "under the canopy", a result of the same kind of price discrimination that is occurring in Victoria. The reason for the absence of price boards in Brisbane is perhaps partly conjectural.
The Commission considers it likely that pressure on dealers from
trade associations may well be the major factor.
When the Commission inspected the Gold Coast/Tweed Heads
area in December 1975, price boards (up to 11 cents "off") were
common. The "price war" in this area is believed to have its origin some years ago in New South Wales in the form of depot
trading at lower prices. Initially Mobil, through the Norco
Co-operative at Murwillumbah, had paid rebates to its members and
out of that came depot trading. Two B.P. sites in Tweed Heads then began discounting and the "war" subsequently spread to Coolangatta. (Notes of Meeting with B.P., 18th December, 1975) In forecourt interviews with several proprietors in this area,
many claimed to be losing gallonage to discounting. Mr. R .
Gralehead, a Shell owner dealer at Kirra who has resisted dis counting claimed that his gallonage had dropped from 10,000 to
5,000 gallons a month. (Transcript, p.5219) He spoke of a customer driving in and asking for 50 cents worth of motor spirit so he could get to the discount area. On the day he was inter viewed, he had sold $7.00 worth of.motor spirit in 2b hours.
(Transcript, p.5221)
191
Mrs. E.J. Lewis, who operates, under lease, a privately-
owned Golden Fleece site at South Tweed began discounting by 8
cents a gallon and during July 1975 achieved a throughput of
19,000 gallons. However, when she ceased discounting, this
dropped to about 4,500 gallons a month. (Transcript, p.5236)
Mr. J.C. Hart, a 3.P. lessee and one of the leading discounters
in the Tweed Heads area claimed to have a turnover of 35,000
gallons a month before discounting started, which then dropped
to 15,000 gallons. On being threatened with termination of his
lease, he began discounting at 5 cents a gallon, with assistance
of 2% cents a gallon from the company, and reached a maximum
monthly gallonage of 48,000. (Transcript, pp.5223-5224) Mr.
Hart claimed there had always been a problem with depot trading in the area, the B.P. depot being the "main cause". (Transcript,
p.5227) B.P., in its comments on Mr. Hart's evidence, stated :-
"Depot trading in the Murwillumbah/Tweed Heads area goes back beyond 15 years and while it started at a rebate of 5 cents a gallon, it progressively increased. We do not dispute our involvement which came about due
to the competitive forces. As a policy ... we do
not favour depot trading as such ... We do not agree that the B.P. depot was the main cause for discounting. The private sales represents a minimum of the total pump sales at the depot." (Letter from B.P. to Commission dated 22nd January, 1976)
The intervention by the Queensland Government to stop depot trading is discussed elsewhere in this Report (see 14.4).
Suffice to say here that the fundamental problem, price discrimina tion, remains.
20.4 Proliferation of Retail Outlets The Motor Trade Association of Queensland, in its
submission, illustrated the excess of service stations in Brisbane by referring to a recent period of fuel shortages. During that period less than half of Brisbane service stations had supplies
of motor spirit yet were, apparently, quite capable of meeting
the needs of the motoring public. (Exhibit 373, p .4, Transcript, p . 4 5 4 2)
192
Brisbane and the Gold Coast are claimed to be two of the
worst examples of service station overbuilding, a section of the Gold Coast being said to contain over 100 retail outlets, the
majority of which are on a 20 mile strip of highway. (Exhibit 373,
p.12) In the Brisbane area, a section of main road between
Wollongabba and Upper M t . Gravatt (5.6 miles) is said to contain
36 service stations. (Exhibit 373, p.5)
There are very few service stations in Queensland which
could claim to be an economic proposition if they were required
to exist on motor spirit sales alone. (Exhibit 373, p .16) The
dealers interviewed unanimously agreed that a substantial reduc
tion in service station numbers was necessary and long overdue
and most indicated that they would not object if their sites were
among those selected to go, if it meant that those who remained
in the industry could trade profitably.
The Commission cites a representative sample of the
opinions it collected from the dealers on their own forecourts
Mr. A.N. Edwards, an Amoco dealer at Mt. Gravatt said :-
''We know there are many service stations and half of them could be put out of business overnight without disrupting the motoring public in Brisbane; the price of petrol could be reduced by 5 cents a gallon and our profitability would go up because of the increased profit and I say this even if I have to go out of business my self - I would be quite happy to go."
(transcript, p.5213)
Mr. K. Matheson, a Golden Fleece dealer at Everton Park said
"I think service stations could be cut bv 25% there are too many big ones." (Transcript, p.5199)
193
Mr. D. Reynolds, a Caltex dealer at Everton Park said
"There are too many service stations, I can give you round about nine within half a mile of here." (Transcript, p.5202)
Mr. J . Hart, a B.P. dealer at Tweed Heads said
"There are 32 operating service stations in six miles. That is too ridiculous ... It could be cut
by a third." (Transcript, pp.5230-5231)
Mr. L. Cartmill, an Esso dealer at Coolangatta said :-
"I think a lot of the service stations ... in
existence are not doing any good because of the number of them. They could be cut by half even if I were in the half that might be cut back ... it is better
to have half the percentage of people living well than everyone on a meagre diet." (Transcript, pp.5241A and B)
Mr. B. Bernoth, a Caltex dealer at Kirra said
"There are far too many service stations on the Coast. There is one every half mile or 300 yards from Southport to the border ... I think half of them
should be cut ... if I were in the wrong half I
would understand the position. At least someone would be getting a living instead of all of us living on a meagre basis. There are so many of us who must be just breaking the bread-line that I would say that
it should be halved to let someone make a good living. As regards the other half, surely there is other work about." (Transcript, p.5251)
Mr. P. Fairbrother, a Shell dealer at Tugan said :-
"A reduction in the number of service stations would benefit those who stayed in ... you could hardly call some of them service stations." (Trans cript, p.5257)
194
There is currently neither a Government nor voluntary
industry scheme for rationalising the Queensland service station
outlets. The Queensland Government has declined to introduce
legislation. (R.E.W. Harris, Transcript, p .4176) Little
effective control exists at the local government level, although
one council (Gold Coast) has introduced a "catchment" plan, too
late, unfortunately, to prevent gross overbuilding in the area. (Exhibit 373, pp. 4-5, 12, Transcript, pp.4186-4187) It is said
that local councils are reluctant to contest appeals by oil
companies against decisions refusing applications for new service
station construction.
According to Mr. R.E.W. Harris, General Secretary,
Queensland Automobile Chamber of Commerce, the massive growth in
service station numbers which occurred in the 1950's and 1960's has begun to level off. Many sites which have been closed by
companies "are not in fact what we would consider to be service
stations but rather the pump outside the store". (Transcript, p.4177) Some companies have closed more sites than others.
Amoco for one is continuing to build. Other companies are build
ing only in new suburbs. The Q.A.C.C. would support a 50% closure in major city areas, mostly of company-owned sites. In
Brisbane, 95% of sites are company-owned. (Transcript, p.4178)
Mr. R.L. Roney, General Secretary, Motor Trade Association
of Queensland stated that in many areas, service station numbers
could be cut in half without any inconvenience.
"A station to be a viable entity should be looking at a minimum of 25,000 gallons a month throughput. Possibly this minimum is too low. It should be more around the 35,000 gallons." (Transcript, p.4542)
20.5 Depot Trading and Trading from Industrial and Commercial Pumps Queensland service station proprietors and their
dealer associations have vigorously complained to the Commission about the competition that dealers face from depots and industrial
195
and commercial pumps retailing to the public at discounted prices,
made possible by the preferred and discriminatory wholesale prices
they enjoy. The Commission has reported on this type of trading
separately in this Report and has referred in particular to the
Queensland complaints and legislation introduced in that State to
deal with the problem. The Commission repeats that the problem,
which is not limited to the Queensland market, is not to be
solved by local attempts to prevent competition but rather by restructuring the price system throughout Australia so that fair
competition is encouraged in a non-discriminatory atmosphere.
Price competition could then be based on genuine competitive
trading not on preferred and discriminatory pricing.
20.6 Restricted Trading Hours - Rostering Restricted trading hours were introduced in Queensland
in 1941 in accordance with a decision by the Queensland
Arbitration Court which varied the relevant industrial award by
fixing trading hours in the Brisbane city area at 7.00 a.m. to
7.00 p.m. Monday to Saturday. No trading was permitted on
Sundays or selected public holidays. These hours were varied in
1944 to 7.00 a.m. to 6.00 p.m. Monday to Friday, with 2.00 p.m.
closing on Saturdays. In 1957, the Industrial Commission varied
the Award to permit the sale of motor spirit in the Brisbane city area outside fixed trading hours by rostered stations.
Eighteen stations chosen by roster in each of several zones
traded on Saturdays from 2.00 to 6.00 p.m. and on Sundays from
7.00 a.m. to 6.00 p.m.
In 19 61, Section 12 of the Industrial
Conciliation and Arbitration Act gave the Full Bench of the Industrial Conciliation and Arbitration Commission specific
power to fix trading hours of shops, including service stations,
and Section 114 provided penalties for service stations trading
outside those hours. In 1964 Part VIIA was inserted into the
Act, giving the Full Bench the power to fix trading hours of
shops, whether or not employees were employed therein, of its own motion or on the application of an industrial union or other
organisation or person. (Sections 96B (2) and 96D(1)) Section
96D(1) provided that the Full Bench may delegate to the Chief Industrial Inspector, inter alia, the preparation of rosters
consequent on the making of an order fixing trading hours and
this procedure applies to the present day. By 1974 a roster
system operated in Brisbane and eight other cities and provincial
towns and areas throughout Queensland. (Exhibit 319)
The position today is that in the Brisbane city area
trading hours are restricted to those between 7.00 a.m. and 6.00
p.m. on weekdays and 7.00 a.m. and midday on Saturdays. Twenty-
five stations remain open on the roster from midday to 6.00 p.m.
on Saturdays and 7.00 a.m. to 6.00 p.m. on Sundays. All stations are closed on Christmas Day, Good Friday and Anzac Day. Rostered
stations only trade on Easter Saturday.
The rostered hours in the eight other cities and provincial towns and areas are tailored to meet particular
circumstances. Thus in the Gold Coast area, normally subject to
restricted trading hours, restrictions are lifted from 15th December to 31st January. Furthermore, even outside this season,
there are three stations which are exempt from control seven
days a week.
Outside the specific rostered areas, trading is not
restricted. But it is open to dealers within a locality to apply to the Industrial Commission to limit trading hours within
that locality and to set up a roster outside those hours. The problem in making this system work seems to be that of obtaining
a sufficient number of dealers prepared to support an application for restricted trading hours, particularly in areas where dealers
change frequently and where restricted hours are opposed by one or more of the oil companies. A.n example of this problem is Toowoomba. The Commission has the impression from talking to
dealers in the area that a majority would support restricted hours and a roster system, and entertains no doubt that it would benefit the dealers both economically and socially. However, so far the
system has not been introduced there.
197
The Queensland Automobile Chamber of Commerce regards
the Queensland system as providing the most sensible and practical
service station conditions in Australia. The Commission has spoken to dealers who have moved from New South Wales to Queensland
to take advantage of the system. Consumption has not declined
with rostering, uneconomic hours have been largely eliminated.
Coin pumps have been installed and are readily available outside
rostered hours.
Queensland dealers interviewed by the Commission were
generally in favour of the rostering system, most reporting that
they picked up worthwhile gallonage on rostered days while still
providing a satisfactory service to the public and allowing the
dealer himself more leisure time. The Commission considers that
the availability of reasonable leisure time for dealers is signif
icantly lacking in the industry and apart from the economic
arguments there is a strong case for extending this amenity in the industry.
20.7 Fuel Shortages
According to the Motor Trade Association of Queensland,
a shortage of refined fuel is now an annual event in Queensland.
There were shortages in 1970, 1972, 1973 and 1974. Shortages
of motor spirit and brake and transmission fluid were experienced
during the latter part of 1975. Some service stations were unable to obtain supplies of brake and transmission fluid for up
to six to eight months.
Industrial disputes and the shutting down of the
Brisbane refineries for maintenance are said to have been the
main cause of the shortages. Mr. R.L. Roney, the General Secretary of the Queensland Motor Trade Association states that
there must be problems with production capacity at the Ampol
refinery. The shortages appear to affect Esso, Caltex and Golden Fleece dealers most severely and others to a lesser extent.
198
Mr. A.J. Svensson, a B.P. lessee at Mansfield, Brisbane,
gave evidence that he had run out of motor spirit from time to
time and at one stage was unable to trade through the rostered
weekend because of fuel shortages. (Transcript, p.4610)
Many dealers interviewed by the Commission during its Queensland visit in December 1975 spoke of supply problems. One, Mr. D.
Reynolds, a Caltex dealer at Everton Park, was without motor
spirit at the time he spoke to the Commission. He stated
that in 1974 he was out of motor spirit for a total of about
three weeks. (Transcript, p .5201)
The Commission has not fully investigated the cause
of these fuel shortages. Principally they relate to refinery
production and accordingly will be dealt with in the Commission's
next report which is on refining.
20.8 OBSERVATIONS ON THE QUEENSLAND MARKET
The Queensland market demonstrates a trend towards
deeper levels of price-cutting and has produced a growing
concern amongst dealers about practices in the market which
are unfair and harmful. The State Government has recognised
the validity of some of these complaints and the need for
legislative solution.
Additionally the Queensland experience emphasises
the benefit the community and the industry gain from a well administered system of rostered trading hours.
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21. TASMANIA, NORTHERN TERRITORY AND THE AUSTRALIAN CAPITAL TERRITORY
21.1 Introduction
The Commission has not visited either Tasmania or the
Northern Territory. No particular complaint has been received
from industry or Government in Tasmania, the Northern Territory
or the Australian Capital Territory.
21.2 Tasmanian Parliamentary Inquiry * ( i )
In 1960, a Joint Committee of both Houses of the
Tasmanian Parliament was appointed to inquire into and report upon, inter alia ;-
(i) marketing of motor spirit and petroleum products in
Tasmania with a view to seeking a method to stabilise
the market;
(ii) the matters relating to trading hours in relation to
petroleum products.
In its report of 29th November, 1960 the Committee
recommended, amongst other things, that legislation should be
introduced for the establishment of a marketing and licensing authority to stabilise the marketing and distribution of petroleum
products, and that such authority be empowered to determine
prices, including a wholesale price below which no deliveries
should be made, and to licence agents, resellers, reseller sites and commercial pumps. It further recommended provision in the
legislation for suppressing under-cutting, special discounts,
commissions and gifts and direct selling by oil companies other than to registered buyers, licensed resellers and licensed
consumers.
These recommendations were not implemented. Once again
however, they demonstrate an authoritative recognition of problems
occurring in Tasmania in 1960, which the Commission finds have continued for many years and are now present in Australia as a whole.
200
21.3 Trading Hours and Rostering
Trading hours for motor spirit filling stations have
been regulated by Statute in Tasmania since 1913. In 1962 , a
system for rostering stations to trade outside fixed hours was
introduced by the Factories, Shops and Offices Act of that year.
This system, with some modifications, has continued until the
present time and, according to evidence submitted by the Tasmanian Department of Labour and Industry, has, by and large,
been successful in catering for the needs of the retailers and
public. Under the legislation certain areas of the State have
been declared to be "roster" areas. In these areas trading
hours are restricted to 6.30 a.m. to 7.30 p.m. on normal weekdays
other than Fridays, when service stations are permitted to
remain open until 9.30 p.m., 6.30 a.m. to 12.30 p.m. on Saturdays
and public holidays and 2.00 p.m. to 6.00 p.m. on Anzac Day.
All stations are closed on Christmas Day and Good Friday. At 10th December, 1975 there was legislation awaiting Royal assent
which would alter the closing time to 6.30 p.m. Monday to
Thursday, 8.30 p.m. to Fridays and 12.00 noon on Saturdays and
provide that on public holidays rostered stations only would be permitted to open. Rostered stations stay open until 10.00 p.m.
on weekdays and weekends, although during winter months permission
may be given to close one hour earlier if local demand does not
justify staying open until 10.00 p.m. Opening on Sundays is permitted from 6.30 a.m. by rostered stations although most of these stations in fact do not open until 7.30 a.m.
There are no rostered stations open after 10.00 p.m.
and before 6.30 a.m. in any roster area. The only source of
supply between those hours are self-service pumps or Royal
Automobile Club of Tasmania roadside service.
21.4 Australian Capital Territory In March 1975 the Commission interviewed members of the National Capital Development Commission in the Australian Capital
Territory and discussed planning control of the establishment of service stations in the Territory. N.C.D.C. had a formula which
201
took account of the number of people in an area to be served by a
particular station. The arbitrary population chosen as sufficient
to justify a service station has been obtained by N.C.D.C. from
the oil companies. In practice, the formula has led to substantial
numbers of service stations in the Canberra area, mostly located on
extremely expensive sites and sometimes situated side by side in a
manner reminiscent of uncontrolled State markets. The N.C.D.C. has
obviously not been able on the information available to it to impose a rational scheme for the distribution and retailing of motor spirit
and allied services. The Commission felt that the situation in
Canberra did not serve as a model for any national scheme to
rationalise service stations.
22. IN SUMMARY - THE INDUSTRY TODAY
22.1 The Commission has, in some detail, traced the evolution
of a system of distribution and marketing which reflected the
commercial policies of the major oil companies, exported to and
deployed throughout this country. It has described the substantial
over-investment in retail sites, the under-utilisation of assets,
the high costs associated with a fragmented market, and widespread
discriminatory pricing practices.
The transition to solus trading, as an expression of the
competitive rivalries of the international companies, which lies at the bottom of much of the observed problems of the industry,
coupled with the failure of the nation's organs of public admin
istration to evolve any comprehensive remedies for the problems,
has meant that for 25 years there has been a progressively larger
investment in a wasteful and expensive system of distribution
and marketing contrary to the best interests of the Australian
community.
The Commission estimates that about $750 million has been invested in service stations (cf Oil and Australia 1974, p.24, Capital Investment in Marketing) and agrees with Esso (Exhibit
228A, p . 23) that over-investment in the retail industry is in the region of $200 - $300 million. All that this over-investment has
produced both in material structures and social terms is still
there in the midst of the nation's commercial and industrial life,
202
demanding service, attention and money. Its very existence
represents the greatest single constraint on reform. This load
of over-investment and what it has procured will not go away.
However convenient it might be, it is simply not possible, even
on a limited scale, to start all over again. The reformer must
grapple with what is there, however inappropriate.
22.2 Amendment of System
The task then is one of amendment and change, not one of
re-establishment. This being so, it must then be said that many reforms, however desirable they may be, are not in practical terms
achievable. There are some areas that cry out for reform but are
so large and consolidated that effectively there are no practical solutions or only limited and partial solutions. The very problem
of proliferation of outlets is in fact, as a matter of practicality,
only partly solvable, and needs to be attacked not by one but a
series of interlocking policy initiatives. Similarly, it is not
possible to turn the clock back and reinstate independent owner dealers as the principal retailers as they were in the pre-1951
pre-solus days, however socially or economically desirable such a
course may appear.
The Commission's conclusion is that the solutions are necessarily partial only, are severely limited by what is already
in place on the ground and must be sought by amendment and re
direction rather than frank and outright change.
22.3 Form of Recommendations The present system of marketing, based on excessive
numbers of service stations and a distorted price structure, is wholly unsuitable for the needs of the consuming public. The 1973 OPEC price rises are leading to the abandonment by the inter national oil companies of market strategies which emphasised
expanding sales of product at almost any cost. Some oil companies
in Australia have been slow to react but some are now moving to divest themselves of uneconomic service stations. However the marketing system as it exists has evolved under the pressure of
203
enormous investment for a quarter of a century and has developed
its own now unwanted internal dynamics. It is not possible to
amend it on a "do this" or "do that" basis.
The only hope of securing beneficial reform and
amendments lies in the evolution of on-going and continuing pro
grams of reform, intelligently and perceptively administered.
The problems that call for reform can be defined; the data that
indicates a starting point can be defined; the future in which
these reforms will be operating can be investigated and defined;
the policy objectives can be defined and the necessary adminis
trative structures can be discussed.
There is a managerial problem. Oil company management
has been taught for most of this century that sales, gallonage,
market share - call it what you will - is what they are there
to achieve. Large scale disinvestment which has to come, brings the spectre of loss of market share to competitors. Competition
for market share, which is the traditional form of competition
in the industry, thus inhibits disinvestment.
An authority or agency with an "honest broker" approach
to disinvestment within guidelines, can provide a proper and
useful vehicle for channelling the oil companies' own momentum
towards disinvestment.
22.4 The Need for On-going Programs
The essentials of any reforms must be incorporated in the form of on-going programs designed to operate for a term of
years. These programs must contain within themselves the ability to evaluate policy alternatives, to change, adapt and evolve, in a word - to administer. No list of "dos" and "donts" can
truly be said to have a serious prospect of anticipating the conditions of the industry in 1985 or even 1980. What has to be
set in motion, within defined parameters and aimed at defined
problems, is an administrative machine that can evolve of itself to modify the old problems and meet the new.
204
There are no pre-packaged solutions.
22.5 An Administrative Solution
Almost every country in the world has some agency or Department of State designed specifically to deal with this
industry in the areas of distribution, marketing and pricing.
The division of public authority in Australia makes emulation of
most of such agencies or departments difficult.
In Australia, no agency is likely to operate effectively
unless it can secure the cooperation of State governments and
the oil companies. To avoid unnecessary conflicts, an agency so
structured to impinge as little as possible on areas of State
responsibility would be prudent,
It is not an accident that whoever in Australia the
Commission has listened to, people or organisations who hoped for improvement and reform, that they all proposed some type of
authority to inform and supervise the process of adaption and
change.
22.6 Will the Oil Companies Cooperate?
There remains the question of enlisting the cooperation
of oil companies. During some past periods it would be doubtful whether effective cooperation could be achieved. More recently,
however, the administration of the Indigenous Crude Oil Absorption
Policy and the applications by oil companies to the Prices Justification Tribunal provide examples of cooperation between
the oil companies and government or government agencies. In
other countries, examples of close and mutually beneficial
cooperation are the rule and not the exception. Having looked at a number of countries administrative systems, the Commission has
no doubt that this industry can work and thrive, while at the same time accepting public objectives enunciated by governments.
205
The Commission itself provides another example of such
cooperation. The Commission wishes to record that it has received assistance from all oil companies. In particular, Shell has
unfailingly moved to assist the Commission when requested to a
degree well beyond that which a merely conventional response
would require. The Commission has received substantial assistance
from Mobil, not only in Australia, but in New Zealand and
Singapore. The Commission has been assisted to a notable degree
by Esso, in Australia, Canada, the United Kingdom and Norway and
by Total, especially in France. There is no reason why an agency
established by the Australian Government would not receive sub
stantial cooperation from the industry as a whole.
22.7 Flexibility and Continuity
The Commission considers that an independent agency
would have advantages over other administrative forms. It would be freer than Government departments to engage the cooperation of
other parties, agencies and governments; its development would
have a degree of continuity that is essential to orderly adminis
tration and perhaps, a more flexible personnel structure. Such
an agency could expect to recruit from the ranks of oil company executives. Such recruitment should fairly quickly lead to the
accretion of that expertise in the industry which now is so
obviously lacking in our governmental structure, while the contin
uity of the agency would remain independently of changes in
government.
Such an agency structure would also accommodate one of the major criticisms made of present governmental arrangements
by oil company managements, namely that in the few areas of government-industry relations no sooner are public servants
educated in the reality of policy alternatives than they are
likely to be transferred to some other department or area of responsibility. At times the structures of departments themselves are changed with a similar loss to industry of trained experts with whom to deal.
206
The remainder of this Report deals in detail with
reforms which the Commission considers necessary and practicable
for the industry in Australia and prescribes the nature of an
administrative agency which can carry these proposals forward
in a flexible manner designed to meet changes as they occur.
207
BOOK II
PART VIII
FUTURE SUPPLY - SOURCE AND COST
23. THE NEED TO ASSESS THE BALANCE BETWEEN FUTURE DEMAND AND SUPPLY 23.1 Little that is useful can be said about the way in which
this industry should be modified in future years until some
assessment is made about the supply of crude, its price and
availability.
Historically, Australia has passed through two periods
both relatively comfortable. During the first, product and
later crude oil was imported. Both were cheap and plentiful.
The problems were simply commercial. During the second period,
one of refinery self sufficiency, the crude oil used was
predominantly indigenous. Since 1973 it has been artificially cheap by world standards. This era is shortly to end.
Thereafter Australia and the world faces an energy future characterised by uncertainty. Crude oil will be imported
at high cost with the prospect that both the crude and the money
to pay for it, will be scarce.
By the end of this century world supply will be failing
203
and ever higher prices reflecting the essential scarcity of the
resource will prevail. This Report treats 1985 as its
"horizon" but does extend some prospects out to 1990. Beyond
that time no useful generalisations can be made.
23.2 Present Consumption
In 1974/75 Australia's total demand for petroleum
products was 222 million barrels; indigenous crude contributed
65%, while imported crude and enriched crude contributed 29% to this demand. Imported product contributed 6%. The crude mix
being refined by Australian refineries was 69% indigenous and 31% imported.
23.3 Consumption Rising The consumption of petroleum products in Australia has,
over the last ten years, risen on an-average of more than 6% a year. The latter half of the last decade was marked by high
increases in consumption, of the order of 9% a year, but during
the 1970's this momentum was not maintained. Consumption for
each of the financial years since 1964/65 was:
TABLE 8
HISTORICAL CONSUMPTION OF PETROLEUM PRODUCTS IN AUSTRALIA
1964/65 121 million barrels
1965/66 132 million barrels
1966/67 143 million barrels
1967/68 156 million barrels
1968/69 172 million barrels
1969/70 184 million barrels
1970/71 191 million barrels
1971/72 200 million barrels
1972/73 205 million barrels
1973/74 223 million barrels
1974/75 222 million barrels
209
23.4 Market Shares to 1984/1935
The Commission sought from oil companies their market
estimates of future consumption and has had the benefit of
studies made by the Petroleum Branch of the Department of
Minerals & Energy (as it then was). High and low estimates of
petroleum product demand in Australia based on these forecasts
show that the rate of increase is expected to drop over the
next ten years and to fall within the range of a high 4.9% to a low 2.5% a year. Consumption, at present 222 million barrels
a year, could increase to between 250 and 300 million barrels
a year in 1979/80 and by 1984/85, to between 280 and 360
million barrels a year. The forecast demand for each year
over this period is:
TABLE 9
FORECAST DEMAND OF PETROLEUM PRODUCTS IN AUSTRALIA Low Estimate High Estimate
1975/76 226 million barrels 243 million barrels 1976/77 231 million barrels 256 million barrels
1977/78 238 million barrels 267 million barrels
1978/79 248 million barrels 281 million barrels 1979/80 254 million barrels 296 million barrels 1980/81 262 million barrels 317 million barrels 1981/82 266 million barrels 316 million barrels 1982/83 266 million barrels 328 million barrels 1983/84 269 million barrels 341 million barrels 1984/85 284 million barrels 357 million barrels
23.5 Product Break-up Forecast demands for individual petroleum products were
also obtained and the ranges for each over the next ten years are given in Annexure "A" No. 2.17. They show that motor spirit demand
follows a similar pattern to the total petroleum product demand
whereas the demand for other products follows significantly different patterns. The relative proportion of products being
consumed are tabulated as follows:
210
TABLE 10
CONSUMPTION ESTIMATES OF PETROLEUM PRODUCTS
Product Proportion of Consumption Estimates
Total Demand to 1984/1985
in 1974/1975
Motor Spirit 36% Increases expected to range
from 2.9% to 4.7% per annum although proportion of total demand should remain constant.
Avtur 5% Could increase significantly
by 4.2% to 9.3% per annum and could be 6% to 8% of total product demand by 1984/1985.
Kerosene and Heating Oil
4% At maximum demand could
increase in a similar pattern to total petroleum demand but more likely at a lower rate and could even decrease on average at 1% per annum
thereby reducing its overall proportion of the demand.
Distillate Diesel
19% Will increase at a greater
rate than other products, that is between 3.4% and 6.6% per annum and will be 20% to 21% of all products
consumed in 1984/1985.
Fuel Oils 19% Depending on rate of increase
in natural gas use, the consumption of fuel oil could be relatively static or possibly rise in the near
future then decrease. Overall proportion will reduce to between 13% and 16% of all products consumed.
211
The remaining 17% consists of liquified petroleum gas
(LPG), aviation gasolene, refinery fuel and other fuels and non
fuels. The proportion of total demand made up by these products
is not expected to change since an increase in refinery fuel and
possibly LPG will be offset by a decreasing proportion for other
fuels and non fuels.
23.6 Shift in Demand Pattern
There appears to be an emerging trend towards demand
for a "lighter" barrel, that is production slates oriented towards the types of hydrocarbons used in the transport industry.
There are substitutes for the "heavy" end of the barrel such as
coal and natural gas for fuel oil but motor spirit has no real
substitute and there is an increasing demand. The reliance on petroleum products for heating and for furnaces is decreasing
and will continue to be affected by the availability of natural
gas. The product "split" can be expected to move towards the
lighter end of the barrel. Excluding non fuels, refinery and
other fuels which are spread over the whole range of fractions,
the demand according to the lighter, medium and heavier fractions
is as follows
TABLE 11
TRENDS IN PETROLEUM PRODUCTION SLATES
Proportion of Total Demand
Product Fraction Group Year 1974/1975
1984/1985 High Demand Estimate
1984/1985 Low Demand Estimate
L.P.G.
Avgas Motor Spirit 45% 46% 47%
Kerosene Avtur
Heating Oil
Distillate
Diesel 32% 39% 34%
Fuel Oil 23% 15% 19%
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23.7 Indigenous Resources
Australia's resources of commercially recoverable crude
oil and condensate from its oil and gas fields at 30th June, 1975
amounted to 1,701 million barrels. This includes approximately
190 million barrels of condensate. It is possible that there
are 2,322 million barrels of crude oil and condensate recoverable depending on further proof of the reserves and the economics
of extraction. Satisfaction of the present level of demand requires 220 million barrels a year. But over the next ten
years, the Australian demand will require 2,500 to 3,000 million barrels of petroleum products. In that ten year term, therefore,
Australia needs an amount 50% to 70% more than the crude oil
and condensate that is at present commercially recoverable from our national reserves or, 10% to 30% more than all reserves
including those not yet considered commercially recoverable.
In addition, it should be noted that the capacity for
production from our reserves cannot meet the present or future
demand. The comparison of demand and production of crude oil is shown in Figure 1 on the following page.
213
Figure I Australian crude production and imports to meet demand for petroleum products
Maximum
Minimum
Imports
Possible
— Probable
Aust. crude production
Year
214
23.8 The Erosion of Indigenous Supply
Indigenous crude oil supplies have over the last ten
years met an increasing proportion of the Australian demand for
petroleum products. For each of these years the indigenous crude
oil production and the proportion of demand met was:
TABLE 12
HISTORICAL INDIGENOUS CRUDE PRODUCTION
Financial Crude Production Proportion of Year
1964/65 2 million barrels Demand 2%
1965/66 3 million barrels 2
1966/67 4 million barrels 3
1967/68 12 million barrels 8
1968/69 14 million barrels 8
1969/70 31 million barrels 17
1970/71 94 million barrels 49
1971/72 120 million barrels 60
1972/73 130 million barrels 64
1973/74 146 million barrels 65
1974/75 145 million barrels 65
The Bass Strait oil fields from which 90% of Australia's
present indigenous crude production is obtained had at 30th June, 1975 only 1,467 million barrels commercially recoverable and a total of 1,640 million barrels possibly recoverable. The
production from this basin is expected to peak in 1976 at 140 million barrels for the year and to remain constant until 1980 when a decline in production is anticipated. Production from
other fields, Barrow Island and the small fields at Moonie, is
expected to decline steadily from the combined 13.6 million barrels in 1974/75 and will in future contribute considerably
less than the present 6% of petroleum product demand.
The declining indigenous crude oil production from 1976 onwards will therefore meet a decreasing proportion of the fore cast demand. Based on the forecasts compiled from submissions
to the Commission these proportions over the next ten years will
be in the following ranges:
215
TABLE 13
FORECAST INDIGENOUS CRUDE PRODUCTION
Financial Year Crude Production Proportion of Demand Met
1975/76 152 million barrels 63 - 67%
1976/77 155 " 61 - 67
1977/78 154 - 156 " 58 - 66
1978/79 153 - 157 " 54 - 63
1979/80 152 - 156 " 51 - 61
1980/81 150 - 155 " 47 - 59
1981/82 144 - 151 " 46 - 57
1982/83 136 - 145 " 41 - 55
1983/84 126 - 138 " 37 - 51
1984/85 114 - 127 " 32 - 45
In 1984/85 Bass Strait will only be contributing 100
million barrels a year and this will further decline to
approximately 50 million barrels a year in 1990 by which time
even with some production from other Australian oil fields only
approximately 15% of demand will be met by indigenous crude oil
supplies.
In summary, Australia has moved from a condition of
almost total reliance upon imports, prior to the mid-1960's, to
65% self-sufficiency in the mid-1970's but faces the imminent
prospect of a rapidly increasing dependence on imported crudes
after 1980.
23.9 What Can be Done to Help Supply?
This position could be relieved by four things:-(a) by further substantial finds of indigenous crude; (b) by "stretching" crude supply by the use of other
hydrocarbons (natural gas, L.P.G. and gas liquids);
(c) by conservation; (d) by new generation of syncrude of some kind from
shale or coal.
Within available time limits, only alternative (a) (new
216
finds of crude oil) has any prospect of large scale amelioration
of deficits in supply. Alternative (b) ("stretching supply")
is to be dealt with by the Commission in its study of national
refinery policy and on natural gas. Alternative (d) (syncrude)
is not assumed to be commercially feasible to any significant extent until 1990. Alternative (c) (conservation) is dealt with
in this Report at 24.1 to 24.8.
23.10 Future Discovery of Crude
To assess this prospect, regard must be had to the
amount of exploration being carried out at present. There has been a decline in exploration activity over the years since 1970.
Whereas in 1970, 336,000 metres were drilled, 209,000 metres for
exploration and 127,000 metres for development, by 1974 this had
reduced to a total of only 137,000 metres, of which 121,000 metres were for exploration. In 1975 the continuing decline in
exploration drilling was evident from the first three quarters
where only 37,103 metres were drilled.
The reducing numbers of wells drilled each year are
tabulated as follows:-TABLE 14
EXPLORATION AND DEVELOPMENT WELLS DRILLED SINCE 1970 Year Exploration Wells Developmei
1970 119 93
1971 75 22
1972 100 33
1973 60 11
1974 51 8
First, Second and third Quarters
1975 18 2
23.11 The Impact of Government Policies The present Government policy on petroleum can be presented as dealing with three aspects :-
217
Role of Government
Encouraging of exploration, development and production
Development and use of alternative fuels.
Except in exceptional circumstances, the Government feels
it should not be directly involved in mineral exploration or
development. Thus the Petroleum and Minerals authority is,
according to the announced policy, to be abolished and the Pipeline
Authority restructured. The Government thereby plans to minimise control of industry but will implement its policies by consulting
with representatives from the industry and other interested groups.
The Government plans to form a National Energy Council to advise
Commonwealth and State Governments on energy policy. It will be
comprised of people drawn from industry, labour, universities and
government, both State and Federal.
Incentives for exploration, development and production
were according to the policy statement, to be introduced allowing
expenditure on exploration to be written off in full against current income and a special investment allowance for development
costs. The Government is however to consider the impending
Industries Assistance Commission report on the effects of taxation
and royalty measures on the mining sector. The Government also is to look to the A.I.D.C. and the Australian Resources Development
Bank to extend their capacity and increase their effectiveness
by bringing together potential investors and mobilising develop ment capital.
23.12 Current Crude Prices in Australia
Crude oil presently being imported into Australia is priced
at an average $9.54 a barrel (Bureau of Statistics' preliminary figures for December 1975). This excludes freight which adds an
average of $0.75 a barrel.
Crude oil from Australian oil fields already in production
has, since 18th September, 1975, been priced as follows
218
Gippsland/Bass Strait
Barrow Island
Moonie
$2.33
2.73
3.00
In addition it has, since 19th August 1975, borne a
levy of $2.00 a barrel imposed by the Australian Government.
According to a statement of policy made by the then
Prime Minister in September 1975 the price of Gippsland/Bass
Strait crude oil is to remain constant for three years, but the price of Barrow Island and Moonie crude oil will be increased as follows:-
Price as from 18th September, 1976
Barrow Island $2.88 Moonie 4.35
Price as from 18th September, 1977
Barrow Island $3.17
Moonie 5.25
According to the Statement of September, 1975 crude oil from newly discovered fields will be priced at the equivalent of the landed cost of imported crude oil at the nearest refinery
port. Similarly the policy of the present Government is that all
new discoveries of crude oil will be sold at world market price.
23.13 Other Crude Resources No particular policy has been announced concerning two other classes of crude oil.
(a) Crude oil from known but undeveloped fields.
The costs of development of such fields will be higher than those of fields currently producing.
(b) Crude oil from fields currently producing but
requiring for its exploitation relatively expensive secondary or tertiary recovery methods.
Elsewhere, while recognising the problems of inflation
the Commission discussed the advisability of allowing the domestic
219
price of crude oil to rise to international parity. Any
"windfall" element of profit gained from such a price increase
can, if thought desirable, be siphoned off in taxation. The
levy imposed in August 1975 partially increases the price of
indigenous crude oil to world parity while exacting the whole of
this increase as an excise duty.
23.14 The United States of America and Canada
In 1975 President Ford prepared a gradual de-control
program for the price of "old" oil produced in the U.S. coupled
with a windfall profits tax on producers that would confiscate
for the government 90% of the difference between the then market
price and the controlled "old" oil price of $5.25 U.S. a barrel
(about A$4.13 at that time).
"Old" oil was roughly defined as the quantity produced
in 1972. New oil, from new discoveries or produced from secondary
or tertiary recovery techniques was to be priced at market levels established by international parity prices.
President Ford's policy implies that all U.S. crude oil must be priced at international parity so as to reduce consump
tion through price elasticity effects and to prevent misallocation
of resources.
The Canadian government has also raised domestic prices of crude oil in a phased adjustment to international levels.
The price of crude oil exported mostly to U.S.A. was raised in
step with OPEC price increases to approximate international
parity, through a series of export tax levies. In Canada the
export tax levy is determined by the National Energy Board. As part of a parallel program the Canadian Government in its budget of June 1975 placed a new federal excise tax of 10 cents
Canadian a gallon on motor spirit for personal use. This tax was refunded to industrial, commercial, business and government
users.
220
In summary, both Canada and the U.S.A. are pursuing or
proposing to pursue programs to price crude in their domestic
markets at international parity so as to restrain consumption
and avoid misallocation of scarce resources. Potential windfall profits to producers are to be taken by Governments in both
cases. Canada has for some time also applied this policy to energy exports.
The Commission concludes that the present era of low
domestic prices of crude oil is likely to end within a
relatively short time. The Commission has also dealt with price
in the context of conservation at 24.7.
23.15 New Finds of Crude Oil Although exploration is not within the Terms of
Reference of the Commission, the success of these policies
measured in terms of new exploration levels and discoveries of
new crude oil reserves, will have an effect on the crude oil
being used in Australian refineries and the quantity of crude oil
to be imported. It is necessary however to recognise the time
required, in terms of personnel and equipment, firstly in preparation for new exploration, secondly in drilling new wells and thirdly, when and if such drilling is successful in bringing
new discoveries into production. Australia is not an attractive oil province. The general opinion in the oil industry is that
any new discoveries of crude oil in Australia are more likely
to be made offshore in even deeper waters than those at present being explored or worked. Exploitation of these
resources would involve very large investments in operations at
the limits of current technology. The time delay in successfully exploring deeper waters and in bringing new discoveries to the market will be significantly longer than for discoveries made
onshore. As a broad guide the Commission considers that onshore discoveries would require approximately six years from the date of initial discovery to be brought to market as product and offshore discoveries approximately ten years.
221
PART IX
WHAT WILL THE COST BE?
CONSERVATION & COST
24. WILL THE COST OF IMPORTED CRUDE CONTINUE TO RISE?
24.1 The Commission in its recent investigations has had the benefit of discussions with the Governments of the United
States of America, Canada, United Kingdom, Norway, France, Iran,
Singapore and New Zealand, with the managements of the major oil
companies and with independent experts.
A number of government agencies are well placed to assess future trends in the price of crude, although it must be realised that there are very large uncertainties in such assess
ments. A consideration of 1976's prices from a point of time located at 1970 illustrates the extreme volatility of the
problem.
All sources, some of whom spoke on a confidential basis with the Commission, were pessimistic on the trend of future
prices. Some opinions in the United Kingdom, although anticipat ing no fall in price, did foresee in medium term some softening
of price on a constant money value basis. This view postulated
227
a medium term drop in consumption under the impact of
recession and conservation policies, leading to over-production
and market pressures to retard what otherwise would have been
inevitable price rises. This phenomenon appears to have been
occurring over the latter months of 1975 and into 1976.
The September 1975 OPEC price rise which was of the
order of 10% in fact represents a significant drop in price on
constant money values over the prices set in early 1974. Taken together with the present position of very considerable over
supply, this does support the United Kingdom view. Some dis
agreement between OPEC countries in maintaining these price
levels has lately become apparent. A deviation was taken by
Iran in February 1976, when it reduced its heavy crude price by 9.5 cents U.S. a barrel. However, in longer term, the
scarcity factor was seen as counteracting the surplus and a
resumption of rise in real values was anticipated.
Other views were less optimistic.
24.2 Attitudes in Exporting Countries - OPEC
The Commission has the advantage of personal discussions
with Dr Jamshid Amouzegar, presently Minister for the Interior of the Government of Iran, formerly Minister of Finance, and his country's senior delegate to OPEC.
While stressing the uncertainty of the future and the
difficulty in assessing the rate of development of alternative
sources of energy - the fast breeder reactor, the fusion reactor,
shale and coal - Dr Amouzegar postulated that for the next ten
years at least the world would be dependent upon the oil and
gas of the Middle East.
Putting the Iranian Government's view, Dr Amouzegar
stressed that his country had no motive in its approach to price
other than its protection of the relative purchasing power of
income derived from oil. This meant that the present price
223
required regular adjustment to allow for the diminishing
purchasing power of money caused by inflation. The inflation
rates have however been assessed against the increase in costs
of imported commodities rather than by consulting statistical
indices of cost of living and similar related data.
Countries such as Iran have embarked on programs of
development financed by future revenue from oil sales. The
latest reduction of 9.5 cents U.S. a barrel by Iran has been
brought about by the need to boost sagging sales and therefore
revenue, so that there will be no cutback in these development programs. The price reduction by Iran followed those of Saudi
Arabia and Kuwait. It does not, however, necessarily indicate
a breakdown of the OPEC policy of maintaining oil prices.
Given the near monopoly position of the oil producers
and their ability to shut-in production capacity in the face
of falling world demand, the OPEC countries will probably be
able to dictate price for a period of ten and perhaps fifteen
years. The only restriction upon them will be based on self
interest. Too high prices may depress demand through the in
ability of customers to pay.
Australia at present is an object of this policy. Australia will become increasingly dependent upon imported crude
and consequently increasingly sensitive to price as the 1980's
move on.
24.3 Estimates of Future Import Costs
The cost of imports of petroleum products and crude are given in Annexure "A", No. 2.18. They reached a maximum
in the sixties of $318.3 million net in the financial year 1967/68. After this the import bill decreased and in 1970/71 had dropped to $225.1 million. With growing self-sufficiency
the import bill was further decreased to $178.2 million in 1972/ 73 but thereafter, with the rise in imported crude oil prices it
has increased and is increasing significantly. In 1974/75
224
it reached $621.6 million and this year is expected to be
approximately $800 million or more.
The increase in OPEC oil prices brought the average
cost of imported crude oil to Australia from $1.39 in 1970 to
$9.54 a barrel in December 1975. These prices over the years
are shown in Annexure "A", No. 2.19.
To this freight costs of approximately 75 cents a
barrel must be added. The total cost per barrel of imported crude oil to Australia is approximately $10.29. Australia can
expect to pay between $1,152 million and $1,667 million in 1980/
81 for imported crude oil, depending upon demand levels. By
1984/85 this import bill will reach a level between $1,749
million and $2,367 million at today's prices.
The import bill therefore reads in five yearly
intervals, based on 1974/75 currency:-TABLE 15
AUSTRALIAN PETROLEUM IMPORT BILL 1969/70
1974/75 1979/80
1984/85
$371.42 million $621.6 million $1,050 to $1,441 million
$1,749 to $2,367 million
The range shown for 1979/80 and 1984/85 relates to the Commission's "low" and "high" forecasts of Australian consumption and crude production given in Annexure "A", No. 2.19.
24.4 Conservation and Cost This estimate of approximately $2,000 million as the
cost of imported crude by 1984/85 is based on the assumption
that there will be no increase in the price of crude oil above
present levels. This assumption is almost certainly far too
conservative.
The present cost of imported crude oil, although it
225
has quadrupled over the last three years, is still well under
the alternate cost of other fuels such as those derived from
shale and hydrogenisation of coal.
"The likelihood is that the apparent cost of imported crude will
at least increase at a rate approximately equivalent to that of inflation and, on constant money values, may also increase to
just under the alternate cost of other fuels."
24.5 Governments Should Initiate Conservation Policies
The matters referred to in the last section raise doubts
as to any large importing country's capacity to pay for imports
on the scale discussed. In turn this means that governments
must actively interest themselves in the conservation of
resources, both indigenous and imported, and in measures designed
to discourage and restrict all but necessary consumption.
When this Commission was in Canada, the Canadian
Government was publishing full page advertisements in the major
daily newspapers as part of a campaign to condition the public to the new energy environment and to provide useful hints on
how to save energy. In the United Kingdom, the Commission
inspected a range of leaflets and pamphlets intended for broad
circulation, again mostly on a "household hints" basis. As the
consumption of fuel oil for the generation of electricity and for household heating forms a considerable part of total
consumption in these countries, the emphasis was mostly in
these areas.
24.6 Public Education on Conservation
The Commission considers that a deliberate campaign of public education on the scarcity of energy resources, together
with practical advice as to how motor spirit may be conserved,
is an essential precondition for public acceptance of policies of conservation, which will have to be implemented and which
are likely to prove unpopular.
226
24.7 Will High Prices Aid Conservation?
The basic mechanism of conservation, however, remains
that of price. Australian crude oil at $2.33 a barrel is the
cheapest in the world and motor spirit derived substantially
from it, even with present levels of taxation, encourages
consumption and the misallocation of energy resources.
For reasons of conservation alone, the price of
Australian crude should be increased by the imposition of excise
to at least world parity price and the price of product modified
accordingly. In short, governments should act to discourage
consumption by the price route.
Most importing countries have already done this and the
price inclusive of taxation of motor spirit around the world is
generally far higher than in Australia.
24.8 Price Elasticity
Unfortunately, it is a characteristic of the market
for motor spirit that it is "price inelastic", that is increases in price do not, to a proportionate degree, inhibit consumption.
This does not mean however that there is no consumer response
to price increases.
In the United Kingdom, particularly, and in France, the
Commission had discussions with officials who were monitoring the effects of the substantial rises in price consequent upon the OPEC price increases. In most cases consumption had turned
down significantly although at markedly different rates for
different products.
Although qualitative studies had not been done there was a general estimate that the downturn in consumption derived
from the current recession rather more than from the pressures on prices. The renewal of prosperous conditions it was expected
would bring an increase in consumption although the trend line
might be lower.
227
Price, therefore, can only be considered one weapon
amongst others in the armoury of weapons which government will need to apply to discourage consumption.
228
PART X
HOW TO CONSERVE SUPPLY
25. HIGHWAY MODE IS LEAST EFFICIENT * ( i ) 25.1 Studies in the United States suggest that within the
transportation sector, the most inefficient sector is the highway
mode comprised for the most part of passenger cars.
"... the efficiency of the urban motor bus in terms of passenger miles per gallon can be two to five times greater than the automobile and any diversion from the latter obviously offers
considerable savings potential." Report of the (U.S.) National Petroleum Council on Energy Conservation in the U.S." (September, 1974)
The Report recommends five measures as offering the
greatest conservation potential (i) Smaller cars. This was expected to become the largest single factor in reducing
fuel consumption; (ii) Improved vehicle maintenance;
(iii) Modification of exhaust emissions and gasoline lead regulators;
229
(iv) Speed limits;
(v) Improved automobile design.
Changes in engine and vehicle design need considerable
lead time for implementation. The impact of changes naturally
is gradual as older vehicles not incorporating the new
efficiencies are phased out.
25.2 Technological Prospects for Reduced Consumption
With appropriate encouragement by 1980/85 a number of
changes in design may help reduce proportionate consumption.
These include:-(i) Possible development of lightweight diesel
engines, which are mechanically more efficient and place less strain on refin
ing resources. American studies suggest
a potential fuel economy of 16 to 20% in
fuel usage.
(ii) Possible development of the stratified-charge engine which combines the prospect
of a 15% economy in fuel usage with a
potential for lower exhaust emission
levels.
(iii) The elimination of components that
require additional power: engine fan,
alternator, power steering pump, air conditioning. When combined, the
reduction of accessories' fuel can
achieve a saving of 2.5 m.p.g.
(iv) Reduction in weight and aerodynamic
drag and the use of radial tyres can
reduce fuel consumption.
25.3 Smaller Vehicles are Essential In the short term in Australia, the Commission considers
that the substitution of smaller vehicles and above all, smaller
230
engine sizes should be strongly encouraged. Profligate
conspicuous consumption of motor spirit by display vehicle will have
to be discouraged, in favour of the use of utility vehicles.
Ideally to achieve this necessary objective, the cost of annual vehicle registration should be steeply graded. This
would require the cooperation of all State Governments. If
this cannot be done the Australian Government should raise the
sales tax level on the familiar eight cylinder and six cylinder
sized engines in those cases where no special circumstances exist,
to punitive levels. Similarly punitive sales tax should be
levied on torque converters, air.conditioners or other accessories
which notably add to fuel consumption.
Of course public acceptance of such drastic measures
will depend at least partly upon the institution of measures and programs designed to educate the public to become
aware of the true cost of energy and the limited alternatives
available. These proposals must be viewed as an alternative to even more drastic proposals which would limit the production,
importation and use of motor vehicles.
25.4 The Example of Singapore At least one country has already moved in this direction.
The Government of Singapore imposes an excise of 45% of market
value on new vehicles plus, where appropriate, an import duty of 45%. In addition steeply rising taxation based upon volumetric
capacity of engines is levied in terms of the following table
TABLE 16
PROGRESSIVE ENGINE TAX SCALE Engine Size
Below 1000 cc 20
Tax
cents/cc
1001 - 1600 cc 25 cents/cc
1601 - 2000 cc 30 cents/cc
2001 - 3000 cc 40 cents/cc
3001 plus 65 cents/cc
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Thus the annual registration for a large engined vehicle of say
3,500 cc would equal $S2,275 per annum (approximately $A742).
The imposition of these levels of taxation has been
accompanied by a publicity campaign designed to educate the
public on the economic impact of energy costs and the ways in
which individual citizens can assist. The cooperation of the
major oil companies in a "how to save" campaign has been sought and obtained.
Concurrently, Singapore has severely restricted motor
vehicle access to down-town areas and greatly expanded public
transport.
25.5 Some Countries Have Smaller Vehicles
Many countries which have a longer tradition of
expensive motor spirit have formulated long term objectives
relating to motor vehicle specifications and design. In Italy
the average engine size was for many years under 1200 cc.
Motoring circumstances differ between countries but at least
Australian city motoring could be performed efficiently using
very much smaller sized engines than those presently used.
Smaller engines doing more miles per gallon represent
the major hope for significant conservation based economies in consumption. In view of the long lead time for changes in
engine design this prospect ought to be pursued immediately.
25.6 Specific Recommendations on Conservation
The Commission recommends that the Australian Govern
ment as a matter of some urgency, evolve integrated policies
designed:-(a) to educate the public of Australia to an
awareness of the need to conserve energy especially in the transportation sector.
(b) to implement practical programs to discourage
232
the use of vehicles with large engines and vehicle
components which require the avoidable use of transporta
tion fuel.
(c) alternatively, to encourage the use of small
and very small engines.
(d) to raise substantially the cost of transporta
tion fuels to all consumers except the public sectors
of transportation, by the imposition of taxation.
(e) to levy high to punitive sales tax on large
sized engines and fuel using components.
(f) to attract the cooperation of the public,
State Governments, oil companies and vehicle manufactur
ers and importers in achieving these ends.
233
PART XI
REFORMING DEALER COMPANY RELATIONSHIPS
26. AUSTRALIA AND OVERSEAS
26,1 F.air Marketing Petroleum Act (U.S.)
In considering reforming dealer company relations, the Commission adopts as its objective the statement
appearing in the Fair Marketing of Petroleum Act executed
in 1975 by the Senate and House of Representatives of the United States of America in Congress assembled
"Declaration of Policy Sec. 2 Competition, non discriminatory practices
and equal access to supplies for all
retailers and distributors are essential
to the fair and efficient functioning of
a free market economy. Gasolene and
other petroleum products should be produced, distributed and marketed in the manner most
beneficial to the consumer. It is the policy
of Congress to assist consumers and marketers
achieve these goals."
234
26.2 The Dealer Company Relationship is Fundamental
No relationship in this industry, with the exception
of the producer consumer relationship itself, is more fundamental
than the relationship between the companies and their lessee
dealers.
That relationship is unsatisfactory and calls for
reform.
There was a time before the introduction of solus
trading when all dealers were individual proprietors. In New
Zealand, almost all are to this day. In Australia some still
are but the majority of mainline stations are managed by
lessee dealers.
Can the clock be turned back? In the Commission's
judgment - no.
Why does a man become a dealer? The answer should be
- to make money. More however is involved than this and
essentially the representation held out by the oil companies
themselves to the unitiated is - become a dealer and be
your own boss, become an "independent businessman". Put
another way - become a lessee proprietor in much the same way
as formerly a man may have become an owner proprietor.
This has been the basic position of the oil companies.
The Commission believes that in practical terms it is simply
not true that the dealer has effective independence.
But the ideal of harnessing the entrepreneurial
energies of dealers, defining an area of independence by a lease and granting the dealer something like the independence
that the companies attribute to him may provide an effective
substitute for proprietorial independence.
234a
In other countries with similar social and economic
systems to our own, and often with the identical companies,
governments have earnestly studied this precise relationship.
The answer that seems to be emerging is this - there should be
such an appropriate degree of divorcement between the functions
of the company as landlord and the function of the company as
product supplier as to enable the dealer to operate both as a
secure lessee and as an independent proprietor of an entrepreneurial
business.
The critical document which governs this relationship
is the lease.
26.3 The Alberta Report Recommendations
In December 1968 the Gasoline Marketing Inquiry Committee set up in the Province of Alberta in Canada, reported to the
Government of Alberta. The Committee had been instructed to
inquire into the marketing of gasoline in Alberta and to consider
the relationships between oil companies and service station
operators. The Committee summarised its major recommendations as
follows :-
" (a) as a preventative measure to help reduce the rate of lessee turnover and to reduce the loss of lessee investment - the provision of essential information to prospective lessees in a service station prospectus:
"(b) to provide the service station lessee with reasonable security for his investment and his business operations - by requiring a five year lease which is not terminable except in designated circumstances;
"(c) as a solution to some problems of the continuing operator, whether lessee or owner - a service station operator's Bill of Rights to afford him some freedom of enterprise and a measure of protection against the
arbitrary actions of oil companies which now vitally affect his business profits and security;
(d) as a step toward the solution of discriminatory pricing practices - the prohibition of some oil company practices which create ties or eliminate competition, and the removal of some obstacles created by oil companies which help to prevent price competition;
235
"(e) as a solution to the credit problem of agents operating bulk stations - credit to be declared to be the responsibility of the oil company where it properly belongs and the bulk agent to be relieved from guaranteeing the debts of all of his customers;
"(f) as a solution to problems in the enforcement of the intentions of the Fuel Oil Tax Act - that persons entitled to the privilege of purchasing gasoline which is wholly or partially exempt from tax be given a permit which will entitle the holder to make such purchases and
to obtain "F" vehicle licences where applicable;
" (g) as a step toward improving the usefulness and accuracy of government records - by keeping some records by company rather than by industry, and by requiring annual licensing of service station operators, bulk outlets, wholesalers and refiners;
"(h) as a step toward providing the government with more adequate information on which to base its decisions - the establishment of a continuing organisation to conduct economic research and to assemble and coordinate
information on energy resources and other matters affecting the economy of the province." (Exhibit 221, pp.44-45)
The Alberta Committee considered that in any case where
a retailer of petroleum products was required or permitted,
amongst other things, to invest his own money or to take a risk
of losing his own money, he should be entitled to certain basic
rights. Some of these are referred to in the summary. Others included a limitation on a lessor oil company's right to terminate
the dealer's lease other than by a notice in writing served on
the service station operator not less than six months prior to
the expiration of any five year lease or renewal. Furthermore,
the lessee occupying a service station should have a right of
first refusal on any new lease and the lessor should not rent
the service station to any person for a lesser rental or on more
favourable terms and conditions than had first been offered to
and declined by the existing lessee. If the lessor decided to
sell the service station, the lessee in possession should have a right of first refusal and the lessor should not sell the service
station at lower price or on more favourable terms and conditions than had first been offered to and refused by the lessee. (Report,
pp.34-35)
236
The Committee set out what it described as rights of all
retailers. Some of these were as follows :-
"(c) to determine the hours during which his business would be open to serve the public, subject only to com pliance with the laws and by-laws of the place where he carried on business, and no oil company which is his
landlord or supplier should offer or give any inducement or advantage or impose any penalty or sanction to influence the operator in his free choice of business
hours.
"(d) to buy, sell, stock, display and advertise on the premises any brand or kind of tyres, batteries, accessories or other merchandise.
"(e) to buy, sell, stock, display and advertise on the premises any kinds or brands of lubricating oils and greases, anti-freeze, kerosene and other petroleum products.
"(f) to service vehicles on the premises or in the lubricating bay or in the service bays with any kind or brand of anti-freeze, oil, grease or lubricants.
" (i) to receive from the oil company or other supplier which advertises its brand name products to the public, at no cost to the retailer, any tickets, chances, gifts, bonuses, premiums, or other promotional items
the retailer may require to enable the retailer to play his part as advertised in the brand or product promotion.
"(j) to receive compensation from the oil company for providing any services which the oil company advertises that the retailer will provide free or will provide at less than his usual price; ...
"(k) to do such advertising on his business premises or elsewhere as he sees fit ...
"(1) to buy and sell any gasoline he chooses, whether brand name or off-brand;
"(m) if he has more than one set of tanks and pumps, to dispense one brand of gasoline from one set of tanks and pumps and another brand or an off-brand from the other set or sets of tanks and pumps." (Report, pp. 35-38)
237
26.4 The Petrol Retailers Charter
The matter of reform has been discussed on an international
level and the Commission was furnished with the "Petrol Retailer's
Charter", adopted in 1970 at the 24th Congress of the International
Office for Motor Trades and Repairs. On page 2, it makes the
point that :-
"... economically the sales outlets are strongly dependent on the contents and wording of the agreements between the dealer and the oil company, whose products they sell. Therefore it is necessary to set minimum requirements to be laid down in the agreements, which have so far been characterised by the economically unequal relative power of the parties to the contract".
There follow a considerable number of demands which, it
is said, any such agreement should meet. The agreement should be
transferable, either against payment or gratuitously to any third
party against whom the other party cannot submit well founded
objections with regard to honesty, solvency and expert qualifica tions. In case of the death of the retailer or his sudden
permanent inability to further observe the agreement, his successor should be given a reasonable time to transfer the agreement if he
does not want to continue it. In the case of termination of the agreement by the supplier without good reason, the retailer
should be entitled to compensation for the investment made by him in buildings, equipment and stock, in so far as these had not yet
been written off according to reasonable standards and also for
the goodwill built up by the retailer. The oil companies should
not have the right to enter independently into competition with their retailer within the territory allotted to him. The Charter
acknowledges the obligations by the reseller to his customers
and to his fellow retailers.
26.5 Major Disadvantages of Australian Dealers None of these minimum standards have been set by legis
lation or regulation in the Australian market. All that has been
done relates to the provision of rostered trading hours in certain
areas in certain States.
236
The Commission sets out lessee and licensee dealers'
complaints in 10.2 to 10.9 and examples of terms common in leases
and licenses used by the companies in 11.5. The companies'
explanations for the inclusion of terms which, as the Commission
states in 11.6, are harsh, are set out in 11.6 to 11.8. The
Commission's observations on the form of leases used are found in
11.8 .
In regard to dealers on company-owned sites, the
Commission finds the following major faults with present arrangements :-
(i) It is not uncommon to find dealers with no current
written lease or licence.
(ii) On occasions, the dealer is only a licensee, that
is the holder of no more than a personal right to occupy
the premises. He has no estate or interest in the
premises and no security of tenure.
(iii) Where the dealer has a written lease, most of the
terms are for the benefit of the companies and to the
burden of the dealers.
(iv) There are under the lease, many reasons, some of
the most trivial kind, for which the dealer can be dis possessed and his term ended. Thus, even when he has a
lease for a term of years, the reality is that the dealer
is there during the company's pleasure. He has no
effective term.
In particular, some leases contain several pages of pro
visions of a housekeeping nature, such as sweeping; repairing; cleaning; opening; shutting; performing; checking; or refer to or
incorporate other documents containing the same lists of impera tives. The omission to perform any one of these provisions is sufficient, according to the terms of the lease, to empower the
company to evict him.
239
Other clauses require the dealer to run his business to
the satisfaction of the companies "in every respect". The effect
of these provisions is that the dealer's lease can in many cases
be terminated at any time at the will of the lessor. Put alter
natively, although the lease may be for a three year term, the
number of causes which give the company the right to dispossess
the dealer are so many that he can be dispossessed at any time
for insignificant reasons. His tenure is in reality no more
secure than that of a tenant at will.
2 6.6 The Companies1 Answer
When questioned about these provisions, the company
witnesses reacted variously :-
(i) Some said that the provisions had been included
in the documents by overcautious legal draftsmen.
(ii) Others said that the leases should be redrafted
to exclude most of such provisions.
(iii) All said, and the Commission accepts that they
meant it, that their company never would terminate a lease on any of the many trivial grounds available under
their company's own lease document.
The Commission considers that this last observation
misses the whole point.
Every time a representative of an oil company walks on
to the forecourt of a lessee dealer, both know that the lessee
can, according to the terms of his lease, be dispossessed for any one of a number of minor causes. The term of the lease is
of little significance.
This gives the company a substantial psychological and
practical advantage. It also robs the dealer of any true inde
pendence. The representation made to the Commission by many
240
companies that the dealers are in fact "independent businessmen"
cannot be supported. For reasons stated in 11.8, the procedure
for relief against forfeiture provides no solution for the dealer
faced with eviction for breach of minor conditions of his lease.
It does not even offer a solution for the licensee dealer in
such a position.
Despite the almost universally one-sided terms of leases
and licenses, there are counter-acting factors
(i) Good dealers are not easily found and the
companies naturally seek to ensure that they keep
successful dealers.
(ii) Company witnesses have told the Commission that
their companies recognise the importance of the relation
ship between the company and its dealers and the need to maintain this on a satisfactory basis in the cause of
successful marketing.
(iii) There are obvious administration difficulties
from the company's point of view in frequent dealer
turnover.
(iv) There is evidence that in cases of hardship, companies will sometimes financially assist their
dealers.
But fundamentally, the terms of company leases and licenses which have been in use for many years speak for them
selves. While companies are permitted to impose such terms,
reform is only at the whim of the individual company. Where such terms are employed, whatever the company's policy as to
enforcement, the undesirable psychological impact of the terms
remains.
241
At 10.3 the Commission refers to the fact that insecurity
of tenure, real or imagined, inhibits dealers from coming forward
in their own defence.
To remedy the unsatisfactory state of current relation
ships between companies and their dealers on company-owned sites,
all dealers must have the security of a lease and clauses which
have the effect of terminating the lease for trivial causes must
be eliminated so that the dealer has independence at least
closer to the ideal of "the independent businessman". Further
more, as the Commission has already stated, dealers must have a
conciliation and arbitration tribunal to which they can go and
have the merits of any dispute between them and their lessor simply
and quickly determined.
26.7 Negotiations in Australia
On 13th April, 1973 the South Australian Automobile
Chamber of Commerce wrote a letter (Exhibit 48, Appendix C, p.18
and Appendix F thereto) to all the major oil companies setting
out basic principles that the Chamber sought to have adopted.
These principles concerned the nature of the dealer's agreement
with his oil company. Some of them appear to be drawn from
the Petrol Dealer's Charter. It is useful to make mention of one or two of them, without in any sense derogating from the importance of all of them. The Chamber sought to have rentals
fixed for the initial term of the agreement and rentals payable
during any renewed term subject to negotiation, and in the event
of negotiation failing, to arbitration. The basis of payment
for fuel purchases should be meter sales, Dealers should be
bound to conform to reasonable standards of housekeeping.
26.3 Shell's Response to Dealer Proposals
Shell responded to this letter on 8th May, 1973 and it appears from the evidence that some substantial measure of
agreement was reached between the Chamber and Shell. It also appears that Shell formulated a lease on the basis of discussions with the Chamber of Commerce. For some reason, which is not clear, further negotiation stopped. In his final submission to the
242
Commission, Counsel for Shell stated (Transcript, pp.4963-4964)
"MR. SEARBY, Q.C.: The basic propositions of policy which the Shell company subscribes to in relation to this area are as follows: firstly, the initial lease for a dealer or in respect to an outlet should be for
a one year period with either party having the right to terminate on 30 days notice prior to the end of the lease. In the second place, once the trial period is over, dealer leases should be for a minimum period of three years, a lesser period to apply at the option of the
dealer. Thirdly, a dealer lease should be a term lease expiring on an ending date, that is it should not be in effect a 30 day or 60 day lease by reason of the right of the company to give notice. Notification of the
supplier's intention not to renew the lease should be given six months before the end of the date. In the fourth place, should the supplier intend to lease an outlet to another after giving notice not to renew, the
previous dealer should, in Shell's view, be notified in writing of the basis on which the decision not to renew is made should the dealer so require. Fifthly, the supplier should have the right to give six months
notice to vacate the premises for the purposes of recon struction or to change the mode of operation, subject to the proviso that the supplier must offer the new premises to the dealer for operation or another equivalent outlet. If the supplier fails to do that one of course
looks to the question of compensation.
"Fundamentally, the supplier's rights to cancella tion of a lease should be for dealer default in payment of indebtedness; bankruptcy or insolvency; if the outlet is unaccountably closed for a period which could be set
at three days or something like that; if the dealer dies or there is damage to the outlet; if the premises are expropriated or if there is a change of ownership or capital structure.
"The dealer's failure to perform the agreed obliga tions of the lease may result in termination provided notice is given by the supplier and a remedy period is afforded to the dealer. There may be some dispute
about the appropriate length of the remedy period, but that seems to be a question de minimis. For properties on lease to the lessor any termination which applies to the lessor under the head lease would apply similarly
to the company's lessee.
"Finally, dealer leases should contain property management obligations and operating conditions which state in sufficiently precise terms the obligations of both parties.
243
"In relation to those matters which are matters of policy, the Shell company says that it is appropriate to consider the inclusion of an arbitration clause and it has no objection to the inclusion in leases of an arbitration clause."
26.9 B.P.'s Position
In his final submission to the Commission, the Counsel
on behalf of B.P. (Transcript, pp.5033-5034) stated that B.P.
supports a three year lease for dealers, supports a six months'
notice period for termination or non-renewal and strongly supports
an arbitration clause to deal with any dispute between landlord
and tenant.
26.10 THE COMMISSION'S VIEWS
In the Commission's view, the following matters are fundamental to a satisfactory and equitable relationship between
the dealer occupying a company-owned site and his oil company :-
(i) The relationship should be that of lessor and
lessee, not that of licensor and licensee. In the
Commission's opinion, it is essential that dealers have the security of a lease. Furthermore, the Commission
considers that the lease should be a period of not less than three years. Dealer organisations in other countries
have urged a minimum five year lease. But the prevailing
view in Australia, as it appears in the evidence before
the Commission, is that a three year lease is satisfac tory from both parties' points of view. During the first
year of the initial lease, if the parties agree, it is
appropriate that each have the right unilaterally to terminate on the stipulated notice. The appropriate period would appear to be 30 days. However, in the
event of the lessor exercising this right, it is desirable that so far as possible, the investment of the lessee in
the site should be protected. The easiest way to provide for this is to provide that the oil company compensate
him by paying him a fair value for his plant, equipment
244
and stock as it stands on the site. If agreement
cannot be reached, the matter should be arbitrated.
Once this initial period of one year has elapsed, any
further termination or non-renewal by either party should
only be on the basis of a minimum of six months' notice
prior to the expiry date or on the basis of a substantial
breach of the agreement, as for example non-payment of
rent. Subject to this right to terminate on six months'
notice of the expiry date, the lease should be an ever green lease, with provision for re-negotiation of the
rent at the end of each period. If such negotiation
fails, the rent should be fixed at conciliation or by
arbitration.
(ii) The lease should not contain any requirement that the lessee purchase petroleum products or T.B.A.
items from the oil company. Furthermore, the hours of trading should, subject to legislation providing for
rostering, which is dealt with elsewhere, be a matter
entirely for the dealer himself. However, the dealer
may be required to keep the business running and open
for a reasonable period on each weekday.
(iii) The lessee should be permitted to transfer the
benefit of his lease provided the transferee is a
person reasonably acceptable to the oil company. In particular, there is no reason why this right should not devolve upon the personal representatives of a
deceased dealer. If in making such a transfer the dealer can, in effect, sell the goodwill of his business, this should not be prohibited or inhibited in any way
by the lease.
(iv) So far as possible, the terms of the lease should be short and clear. The Commission has obtained and
examined forms of leases used in other countries. Fundamentally what is required is a lease containing
245
basic "real estate" terms conforming to the law and
practice of each of the States, together with a short
series of special conditions, as, for example, those
establishing a submission to conciliation and arbit
ration and a reasonable housekeeping clause.
(v) Elsewhere in this Report, reference is made to
the charging of an economic rent, and the prohibition
of discriminatory pricing practices by oil companies.
In the course of his address, it was submitted by
Counsel Assisting the Commission that as the price for
exclusivity clause, so far as motor spirit was con
cerned, there should be an express clause entitling the
lessee to avoid the exclusivity clause if the lessor
company discriminated against him in the wholesale
price at which it supplied.
The Trade Practices Commission has refused to authorise exclusivity clauses. Accordingly, this particular
approach seems closed. However, the Commission considers
that steps must be taken to prevent price discrimination
of the sort it has observed in the Victorian market.
It is apparent that there are problems in enforcing the
provisions of Section 49 of the Trade Practices Act 1974
in cases where price discrimination is not such as
substantially lessens competition in the market as a
whole. The Commission believes that Section 49 should be amended to come into line with Section 2 of the
Clayton Act, as amended, so as to render illegal discrim
inations in price which have the effect of injuring destroying or preventing competition with any person
who either - ( a ) ( b ) ( c )
(a) grants;
(b) or knowingly receives the benefit of such discrimination; (c) or who is a customer of either of them.
246
Such a provision fixes more narrowly upon the
probability of an adverse impact on the competitive relationship between the reseller and his competitors
(primary line injury); between the favoured and dis
favoured purchasers (secondary line injury); and
between the customers of either of them (third line
injury). Such an amendment would ease the burden of
administering the illegality of a price discrimination
by eliminating the necessity for an exhaustive market
analysis. If such an amendment is not made to Section
49 of the Trade Practices Act, it is essential that a
clause be written into every lease obliging the lessor
to adhere to this standard. While the proposed re structure of pricing in the industry should greatly
reduce the potential for price discrimination, its
frequent appearance in this industry suggests that more
direct measures are necessary.
(vi) In the United States of America, a number of
State Legislatures have passed legislation regulating the relationship between the oil company supplier and
the service station dealer. A common feature of this legislation is a mechanism whereby the dealer is able
to challenge the oil company's conduct before a court
or arbitrator. The procedure is simple. The dealer has to show to obtain a remedy that the company is in
breach of the legislation or, alternatively, of its agreement with him. Legislation of this type has come
to be known as the "dealer's day in court" legislation.
Throughout Australia, dealers, in order to enforce the agreement or protect themselves against unfair
conduct or breaches of the agreement by the oil com
panies, are compelled to resort to ordinary court procedures. These are expensive. Resolution of the
problem may take considerable time. Furthermore, the
procedure tends to harden the attitude of each side.
247
Inevitably it is weighted in favour of the oil companies
who can prolong the matter and add to the cost by
following a course of appeal. There is indeed little
incentive for a dealer to try to fight his oil company
landlord through the court and his lease is generally
drafted in such stringent terms that he would be fool hardy to do so.
The Commission considers that an opening for con ciliation and arbitration needs to be established. In
the first place it should be possible to refer any
dispute between a dealer and his oil company to a con
ciliator, who can deal with on an informal round-the-
table basis. The aim is to provide a cheap simple and
speedy method of solving minor difficulties. There is
ample precedent for such a procedure to be found in industrial relations legislation. The Commission pro
poses that leases or supply agreements include a
clause whereby the parties agree that in the event of an issue arising between them, it may on the motion of
either party be submitted to conciliation. The con
ciliator will be nominated by the Government or by the
Agency to which reference elsewhere has been made,
proceedings will be relatively informal, with the dealer representing himself or, at his option, being
represented by an officer of his trade association,
and the company being represented by one of its staff. Legal representation would not be permitted and costs
would not be awarded. Decisions would be binding on
the parties unless arbitration was invoked.
If, and the Commission believes this would only be
an occasional case, conciliation does not solve the
problem, the parties should be able then to resort to arbitration. Again the lease would contain a sub mission to arbitration and the arbitrator would be
appointed by the government or the Agency. Again,.
248
the procedure should be as informal as possible but the
decision of the arbitrator should bind the parties and
should not be open to any further appeal. As complicated
issues may well have to be canvassed, legal representa
tion should be allowed the parties. The proceedings
would be conducted very much as an industrial arbitration
might be conducted. The arbitrator should have a dis
cretion to award costs but the Commission would not
expect him ordinarily to award costs against dealers.
It is considered that these two tribunals would
perform a very valuable role. In any attempt at sub
stantial readjustment of industry, considerable hardship
may be imposed upon dealers. In the past dealers had,
in the judgment of this Commission, no effective
recourse.
The process of rationalisation of this industry
will scarcely be tolerable unless this "dealer day in
court" concept can be introduced to ameliorate where
possible the effects of rationalisation. It is of course contemplated that the companies will equally have
access to conciliation and arbitration when they so wish, and that the tribunal's function will be to define so as to protect the rights of both parties.
Subject matters which may be expected to be raised
in conciliation or arbitration proceedings, but without
limiting the list of topics, are :-
(a) the termination for cause of leases;
(b) price discrimination against lessees by
companies; ( c )
(c) the quantum of rents which might be paid on
renewal of leases;
2 49
(d) adequate "housekeeping" practices by lessees;
(e) transfer of leases;
(f) any difficulties arising out of the surrender
of leases and evaluation of assets.
26.11 Proposals for a Lease The form of the conciliation clause and the form of the
arbitration clause are Annexure "B" to this Report, as part of
a list of clauses which the Commission considers appropriate for
a form of lease between companies and dealers.
It is not intended that Annexure "B" should be regarded
as a precedent for a lease. The lease may well have to be
varied to meet a large number of differing circumstances and
the legal context of each lease will depend upon relevant State
legislation which does vary.
Rather should Annexure "B" be regarded as setting out
in broad terms the type of provision that the Commission considers
should be incorporated in leases.
250
PART XII
RATIONALISATION OF OUTLETS
27. WIDE AGREEMENT - TOO MANY SERVICE STATIONS
27.1 The Commission finds, and virtually all of the oil
companies agree, that there has been a considerable overbuilding
of service stations in Australia. In general, this trend does
not appear to be continuing, although new service stations are
still being built and fairly large investment is being maintained
in the redevelopment of older sites. In two States, as a result
of initiatives from the State Governments, the first steps
towards rationalisation have been taken and some companies, for
their own commercial reasons, have dropped less economic outlets.
Overbuilding of stations has resulted in average
throughputs very considerably below the physical capacity of the stations, particularly those in the metropolitan and pro
vincial areas which are large, well situated, and of modern design. Some further evidence of the gross under-utilisation
of asset capacity has been uncovered by the Commission when, during inspections of service station sites, the Commission
saw relatively small and poorly furnished outlets selling well over 100,000 gallons a month and in one case over 300,000 gallons a month against a national average of about 10,000 gallons
a month.
251
Demand for motor spirit is not evenly spaced throughout
the day but tends to peak in the morning and evening hours during
which most people travel to and from work. The physical dispensing
capacity of a station is not the sole measure of utilisation of
the facilities.
27.2 Australian Throughputs Compared with Canada and the United States
Another indication of the degree of overbuilding of
Australian service stations may be derived by comparing average
station throughputs in Australia with those in the United States
and Canada. This comparison is shown in the following table.
TABLE 17
AVERAGE SERVICE STATION THROUGHPUTS
1974
Australia Canada United States
Total Retail Outlets (000) 17.1 30.8 250.0
Estimated Total Sales to Retail Outlets (million gallons a year) 1,990 6,800 85,900
Average Monthly Sales per Outlet (000 gallons) 9.7 18.4 28.6
The average monthly sales of Australian outlets are
about half of those of Canadian and only one third of those of the United States outlets and in both these countries there is
considerable pressure to increase gallonages to improve service
station economics. These figures are based on all retail outlets,
including pumps at grocery stores and small outlets. However, a
comparison of mainline outlets only in each country would show
similar proportionate results.
27.3 Market Share and Service Station Numbers In Australia and in some similar markets overseas until
recently, oil companies have traditionally competed for market share by the acquisition or erection of more and more branded
252
service stations. Indeed, market shares are very closely
correlated with share of outlets. The correlation between markets and number of outlets is shown in Table 6 (15.3).
Competition in Australia has traditionally meant
competition for market share, not price competition.
27.4 Solus Trading Helped Cause Proliferation
The move to solus trading in 1951 generated
competition to acquire solus-branded sites. (8.6) Those
companies that lagged in site acquisition responded by
sponsoring new site construction. The competition for new sites was exacerbated by the entry of new marketers; Total
(C.F.P.) in 1955, Kangaroo in 1959 (taken over by Sleigh
in 1962), Phillips in 1962 (taken over by Sleigh in 1967),
Amoco in 1962 and XL in 1966. The development of the local
Australian refining industry made the acquisition of a captive market of secure company-owned product outlets
especially attractive.
253
27.5 Australian Product Sales Generated Upstream Profits
The companies were able to compete on the basis of outlet
numbers because the marketing of motor spirit, despite the
increasing proliferation of stations, was profitable. There were
two aspects to this. In the period from the mid-1950's to the
mid-1960's, the companies generally viewed "downstream" refining
and marketing activities as providing outlets for crude oil
production, primarily in the Middle East. This was quite profit
able and the companies viewed profitability on an integrated
system basis. Thus, upstream profits in crude oil production
were available to finance and subsidise if necessary downstream
investments. (see discussion at 8.11 to. 8.14)
"... refining-marketing operations are generally considered as profitless or unsatisfactory, and we have heard much of the 'downstream losses' that 'must be incurred' if a company is to market its crude. But downstream 'losses' reckoned by deducting from receipts on intra-company accounting figures rather than arm's
length prices for crude and for tanker services have no meaning. These fictitious prices are a legal and open method whereby taxes are minimised." (The World Petroleum Market, p .166, by M.A. Adelman, Professor of Economics at the Massachussets Institute of Technology)
The establishment of ceiling prices by the South Australian Prices Commissioner did not effectively limit profit
opportunities due to the conceptual basis and data used by the Commissioner. (32.2)
27.6 Competition was not Price Competition For many years competition was almost solely on a non
price basis reflecting the market dominance of the major inte grated international oil companies. The Australian-owned companies
were at least to some extent dependent on the majors for crude and for product supplies and tended to compete in a similar
fashion to the majors. There have never been any independent refiners and Australia is remote from other refining centres capable
of supplying product. In contrast to the United States of America,
Canada and much of Europe, fully independent marketers with independent sources of supply, competing with the major oil
254
companies on a price basis, have never become established in
Australia. Until recently there has been very little competitive
pressure to reduce motor spirit prices in the market.
27.7 High Dealer Margins Protected the Inefficient
There was also very little pressure to produce competitive
dealer margins. Lack of competition on price at the pump, non
existent or ineffectual price control by Governmental authorities
and the power of dealer associations to recommend pump prices, and
hence dealer margins, all acted to ensure that dealer margins were
set at a high enough level to protect the great majority of the most inefficient stations. Thus, under the shelter of excessive
wholesale and retail margins, there was sufficient profitability
available in the motor spirit marketing chain to justify continuing
investment in service stations.
27.8 No Effective Control of Outlet Numbers
A final cause for the proliferation of service stations
was the lack of any effective control by governments within
Australia, and by local government, on the establishment of new
sites.
27.9 Failure of South Australian and New South Wales Schemes
The South Australian site reduction scheme is discussed at 19.2 and the New South Wales scheme at 17.3 to 17.4. The Commission considers that in substantial terms both were failures.
Why did they fail? The conventional view is that they did not
proceed any further because of the Trade Practices Act.
The Commission considers that the coming into force of Trade
Practices provisions merely provided the occasion for the revelation that the scheme had failed. In fact the schemes had always been ineffective because of their failure to force any adequate redistribution of gallonage.
Furthermore, it is regrettable that the passage of the Trade Practices Act could be regarded as any occasion for not
pursuing a rational program of disinvestment.
255
27.10 South Australian and New South Wales Schemes - Lessons to be Drawn
There are several lessons to be drawn from these ration
alisation schemes. Of particular importance is the fact that
after the first 10% closures, the companies encountered consid
erable difficulty even with the significantly reduced targets
which had had to be agreed upon by all. In effect, due to the
relations between outlet numbers and market share, the lowest
common denominator that the most recalcitrant company was willing
to accept became the closure target.
The first 10% closure was relatively easy as almost all
companies had some sub-marginal sites that they had no objection
to closing. Each succeeding closure "bite" out of the service
station populations became more difficult, as better and higher
volume stations had to be closed. Furthermore, some "leakage"
was possible as closed sites could be reopened by independent
operators and have been since the schemes broke down. The companies believed that with the Trade Practices Act in force,
any further voluntary schemes would necessitate exemption from
some provisions of the Act. There are now no State-wide voluntary schemes. Each company determines its own rationalisation
strategy.
27.11 Are Such Schemes Practical?
In fact this Commission entertains grave doubts as to
whether it would be practical to proceed further than the initial
"bite" on a percentage basis. An examination of closures in Australia which includes the effects of the South Australian
and New South Wales programs shows that the overwhelming number of closures during 1973, 1974 and 1975 were of dealer-owned
sites, mostly in the sub-5,000 gallons a month range.
256
TABLE 18
RETAIL OUTLET CLOSURES IN AUSTRALIA
1973 TO 1975
THROUGHPUT TOTAL NUMBERS, 1973 TO 1975
GALLONAGE RANGE Company-- Dealer- Total (gpm) Owned Owned 0 - 5,000 255 2,025 2,280
5,000 - 10,000 241 102 343
10,000 - 15,000 100 17 117
15,000 + 8 15 23
604 2,159 2,763
Of the total number of 2,763 outlets closed on an
Australia-wide basis, no less than 2,025 were dealer-owned and
under 5,000 gallons a month. While it can be conceded that
every little bit helps and while no criticism is offered of the State Governments concerned, in terms of rationalising the
essential area of mainline service station trading, the South
Australian and New South Wales schemes scarcely touched the problem.
27.12 Advantages of Rationalisation * ( i ) Despite this history, the Commission believes that the
objectives of rationalisation are valid. There has been a
considerable volume of complaint from the general public and from
trade associations against the proliferation of service stations.
These complaints include :-
(i) the social and aesthetic nuisance created by the
building of service stations,
(ii) the negative impact of proliferation on dealer throughputs and incomes, and
257
(iii) the costly inefficiencies in distribution
perpetuated by proliferation.
A significant program of service station rationalisation
can have the following advantages :-
(a) Lower margins, both wholesale and retail, will
be required for the economic viability of dealers and
companies;
(b) The capital investments in those stations that
remain will be more fully utilised;
(c) There will be reduced scope for ruinous price
competition as disparities in economies of scale will
be reduced;
(d) Nevertheless, the average real price of motor
spirit to the Australian public could be reduced;
(e) Dealer incomes may be improved, or at least the
problems of low volume, low income dealers can be
mitigated; however, some unemployment in the industry will probably occur;
(f) There may be an aesthetic improvement as service
stations are removed.
Economies of scale in motor spirit marketing is the
underlying factor which makes possible the achievement of many of the advantages of rationalisation. To understand the operation of this factor, it is necessary to examine the economics of motor
spirit marketing and then see how economies of scale are
applicable.
258
PART XIII
BASIC ECONOMIC FACTORS IN RETAIL MARKETING
28. SERVICE STATION ACTIVITIES
28.1 Most retail motor spirit sales are made through pumps
located at service stations. The remaining retail volumes are
sold through pumps located at a variety of business establishments including motor vehicle sales dealerships and country general
stores. Outlets in this latter category do not generally have
the retailing of motor spirit as a primary activity and very
rarely would be owned by the oil companies.
A modern service station engages in a number of
activities. Motor spirit and oil are sold on the pump islands. Tyres, batteries and accessories are sold. Repairs are performed
ranging from simple tyre repair to complex engine tuneups. Some stations may sell non-automotive products such as confectionery,
cigarettes, soft drinks and ice. Some stations have automatic
or semi-automatic car washing facilities. A few may have associated cafe bars or restaurants.
28.2 Service Station Economics for the Dealer - the Balanced Operation The provision of each of the products and services offers
the dealer a profit potential. His skill in managing his business premises and facilities and his labour force, both
specialised and non-specialised, is an important determinant of
259
his profitability. The basic function of the station, the
retailing of motor spirit, brings a constant flow of traffic
across the forecourt. Each vehicle provides the opportunity
for non-motor spirit sales if the dealer and his employees are
skilful in identifying the needs of the motorist and in selling him the products and services he requires. A "balanced"
operation for a modern service station would derive roughly half
the total gross margin from the sale of motor spirit and the other
half from the sale of other products and services. As these are
generally performed inside the work and lubricating bays, they
are referred to as "inside business" as opposed to pump island
or forecourt business. According to Shell mainline service
stations carry out more than 50% of all mechanical repairs in
Australia, (Exhibit 230, p.29) sell about 25% of replacement
tyres for passenger cars and constitute a main supply point for
a comprehensive range of spare parts and accessories.
The major expenses incurred by the dealer are for labour,
materials and supplies, utilities such as light and water, and
rental of the site from his supplying oil company. Labour costs
are the largest single operating cost item. Demand for motor
spirit is not spread evenly throughout the day, but generally
peaks in the morning and evening. Thus in order to avoid potential labour wastage, it is important for the dealer to
(i) use some casual labour to cover peak demand periods and (ii) generate non-pump island work for the labour employed full
time, such as minor repairs and services. Wages to employees
typically average 40% to 50% of gross profit, excluding the
value of the dealer's own labour.
28.3 The Dealer's Investment in his Site Even though lessee dealers do not have any real property
investment in the sites they lease from their supplying oil
companies, they do have to make a significant investment in the business. This investment covers equipment, product inventory and credit extended to customers. A minimum capital investment of $10,000 distributed according to the following table appears
260
necessary for a small station in the 8,000 to 10,000 gallons a
month range :-
TABLE 19
Investment % of Total
Motor spirits and oil 25
T.B.A. 20
Cash 5
Tools and equipment 10
Cars and vehicles 35
Miscellaneous 5
TOTAL 100%
Significantly greater investment is required for higher
volume outlets. An outlet selling 30,000 gallons a month would
probably require a dealer investment of at least $20,000. (see
Shell Exhibit 230 , p .24) Most dealers are under capitalised,
particularly those in small marginal outlets, and often receive
long-term loans from the supplying oil company in order to enter
the business. Naturally, a part of the earnings from the outlet
should be considered as a return on the dealer's capital.
The dealer will generally pay himself drawings of a
certain fixed amount a week or month to cover his living
expenses. The dealer's final profitability will be a result of the interaction of all of the factors des cribed. After servicing his capital investment, the amount of profit he earns should be considered in regard to his hours
(most mainline stations operate 80 hours a week or more) and the
fact that as a self-employed businessman he does not receive fringe benefits such as paid annual and other holidays, penalty
rates, sick pay, workers' compensation. In some cases, the companies will provide the dealer with profitability assistance.
(Shell Exhibit 230, p.23)
261
28.4 Service Station Economics for the Oil Company
The chain of branded retail outlets supplied by each oil
company consists basically of two groups of outlets, company
controlled, most of which are leased to dealers, and dealer-owned.
Dealer-owned outlets are usually supplied under contracts designed
to run for a term of years. The dealer generally receives a
discount off the wholesale or dealer tankwagon price. Currently
this discount is in the 2 to 10 cents a gallon range, but averaging
2 to 3 cents. See Annexure "A" No. 2,15. The dealer who owns his own outlet may also receive a number of other inducements in order
to sign a branded supply contract with an oil company. Dispensing
pumps and storage tanks may be provided along with identification
signs. He may receive a loan at favourable rates of interest or
a company contribution toward expansion or maintenance of his station facilities. He may also be given advertising or other
allowances.
However, there is a degree of insecurity for the companies
with dealer-owned outlets as they may change suppliers at contract
expiration dates. Furthermore, most of these outlets are not the
type of modern, high volume potential outlets that the companies
seek, especially in urban areas. These are more likely to be
company built chains of company "owned" stations. These stations
include sites where :-
(i) the company owns the land and builds the
facilities;
(ii) the company leases the land on a long-term
basis, generally 15-20 years, and builds the facilities;
and
(iii) in a few cases, where the company leases both
the land and the facilities.
262
28.5 Site Selection
In selecting sites, especially for company-owned
stations, a number of factors are considered by the company. For
each potential site, the company attempts to analyse the traffic
flow patterns. There are two components: a local residential
traffic flow, especially important in providing a market for non
motor spirit sales at the outlet, and transient traffic flow.
The size and nature of each of these markets is analysed, the
accessibility and visibility of the site is weighed and the
competition in the immediate market from other stations is con
sidered. "Accessibility" in this context means accessibility of
the particular site to the passing motorist. Involved are con
siderations of traffic flow, street frontages and size of fore
court. "Visibility" has a marketing connotation, again relating to the impact,the presence, colour and design of the outlet may
have upon the passing motorist who may be so arrested and brought
into the service station outlet. From this evaluation emerges an estimated motor spirit sales volume for the site. Based on the
forecast volume and the company's estimate of the sales potential
for other products and services, the dealer income potential of
the site is evaluated. The ability of the site to generate an
acceptable dealer income is an important criterion in site
selection, according to the companies.
28.6 The Company's Return on Investment The return to the company from its investment in a
company-owned station is derived from the sum of two streams of income to the company, rental paid by the dealer and profits on the
supply of petroleum products to the dealer. (see 13.4) For new
sites, supply profit estimates are generally based on the marginal
or incremental cost to the company of product supply. (B.P.
Exhibit 226A, p .120) The companies frankly acknowledge that service station rentals received from lessee dealers are not
economic in the sense that they are not based only on the investment or market value of the site as would be the case in a straight forward real estate transaction. For example, Shell's Exhibit
230, p .36, states :-
263
"Rental is only one of the factors taken into account by Shell in calculating the profitability of a service station. Whereas an ordinary landlord in seeking a return on his capital investment at a certain rate can look only to his rent and, in calculating that, makes allowance for any expenditure he may be obliged
to incur by way of meeting rates and taxes or of making repairs, Shell in seeking a return on its capital investment naturally takes into account as well the return it will get on the petroleum products supplied by it to the particular service station. For a service
station is not merely premises to be let so far as Shell is concerned but as well an outlet for its products.
"In assessing profitability, Shell calculates in relation to each company controlled retail outlet a return of a certain percentage per annum after tax on capital invested. Rental is taken into account as a factor in arriving at the earning power of, or the return on, investment in service stations, but unlike the rents of owners of commercial properties who purchase or construct them for investment purposes only and have no direct interest in the trading activities of their tenants, the rents of Shell service stations do not bear a fixed ratio to the capital investment in, or the market value of, the service station premises."
Rentals charged as such vary considerably, but 1.5 cents
to 2.0 cents a gallon is a reasonable generalisation. The companies' targets for return on investment in new company "owned"
sites would currently average about 15% on a discounted cash flow basis (discounted cash flow being an established technique
for appraising .investment projects taking into account the
effects of differences in the time value of money): B.P.,
Exhibit 226, p.120; Caltex, Exhibit 281, p .4; Shell, Exhibit 414A, pp.10-11)
28.7 Economies of Scale in Motor Spirit Marketing The economics of motor spirit marketing through service
stations are summarised in Figures 11 and 111 which follow.
264
Figure II Required motor spirits marketing margins
Service station monthly sales volumes (000 I.G.)
N o n -m o to r spirits in co m e
R e q u ire d m o to r sp irits m arg in
2 6 5
Figure III Motor spirit marketing economics
Total m arketing costs
D ealer income
O ther retail costs
Station labour costs
Real estate costs
Delivery costs
C om pany m arketing costs ... ' . . . .
Service station monthly sales volumes (000 I.G.)
The assumptions and data used to develop the figures are fully
described in Annexure "C".
The economic analysis is based on a station assumed to
be typical of mainline company-owned stations in the metropolitan
areas. The figures clearly demonstrate the powerful economies
of scale available in the marketing of motor spirit as station
throughputs increase. The total marketing costs, including return on capital investment, and required motor spirit margins
for the same station at various throughput levels are summarised
in Table 20. Margins refer to the total wholesale plus retail margin available from the refinery or primary terminal gate
through to the retail pump, not merely the dealer margin.
TABLE 20
MOTOR SPIRIT MARKETING COSTS AND REQUIRED MARGINS
Average Station Throughput in Gallons per Month
(Φ/gal) 1 0 , 0 0 0 2 0 , 0 0 0 3 0 , 0 0 0 4 0 , 0 0 0 5 0 , 0 0 0 6 0 , 0 0 0
Total Costs per gallon 6 9 . 7Φ 3 9 .7Φ 2 9 . 0Φ 2 3 . 3Φ 2 0 . 5Φ 1 8 . 7Φ
Less Non-motor Spirit Income -o o
r— 1
1 0 . 0Φ 8. 0Φ 7. 0Φ 6. 0Φ 5 . 2Φ
Required Motor Spirit Margin (wholesale and retail) 5 5 . 7Φ 2 9 . 7Φ
â¢o o 1 —1 (N
O co ID i— 1
1 4 . 5Φ 1 3 . 5Φ
The non-motor spirit income may be somewhat conservatively
estimated for the higher volume stations, as discussed in Annexure
"C"; however, the figures are reasonably representative.
Against the bottom line of numbers may be set the present combined wholesale and retail margin which varies but can
be put at about 25 cents a gallon. Such a margin cannot reasonably be reduced for service stations averaging less than 20,000 gallons
a month ,
267
To check upon the validity of this approach to recently
developed high cost stations, which may be more representative
of any future building, the Commission examined four recently
opened metropolitan company-owned outlets submitted by one of the
major oil companies to test the reliability of its model.
The most striking difference in comparing the economics
of these outlets with those of the Commission's model is in
relation to real estate costs. These are set out below, all
costs being expressed in 1968 dollars on the basis of the
Australian Bureau of Statistics'
houses (Annexure "C").
Commission's Model
High Volume Outlet "A"
High Volume Outlet "B"
High Volume Outlet "C" High Volume Outlet "D"
Index on buildings other than
$122,500
$170,000
$140,000
$160,000 $180,000
The average of the real estate costs of the four
company-owned metropolitan outlets are significantly higher
than those which the Commission has accepted, based on company
data, as being representative of a high gallonage metropolitan
outlet. There would, of course, be a considerable number of outlets whose real estate costs would fall significantly below
those employed in the Commission's model.
268
TABLE 21
COMPARISON OF SERVICE STATION ECONOMICS: 1975 (excluding REAL ESTATE COSTS)
(this table reproduces part of Annexure "C")
Site Comm. Site Comm. Site Comm.
"A" Model "3" Model "D" Model
Comparative 22,300 gallons 31,700 gallons 45,500 gallons Volume: per month per month per month
Company Marketing Costs 3.2 2.9 2.2 2.0 2.0 1. 4
Delivery 1.0 1.0 1.0 1.0 1.0 1.0
Station Labour 9.2 10.2 8.0 8.3 7.6 7.1
Other Station Expenses 3.4 2.4 2.9 2.1 2.3 1.8
Dealer Drawings 2.6) ) 2 V ⢠)
5.9) )
1'6)
2.1) 4.1) )
1·4!
1.5) )
2.3^
2.9) )
1 2* " )
Return on Dealer Investment
)
3.5 j
Total Marketing Costs (excluding Real Estate Costs) 21.8 24.0 19.7 18.9 16.3 15.4
Non-motor Spirit Income 9.9 9.5 9.0 7.8 7.3 6.5
Required Motor Spirit Margin (excluding Real Estate Costs) 11.9 14.5 10.7 11.1 9.0 8.9
If real estate costs are excluded the aggregate of the
expenses and revenues are similar, especially as the throughput
volume increases. For purposes of comparison, dealer drawings
and return on dealer investment are combined.
269
If real estate costs are added in to the Commission's
model (see Annexure "C", Table 4 - Service Station Economics of New Company-owned Outlets), the gallonage necessary for the dealer
to receive an income of $300 a week and an appropriate return
on his investment is a minimum of 25,000 gallons a month. The
higher real estate costs of the four company sites compared means
that, for the same return, the dealer would require even greater
volume. The inference to be drawn is that unless high investment
sites do better than "benchmark" gallonage, they are likely in
the future to be better not built.
28.8 Cost Savings on Higher Volumes (Annexure " C", Table 3) The cost of marketing through a 50,000 gallon a month
station is only 62% of the cost a gallon of marketing through
the same station selling only 25,000 gallons a month.
Based on the figures in Annexure "C", if all mainline
stations averaged 25,000 gallons a month and, through a rational
isation program, the average throughput of those stations that
remain could be increased to 50,000 gallons a month, it would
theoretically be possible to reduce prices at the pump by about
10 cents a gallon, ignoring the impact of inflation on costs
during the rationalisation process.
Of course, such an extensive rationalisation may not
be possible for a number of valid reasons. Furthermore, higher
margins would be required by non-metropolitan stations which
would have lower average throughputs. Thus, such a drastic
reduction in prices to the public is probably not feasible,
but the example does demonstrate the benefits to the public of achieving economies of scale. In the example the oil companies
and dealers also receive benefits. Each are assumed to earn an
economic return on invested capital and the dealer income assumed
is $300 a week (at mid-1975).
-270
In summary, a program of rationalisation of service
stations could help to provide adequate returns on capital
investments to oil companies and dealers, provide good dealer
incomes and make possible reductions in the cost of motor spirit to motorists.
271
PART XIV
RATIONALISATION PROPOSALS: WHAT AND WHERE
29. SOME COMPANIES HAVE RATIONALISATION PROGRAMS
29.1 Some oil companies have already embarked on programs
to rationalise their own service station networks and plan to
close a considerable number of outlets in the future. Not all
companies therefore would commence from the same position. For
example, Mr. T. Young, Marketing Manager of Esso, said in evidence
(Transcript, p .3074) that if the industry were left to its own
devices, there would be a fairly substantial reduction over the
next five years of, say, 30% of outlets. This percentage would however not be uniform for all companies. Further, a "leakage"
of sites closed by the companies and then reopened by independent
owners has occurred in the past and could occur again.
Another problem is that what may be an optimal program
for each individual company may not in aggregate be optimal for
the industry as a whole. Almost certainly only those sites from
which a "spill" to another company-owned site of gallonage is to
be anticipated will be considered eligible for closure.
29.2 Close Sites or Redistribute Gallons?
The two rationalisation schemes of the New South Wales and South Australian Governments have already been discussed.
Both proceeded on the basis that sites should be closed with an
initial proposal of 10-12%. Both achieved this closure target
272
and both then broke down. While a number of reasons have been
advanced for the breakdown, all of which may have operated to
some extent, the Commission considers that the essential reason
for breakdown lay elsewhere.
The first 10% could be chosen from sub-economic outlets,
often in the nature of "backyard" pumps in rural or fringe
areas where gallonage was so small that the continued presence
or absence of the outlet hardly mattered. However, as they
closed the divisor into each company's total sales fell and
produced a seemingly encouraging result. For instance, there
are thousands of outlets throughout Australia where the volume
of motor spirit throughput is in the 0 - 5,000 gallons a month
range, that is their average gallonage a month is 2,500 to 3,000
gallons. To close ten of these outlets would only redistribute for the rest of the system the amount (25,000 to 30,000) normally
done by one higher grade suburban station. But put a figure ten
less into the total sales of the company and the result in terms
of average gallonage looks better. The Commission did encounter
in Melbourne one small site doing 315,000 gallons a month or about the equivalent at one site of perhaps 100 sites in the range discussed.
A second step of 10% reduction, which was never taken,
would start to bite into the real problem. But it would still
be possible for one company to close 10% of outlets averaging 3.000 gallons each, while another closed 10% which average
10.000 gallons each.
The Commission concludes that mere percentage closures
are a quite uncertain guide to the effectiveness of any rational isation scheme. The aim of the scheme is to close uneconomic
outlets but most importantly, at the same time to promote the redistribution of that gallonage to improve the throughput and economics of those which remain. (see 28.7 and Appendix "C")
273
29.3 Gallonage Objectives and Redistribution
The objective in a rationalisation program is not the
closure of any number of stations per se, but the achievement of
significantly higher volumes in the remaining stations and the
concomitant gain in economies of scale.
This latter conclusion has led the Commission to determine
a reasonable objective for rationalisation over a period of five
years, in terms of average gallonages which might be achieved.
The economics displayed by the "benchmark" service station as it
has been called can be considered by consulting Annexure "C".
Of course it has to be appreciated that the scheme is
aimed at a constantly shifting target. Consumption of motor
spirit to 1984/1985 is estimated to grow at between 2.9 and 4.7%
per annum (23.5) which, if no new service station sites are
built, will tend to increase present turnover. The Commission
anticipates that about 40% of the difference between present gallonages and the "target" or benchmark station will be achieved
by annual growth and about 60% from closures.
29.4 Focus of Program The Commission identifies four broad areas, not at all
equal in size or importance which need strong differentiation in
any disinvestment program. These four areas, with accompanying
descriptive definitions are as follows.
29.5 Rural Outlets; Dealer-owned These outlets are best represented by the small
isolated outlet, often a store, post office or roadside stall facility. Gallonage is almost always very low and the income generated is usually small and supplementary to the income generated
by the site's major activities.
274
Such outlets provide an important service in isolated
areas. The Commission is satisfied that even with respect to
such outlets, rationalisation involving the reduction in numbers
of outlets with corresponding increases in gallonage would be
beneficial. However, in administrative terms, this would involve
a case by case analysis based on fluctuating and elusive criteria.
Rationalisation would be expensive, slow and imperfect. The Commission therefore does not recommend a rationalisation program
with respect to such sites except to the following extent :-
(i) These outlets should conform to the pattern of
economic rationality. This means particularly that
product should be sold at a true economic price reflec
ting in particular the distance through which product
is transported, the size of the drop, economic rental
for pumps and maintenance costs. This will undoubtedly mean that product sold under these circumstances from
sites lacking convenience and the economies of scale
will be higher. No one should expect otherwise. If,
under these modest pressures, some outlets do close this should not be regretted. Another way of making
much the same point is to eliminate the cross subsidies
discussed in 31.2.
(ii) There is probably a case for observing some
criteria for continued licensing pertaining to the condition of premises and certainly so where public
safety might be involved.
Basically, however, the case for these outlets is based upon convenience in isolated locations, preferably
at low capital cost. Should, in years to come, rationalisation be desired in the interests of economy,
the main criteria for closure would be proximity to other outlets and duplication rather than suitability
of premises or size of investment.
275
29.6 Rural Outlets: Company-owned, including Depots Company-owned service stations in rural areas in
categories similar to those described in the previous paragraph
are not, relatively speaking, very numerous. The Commission
would not propose any program of rationalisation with respect
to them. The economics of such outlets would be affected and
determined by the general reforms of marketing and pricing which
the Commission proposes.
The Commission would regard as "rural" all country areas
outside the general metropolitan area (not necessarily the
metropolitan delivery area) and outside the local government
area of towns and cities with a population greater than 10,000.
While companies should be encouraged to close redundant
or sub-economic outlets, no program of rationalisation is
proposed.
As noted in Part IV, there has been strong, sustained and bitter opposition to retail pump sales to the public at
depots. The Commission understands and sympathises with these objections as present trading is based upon quite unfair price discrimination, favouring the depot at the expense of the service
station dealer.
Should the reforms in marketing and pricing discussed
herein take place, then outlets and depots would be competing on
an equal price-competition basis, the service station outlet
having the advantage of convenience and service and the depot
perhaps a small advantage in price. The Commission sees the
competition inherent in that type of situation as desirable.
The Commission therefore would not propose any rational
isation in rural areas as defined for depots.
276
29.7 Metropolitan and Provincial Town Outlets: Dealer-owned
The Commission is here dealing with the mainline station which is owned by a dealer rather than the company.
In metropolitan areas, such outlets represent 20% of all metro
politan outlets but handle only 13% of product sold.
However, some companies have far higher proportions of
dealer-owned outlets than do others. This disparity arises
because companies that have been operating extensively for many years often reacted to the introduction of solus trading not only
by building new outlets but also by making supply agreements with
owner dealers. These agreements often provide for the funding
of service station reconstruction with rebates from the sum
advanced being deducted from sales of product until the debt
was extinguished.
Thus some companies have acquired a substantial "string"
of outlets, dealer-owned and operated but resembling in style
company-owned outlets.
In such cases any reduction in company-owned outlets
which does not take account of the competitive strength of the
company in dealer-owned outlets would diminish the market
representation of such a company far less than a similar
reduction would diminish the market representation of other
companies.
The Commission has also been informed that some companies
are proposing to sell off sub-economic outlets to prospective owner dealers. This course would be to the advantage of the company. It would get rid of outlets which are essentially
not profit-making but would still hopefully retain the outlets for its product under the supply contract. Additionally, in the event of any rationalisation process, the company's adjust
ment of its retail chain would be the easier because of this divestment of unwanted outlets.
277
On a national basis however, such a course would have
entirely regretable results. It would set up a new generation
of non viable dealers, who would add to the chorus for increased
margins at a time when rationality would require decreases. Such
a policy would perpetuate the problem of the sub-economic outlet
in a form even less tractable than it is at present.
The Commission recommends that to guard against this
prospect all outlets standing to the ownership of companies at
1st July, 1975 and still operating as outlets supplied by the
company, anyone on behalf of the company, or anyone in contractual
relations with the company should, for the purposes of rationalis
ation, be treated as if they were still part of the company's
distribution chain at the time the rationalisation program commences.
A program of rationalisation with respect to this
sector poses special problems. With company-owned outlets the
basic objective is to see that the rationalisation process is
carried out fairly and equitably, with no undue advantage or
disadvantage occurring to any company.
In this sector, however, thousands of individual dealers
are involved. Short of a large bureaucratic process designed
to evaluate the merits of each outlet, there is no way to
reduce numbers similar to the ways which can be applied to
company-owned stations.
There is however a basic decision to be made - granting
that the company-owned sector should be reduced by a substantial
percentage, should or should not the privately-owned sector be
reduced to a commensurate degree?
The argument against commensurate reduction is usually
introduced by referring to the undisputed fact that since the
introduction of solus trading the whole trend of change in the industry has been in the direction of increasing company-owned
2 7 8
outlets and displacing privately-owned outlets, with perhaps a
minor reservation with respect to companies that have closed some of their sub-economic outlets.
The argument for commensurate reduction turns on the
proposition that it would in some way be unfair to expect a cut
back in the oil company controlled sector unless there was a
corresponding cut back in the private sector as well. There
would undoubtedly be in any company disinvestment program some
"leakage" of gallonage from the company sector to the private
sector and it could plausibly be claimed that as disinvestment
progressively continued, the private sector would "build" at the
expense of the company sector. There is, it is said, no particular
reason why this should be desired.
A third ingredient however can be added. To almost
every oil company witness the question of how disinvestment in
the private sector might be achieved was put. No effective answer was ever received. In the South Australian and New South
Wales State supervised disinvestment programs it seems to have
been assumed that in some way the oil companies would close unwanted dealer-owned outlets, presumably by a mixture of cajoling and
denial of supply. Such a program does not commend itself to the
Commission.
A fourth ingredient does perhaps provide a clue to what might be done in this sector. Many dealer-owned outlets in fact
are in physical terms very poor; small, cramped, with small fore
courts causing queues across footpaths and on streets, with
kerbside pumps, bad access, unpaved forecourts and the like.
Indeed the Commission very frequently, and especially in Melbourne,
was surprised that local government authorities ever permitted inadequate, inconvenient and sometimes from a traffic point of view,
hazardous types of sites to continue to exist and operate.
Mostly, because of the intractable nature of the
administrative problem, the Commission does not recommend a
direct reduction and disinvestment program for this sector. It
does expect however that this sector will be heavily influenced
both by measures which will apply to all service stations with
respect to the nature and suitability of premises and by
economic measures which will exert pressure against the continued operation of sub-economic dealer- owned outlets. Many of these
outlets will not prove to be competitive.
29.3. GENERAL RECOMMENDATIONS
(i) The Commission's recommendation is that all
outlets be licensed.
(ii) These licences could and should be made subject
to conditions.
(iii) A progressively implemented and conditioned program should be devised for this particular sector.
(iv) Such a program would provide that at suitable
intervals of, say, one year, all outlets without special
exemption (the program should possess inbuilt flexib
ility) should -
(a) remove all kerbside pumps;
(b) later, possess adequate paved fore court so as to avoid queueing vehicles across paths and
up streets;
(c) later, contain sufficient tank space as to
be able to receive economically large drops; ( d )
(d) otherwise conform to suitable standards
with emphasis on public safety and convenience.
280
In no way are these suggestions intended as an exhaustive
account of methods which might be used to upgrade outlets. This
sector would be subject to a flexible policy designed to shed
unwanted sites and at the same time to permit sites which it would
be reasonable to upgrade, to do so. Undoubtedly however some
sites will be found too inadequate to salvage. They should close.
Further, the proposals for disinvestment which are
recommended in the next section of this Report will have a progres
sive impact on the efficiency of outlets. Improved efficiency,
particularly in the form of increased gallonage, will result in a
larger cash flow and at the same time leave room for an effective reduction in both retail and wholesale margins. This reduction
should be passed on to the public.
Trading conditions for the efficient outlets should
improve, but essentially uneconomic stations will be subject to
costs pressure which will result in closures.
Additionally, it must be borne in mind that the reforms in marketing and pricing discussed in this Report and particularly
the elimination of price discriminatory practices in favour of
poor sites will expose those sites, many of them for the first time, to fair price competition. In this environment many will
fail but this need not be regretted.
29.9 Metropolitan and Provincial Town Outlets: Company-owned This section deals with the company-owned "mainline'
service station in metropolitan areas and provincial towns. The mainline station represents the true problem area as approxim ately 80% of all retail sales of motor spirit in the metropolitan
areas are made through these stations.
It is first necessary to deal with some mistaken views of the true nature of events in the industry. Statistics published
by the Petroleum Information Bureau and referred to argumentatively
281
by oil companies in evidence suggest that the companies have for
some years been closing service stations. One version was pub
lished in the Sydney Morning Herald of 3rd March, 1976 over the
signature of Mr. J.M. Flower, who is Director of the Petroleum
Information Bureau (Australia) :-
"The fact is that service station numbers began falling ten years ago, long before governments took any interest in the matter. At June 1975, there were 16,787 outlets compared with 21,391 in June
1966 - a 21% reduction over nine years during which the motor vehicle population rose steadily."
These figures however are illusory. When broken down
by volume it becomes clear that the substantial bulk of these
closures have been in the private, not company, sector and of
outlets with volumes of less than 5,000 gallons a month. These
outlets in the 0 - 5,000 gallon a month class must average about
3,000 gallons a month and to the extent they represent service
stations that are hopelessly sub-economic.
The fact is that very few of these closures really refer
to service stations at all. Rather they refer to pumps of convenience in yards, factories and business sites, where economics
in terms of distribution cost, pump utilisation and maintenance
became too unfavourable to be persisted in. No one is suggesting
closure for the mere sake of closure. Outlets under 5,000 gallons a month, averaging about 2,500 to 3,000 gallons a month, do not
make very significant contributions to the redistribution of
gallonage to those outlets that remain.
The true target for closure are those outlets in the
10,000 to 20,000 gallons a month range or even higher, which embraces the present average for metropolitan company sites,
especially where the site is carrying a large capital investment.
The following table is derived from information furnished
by the companies and is designed to provide information in percentage terms concerning the relative proportions of service
282
The analysis covers the four years 1973 - 1976 inclusive.
It demonstrates that 80% of all closures are in the sub-5,000
gallons class and very few are in higher ranges. Buried in the
figures are some of the closures resulting from the South
Australian and New South Wales rationalisation programs. The few
larger stations were almost certainly closed because of changes
in physical circumstances such as fire, realignment or redirection of roads.
stations closed assessed in classes according to monthly sales.
TABLE 22
ANALYSIS OF CLOSURES - 1973/1976
PERCENTAGE CLOSURES IN EACH RANGE
Nos. Of closures
0-5,000 gallons per month
5-10,000 gallons per month
10-15,000 gallons oer month
15,000 + gallons per month
1973 724 81.5% 13% 5% 0.5%
1974 1,103 83.0% 11.8% 4.4% 0.8%
1975 936 82.5% 12.5% 3.6% 1.4%
1976* 678 77.1% 14.7% 6.2% 2.0%
* Company estimates not including Ampol and Amoco which
have no predictions on closures after 1975.
To show how totally unsatisfactory it is to gauge
closure by numbers, as the Petroleum Information Bureau has
done without reference to redistribution of gallonage, the Commission publishes the following table.
283
TABLE 23
ESTIMATED REDISTRIBUTION OF MOTOR SPIRIT FROM
CLOSURE OF RETAIL OUTLETS
Vol.Redist. as a % of
m/s sold to retail outlets
Volume Redist. mill. gals.
Volume Redistributed by Ranges 0-5,000 gpm mill.
gals.
5-10,000 gpm mill. gals.
10-15, gpm mill. gals.
000 15,000 + gpm mill. gals.
1973 1.7% 32.7 17.7 8.6 5.3 1.1
1974 2.4% 48.8 27.5 11.7 7.2 2.4
1975 2.1% 42.9 23.2 10.5 5.1 4.1
1976 1.7% 34.9 15.7 9.0 6.3 3.9
Several companies firmly favoured the "let the market
do it" philosophy, and suggested that mechanisms initiated by
the companies would achieve disinvestment. Indeed the inference to be gained from the Petroleum Information Bureau letter in the
Sydney Morning Herald is that the companies were satisfactorily
attending to the problem of too many outlets. Yet gallonage so
redistributed by these efforts ranges from a"high" of 2.4%
to a current "low" of 1.7%. As evidence of voluntary disin
vestment these figures demonstrate the results to be insignif icant. Nearly all the sites tabulated in Tables 22 and 23 on
rational economics and disregarding cross subsidies, would never
be profitable. The economics of scale are so overwhelmingly
proved that the case, reduced to its simplest, for closing one such station in order to double the gallonage of another such
station is very strong.
No company really resists the case for disinvestment.
What they have done or do propose to do about it however varies widely. All companies admit the logic of redistribution of gallonage so as to increase by a substantial degree the average
throughput of the remaining outlets.
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Some, such as Shell, with its Perpetual Network Plan,
Mobil, B.P., Caltex and Esso, have sophisticated programs to
close unwanted outlets. Within each company, the accompanying
concentration on large outlets and the attempts to collect
"spillage" from each closed site by maintaining sites further
down the line may be successful in raising individual gallonages.
However, what may be optimal for each individual company,
may not be optimal for the industry as a whole. Further, the
major constraint on closure is the fear that market share will be lost to competitors who are often just as well placed to capture
the gallonage from a closed service station as is the closing
company.
In answer to questions presented to companies by the Commission, Shell, Mobil, Caltex, B.P. and Esso did advise of substantial programs of disinvestment, although these were not
necessarily on the scale the Commission prefers.
However Ampol said :-
"We are unable to predict the closure rates as requested for 1976/1980 in the present severely depressed Australian property market. It is still our policy however, as stated in earlier submissions
to the Commission, to rationalise our outlets where they are shown to be uneconomic in the return on investment."
Total advised of its proposed closures. They were
minimal.
Amoco had no closure proposals to lay before the
Commission.
Sleigh had a very modest proposal concerning closures
and a rather more ambitious program for further building.
28 5
The Commission considers that the disinvesting group -
Shell, Mobil, Caltex, B.P. and Esso - should not experience any
great difficulty in reaching the broad objectives for disinvest
ment proffered by the Commission.
However, it offers the following observations concerning
Ampol, Amoco, Total and Sleigh.
(i) Their disinvestment objectives where they exist
are inadequate.
(ii) The net effect of this position is that they
have been benefiting and without more, will continue to
benefit from the gallonage lost by the disinvesting
companies as they close outlets.
(iii) This loss can only have the effect of dis
couraging disinvestment in those companies which would
like to proceed with their programs. In short the competitive postures of the companies are calculated to
inhibit disinvestment.
(iv) Initially the effect of this process may be to the advantage of the companies that are not disinvesting.
They will gain gallonage.
(v) But subsequently, if the Commission's economic
studies and presumably the studies done by Shell,
Mobil, Caltex, B.P. and Esso, are correct, the stations
owned by the non-disinvesting companies will become
less and less economic.
(vi) If the Commission's proposals on price and margins are accepted the non-disinvesting companies
will not be sheltered from their own inefficiencies by excessive margins and returns.
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(vii) The Commission sees as the appropriate course
a scheme of disinvestment so structured as to require
all companies to attain minimum objectives.
29.10 Policy Objectives
In policy terms, then the Commission sees as its
objectives :-
(a) to define an appropriate disinvestment objective;
the Commission discusses this objective in terms of a
hypothetical "benchmark" station;
(b) to define a program by which this can be done which will not notably prejudice any company, particularly
as to its market share. The Commission has referred to
this principle as the "principle of neutrality". No choice is made which is intended to favour any one
company against any others;
(c) to lay down public examinable criteria which
permit each company both to examine its own position and
to assess the proposals of its competitors;
(d) to provide for an "honest broker" to review and
administer the program. The "honest broker" could be
a government or an Agency established by government;
(e) to encourage by a necessary appreciation of
their problems, companies to participate and cooperate
actively in a disinvestment program; ( f )
(f) so to determine the disinvestment objective as to reinforce the evident movement of some company managements towards disinvestment. This can best be
done by freeing them from the constraints which
presently limit their unilateral progress.
2 8 7
(g) to assist those companies whose present programs
do not include significant disinvestment (and there are
several such companies) to take steps towards rational
disinvestment. Such steps may include amalgamations,
exchanges of markets as major steps to rationalisation
and limitation of marketing costs.
29·. 11 The Disinvestment Objective
The Commission has considered the concept of a "bench
mark" station. Presently the average gallonage for company-owned
metropolitan stations range from a low of 9,900 in Queensland for
Sleigh to a high of 25,600 in New South Wales for Caltex. The
present price including both wholesale and retail margins is far
too high due to the lack of true economies of scale in the
retailing sector. (Annexure "C" Table 3) These economies must be
achieved.
As described due to the economies of scale in motor
spirit marketing, higher volume stations require much lower margins than do lower volume stations. Stated another way, as
margin levels are lowered, either by direct reduction or by
failing to increase them as inflation raises other prices, only progressively higher volume stations will be economic. This
pressure is designed to reinforce any administrative disinvestment program. The outlets will not be wanted that cannot pay their
way on the available margin. The relationship of required margins
to various station throughput levels is illustrated in
Figure 11. For example, at 25,000 gallons a month a station
requires a total wholesale and retail margin of about 24 cents
a gallon. The same station at 40,000 gallons a month requires
only about 16 cents a gallon in total margin. (Current total
margins are estimated at about 25 cents a gallon. (see Annexure
"C")
288
High margins permit the continued existence of lower
volume uneconomic stations. Present levels of margins are much
too high and as a result, price-cutters are very successful. A
margin squeeze will provide an economic incentive and reinforce
ment to the oil companies' rationalisation undertakings. Dealer-
owned stations, that are primarily motor spirit retailers, will,
responding to the same pressures, assist the trend towards
rationalisation.
29.12 What Margin will be Needed?
The benchmark station proposed (30.5) has a monthly
average throughput of about 35,000 gallons for New South Wales
and Victoria and comparable averages in other States. It will
require a margin of about 18 cents a gallon at current cost levels,
(see Annexure "C", Table 3) The recommended rationalisation
program involves reaching the benchmark station throughput levels
by the end of 1980. Thus, before correcting for cost inflation between 197 6 and 1980 , total marketing margins could theoretically
be reduced in the metropolitan areas by about 7 cents a gallon
from current levels and the price of motor spirit reduced
accordingly.
These calculations are based on providing a 15% DCF rate
of return on the original capital investment in the station, assumed opened in the late 1960's. The return on this investment
component is considered fixed and not subject to inflation. For new investment, higher than benchmark throughputs or other economies would be required to justify the higher cost investment
in new facilities. (see Annexure "C")
29.13 Margins for Rural Stations Rural area service statio'ns will have to be studied
separately to determine appropriate margins. Compared with metropolitan area stations, these stations generally have lower motor spirit sales but, at the same time, higher incomes from
other trading activities.
289
In order to control the total wholesale and retail margin
it will be necessary for government to set or at least monitor both
ex-refinery and retail pump prices. Price control is discussed in
Part XVI.
29.14 Should Prices be Reduced?
The Commission has given serious consideration to recom
mending direct reductions in margins and ex tax price as the dis
investment process proceeds. In terms of economic rationality such a recommendation is fully justified. However, the Commission
is concerned at the traumatic effect this may have on the liveli
hood of many dealers. Dealers have often borne the brunt of this
industry's self-generated problems and will again. There is no
way that disinvestment can be secured painlessly. The Commission
therefore recommends an easier alternative.
Despite its view that margins are far too high, the
Commission does not in the present inflationary circumstances
recommend a reduction in margins. It proposes that from the commencement of the process of rationalisation margins be held at
present face values which would effectively reduce the size of the margin. The economic pressure that this would place against sub-
economic outlets is a necessary part of the total package of policies which must be deployed to secure disinvestment. This
economic or market pressure must be seen to dovetail with the pressure exerted by administrative programs of disinvestment
described in 30.1 to 30.13. The two policies should reinforce
each other, in securing the closure of unwanted outlets.
30. COMPANY ATTITUDE: LET THE MARKET DO IT 30.1 Several companies argued that market forces and company
initiatives could, unaided, achieve disinvestment (29.9) and that
these market forces, which the Commission has described especially in Victoria (15.7, 16.2) should continue to operate as at present
in the hope that in the fullness of time the competitive attrition
of the market place will determine who and what will survive.
All the programs that the Commission proposes are market oriented programs. All are based on the essential dynamics of
290
orderly marketing with price competition. Indeed, much that the
Commission proposes is designed to set the stage for orderly and
fair price oriented competition, and to lay down ground rules within which the companies can compete.
The special plea made for "letting the market do it" as a solution to the admitted marketing ills of this industry is
dismissed essentially because that which is observed that is
competitive, does not conform to the pattern which the Commission
finds socially or economically desirable. This is chiefly because
it is based not on fair competition but on price discrimination.
In short, truly free and fair competition working to
promote efficiency is precisely what is absent in Victoria, and precisely what is not operating presently in the market place.
The "competition" described in 15.7 and 16.2 is based
on grossly unfair and widespread price discrimination supported
by tiers of prices, rationale for which has passed into forgotten
history, secret payments and deals and shifts and stratagems of
the sort described in this Commission's Third Report.
A stroll through Melbourne's suburbs shows handsome
sites and developments now derelict, inconvenient "backyard" sites where fortunes are made and retailing systems designed for
the distribution and sale of motor spirit surviving for the most part by charging heavily for repairs and ancillary services, as
the Commission was told over and over again by the dealers
themselves.
The aim of the Commission is to amend this system so
that fair price competition based on rational and proper invest
ment can protect the Australian public against excessive prices.
The method of the Commission is to adopt that style of
rationalisation which it considers the more forward-looking company managements would adopt for themselves if they were not
291
constrained by the presence of their competitors and the
accidents of history; that is to act to reinforce the trends in
the industry which both here and overseas are moving towards a
reorganisation of the retail market to a form both profitable
and price competitive.
The plea "let the market do it" amounts to a plea to let
the companies do it. "Price war" has run for ten years with
fluctuations in Victoria. There is no reason to expect any imminent
improvement, and there has never been any improvement that has not
proved to be transient and temporary. The essential reason why
"the market won' t do it" is that the present market is poorly
structured. The aim of any program of reform should be to evolve
a market where fair price competition can control the inefficient.
On rationalisation, the Commission accepts the submission
of Mr. P.R. Jordan, Counsel for B.P., in his final submission at
p . 5008 :-
"... we find ourselves in complete agreement with my learned friends (Counsel Assisting) on one other underlying aspect of reform and that is that, in our opinion, the ills that beset the market place, the ills that beset the industry at large are incapable of resolution by cooperative action between the companies. We think that the evils that exist, which can be shortly said to be the distortion of the market place, particularly the Melbourne market place and over-pumping and separately, or consequentially, the loss of profitability to the dealers and particularly those in company-owned sites are too obvious to be gainsaid and that the industry has, as an industry, proven it is incapable of solving these matters by mutual agreement.
"We do not associate ourselves with a lot of the material from our competitors which has been placed before this Commission, which if I may so so, smacks more than a little of what I might term Gothic economics, in the sense that they remind me strongly of the philosophies that pervaded the United States of America in the late nineteenth century. We simply do not believe that in the economy which this country has, the problems can be
solved by what is commonly described as market forces operating in an unstructured economic context. That is little short of the robber baron philosophy and if it is allowed to be applied, the ultimate losers are going to be those who have the least control over that market.
292
"We say that the distortions that underlie all the evidentiary aspects of the problems besetting the industry can and should only be ameliorated and then eliminated by government suasion and supervision and, failing the
effectiveness of government suasion and supervision, by government action and sanction and we stand by that viewpoint ..."
30.2 Licensing Outlets
The Commission has earnestly considered whether there is an effective alternative to licensing. It concludes that
there is not. Licensing is an essential pre-condition for any restructuring of the industry.
Without licensing companies which close sites cannot
ensure that the very same sites are not later opened by
competitors. Reopening precisely negates the whole exercise,
that is disinvestment by closure of unwanted sites, not only with
respect to individual companies but with respect to the industry.
Furthermore, if government is going to influence the direction of
development as well as devolution of the industry, licensing upon terms and conditions is an essential tool of administration.
An immediate problem is the extent of power of the
Commonwealth Parliament to legislate to establish a system for
licensing not only outlets, but also refineries and terminals.
There is no doubt that the Commonwealth Parliament has power so
to legislate for its own territories and that each State has power so to legislate within its own territorial area. The Commission considers that an overwhelming case has been made
for the reform of this industry on a uniform national basis and
it is fundamental to such reform that the market be rationalised in the manner already described. Essential to such rationalisation
is a uniform nationwide system of licensing. The Commission does
not wish to advance any one source of power as preferable to
another. The Commonwealth Parliament's power with respect to
taxation (Section 51 (ii) of the Constitution) can be used and has been used to influence the conduct of persons and companies
on matters that are not within the legislative power of the
293
Parliament. The Parliament's power to impose taxation, with a wide
discretion as to amounts, as to subjects, as to conditions and
as to machinery, provides a basis upon which, in a number of fields
the Commonwealth has been able successfuly to influence the
conduct of persons and companies. In the industry with which the
Commission is concerned it seems possible that the taxation power
can be used so as to impose taxation (for example sales tax) on all
refinery products, but exempt those where :-
(a) the products are retailed through licensed outlets;
or
(b) the products are sold by registered contract.
All existing outlets, including depots, should be
licensed and all contracts should be registered where the terms of
the contract show that it is an ordinary commercial contract.
Exchange or borrow or loan arrangements would not be subject to
registration.
The major advantage of such an arrangement is that
government can place conditions upon licensing or registration.
In the context of disinvestment, the government or Agency would
withdraw the licence of any site closed pursuant to the program
and ordinarily would not permit reopening or to put the complete situation, would not forego the additional level of tax
levied if the site did reopen. Where, as in the case of dealer- owned sites, it is not desired to implement a formal disinvestment
program but rather to upgrade or alternatively close inferior
sites, a government or Agency could gradually insist on more
stringent terms for continued licensing by introducing basic "local government" type standards as discussed in 29.8. In the
case of lessee dealers, a government would not necessarily
continue to license a site unless it were held on a lease in an
approved form.
294
Licensing is therefore a fundamental instrument of policy
and the first step to take. Without licensing very little can be
done to assist this industry with its problems and the Commission's
proposals are dependent upon licensing as the foundation of its
approach to reforming the industry.
The Commission has observed other licensing systems in
operation in countries such as New Zealand and France. The French
system particularly furnished in part the model for the proposal
now put. The Commission considers that a simple system with a
minimum of bureaucratic involvement is the most desirable.
In practical terms, the Commission sees advantages
flowing from licensing
1. Minimum standards for safety, comfort and convenience
can be established, tending against such things as kerbside pumps, inadequate product tanks, unsealed forecourts, queues across pavements and along streets. Outlets not meeting
elementary standards would receive only temporary permits
subject to the premises being upgraded. Standards can be
reviewed from time to time ensuring that the less functional
stations are either improved or closed. Outlets in rural
areas or where special circumstances exist can be wholly or
partly exempt from standards.
It is not contemplated that a large number of outlets
will be closed due to failure to meet minimum physical standards. Those that do close however certainly will fall
into the unwanted category. 2
2. Requirements for new licences for new service stations can be stringently defined. It would be necessary to demonstrate that the proposed trading area was not already
adequately serviced by existing outlets.
295
3. Licences of closed outlets would be withdrawn and can
celled. Outlets would not be licensed to reopen to circumvent
the objectives of rationalisation.
4. Depots, industrial premises, jobbers who buy to turn
product into the retail market, taxi stations and others
wishing to retail motor spirit to the general public would
have to be licensed. They would have to meet the established
physical standards required to obtain a retailing licence.
Product would have to be purchased from the supplying oil
company at the posted delivered dealer tankwagon price
(see 31.9) Thus, licensing would enable the elimination
of "unfair" retail competition from depots, taxi stations
and the like, based upon price discrimination.
5. A licensing program will provide data and machinery
necessary to monitor the companies' progress toward their
rationalisation objectives.
6. It will provide standby machinery necessary to
implement an administrative rationalisation program, should
it prove necessary, through a progressive administratively-
determined program of licence cancellation.
7. By means of the imposition of conditions on licence
government will be able to implement rational policies so
conspicuously lacking in this field. It is suggested that the days have long since passed wherein governments could
ignore this area of industry.
30.3 Alternative Methods of Disinvestment * ( i ) The Commission considered several alternative methods
of disinvestment
(i) It considered and rejected a case by case approach on the basis that it would be slow, clumsy, administratively
elaborate, burdensome and expensive.
296
(ii) It considered a percentage closure basis - so
many percent of outlets a year similar to the South
Australian and New South Wales methods. (19.2 and 17.3)
The Commission has stated its reasons for considering
that this approach proved unsatisfactory. (27.9 to
27.10)
30.4 Matters to be Taken into Account in Programs of Disinvestment
(i) Companies which have current disinvestment plans A number of companies have already moved significantly
towards the disinvestment objective. Some have not moved
at all. This raises the question of starting point.
The Commission's proposals accept present averages with
their inequalities as a starting point which avoids a
significant number of problems. The effect of the Commission's proposals is that each company will take ten separate steps towards disinvestment over a period of
five years but that those companies which have not yet
disinvested will take larger steps than those which have
commenced disinvestment of their own accord and are
therefore already closer to the objective.
(ii) Leakage The problem of "leakage" to the owner dealer sector
of the industry is a significant one. The answer to it
lies elsewhere in the Report and in particular the recommendation concerning posted prices and price
compression. The dealer-owned sector will have to
compete without the benefit of price discrimination and on the basis of its own efficiency. Some will and
some will not be able to. Leakage to other sectors
is discussed at 30.7.
297
(iii) As little administrative interference as possible Within the limits of the program laid down, the
Commission has been concerned to interfere with
companies' domestic managerial arrangements as little
as possible. Under the Commission's proposals, each
company will decide for itself what is to be closed
and what strategy it may employ - provided always
that the objectives are met.
30.5 What is the Benchmark Station?
The Commission considers it entirely reasonable to set
as an objective, at the end of a five year program, the raising
of the standard of operation of company-owned mainline service stations in metropolitan and provincial areas to 35,000 gallons
throughput a month in New South Wales and Victoria and comparable
averages in other States.
This figure of 35,000 gallons is seen as as average
for each chain. The Commission's expectation would be that
the better "neighbourhood" type stations with throughputs in
the range of 20,000 gallons a month would remain viable and
form the bottom half of the "average" range, while a number of larger stations upon highway locations, and self-service
outlets, perhaps of the "gas and go" type, would be found
in the upper range of the average.
Difficulties do intrude.
298
(i) Annexure "A", Nos. 2.22-2.24 show that companies are
essentially unequal in terms of present average gallonage. Some companies have been unilaterally disinvesting and
therefore have already moved significantly towards the
"benchmark" level. Other companies have done little or
nothing at all. Broadly speaking, Shell, Mobil, Caltex
and B.P. should not experience any significant difficulty
in reaching the objectives set. Esso may have some
difficulty, but has impressed the Commission as being a marketer which is likely to compete successfully within
any set of reasonable rules.
Amoco presents difficulties because of its small
size, although the quality of its outlets is superior.
Total is also relatively small and has poorer outlets.
Sleigh's averages in some States, especially Queensland,
are very low. Ampol is pursuing a radically different
marketing policy to other companies, emphasising the supply
of secondary chains, such as Southern Cross, Target Tyres, XL and Yellow Cabs at large discounts while its
own service stations, many of which are on large well
positioned sites and well designed, are atrophying.
Ampol company-owned sites in Victoria average 11,000
gallons a month, which is very low.
This means that companies which have lagged in dis
investment and consequently have many more low gallonage
sites, will have to close far more sites than those
companies which have had the prudence to initiate programs
over recent years.
(ii) Looked at on a State by State basis, it is
apparent that some States have service stations with far lower State-wide averages than do others.
299
This means that if a common benchmark is applied to all
States, in some States marketers will have to disinvest
more than in others.
While it is appropriate that the low gallonage States
should be asked to move further than high gallonage States
- after all they have more to reform - the Commission
is conscious of the need to present attainable targets.
The Commission has decided therefore to recommend that
different benchmarks be set for different States related
primarily to the present level of average gallonage in each
State. This is done with some reluctance as to the extent
any State falls short of the benchmark level of 35,000
gallons a month, to that extent the industry in that State
is less economic than it should be and is consequently being supported by consumers through higher than necessary
margins.
To illustrate this position the Commission cites
Sleigh's position in Queensland. Average gallonage was a
very low 9,900 gallons a month in 1975, produced by a
chain of 128 company stations. The Commission proposes
that company-owned outlets selling less than 5,000 gallons
be closed at once, which reduces the effective number of
outlets to 106.
With a benchmark objective of 35,000 gallons, Sleigh would need to close about 55% of all outlets and if in
the process it lost gallonage by "leakage", as it well might, then the closure percentage could be much higher.
It would seem hardly viable in that form.
This position is not necessarily the worst position.
Several of the smaller companies must have difficulty
in achieving a rational share in the market. Ampol in
Victoria is probably the worst case again.
3 0 0
All this emphasises the fact that if it were not
for excessively high margins, some of these companies
would have been forced from some markets or merged
already. If in the future this becomes apparent it will
not be because of rationalisation. With competition
from companies which are divesting towards an economic
objective they are unlikely to survive in any event without divestment and considerable reorganisation.
(iii)A third observation needs to be made about
Victoria. There the average company station is shown
as 15,300 gallons a month. This is a long way from
a benchmark objective of 35,000 gallons a month.
Nevertheless, the Commission does propose a 35,000
gallon objective. It treats the 15,300 figure as one reflecting the extensive distortions of the Victorian
market brought about by widespread price discrimination
and price-cutting.
The Victorian market cannot be reformed by treating
it gently. While the impact of a reform program for
Victoria may be great it is not likely to be more
traumatic than the events currently occurring in the
market. The process of reform will be much more
productive.
The Commission does not consider that any accommodation
should be made with respect to those companies whose chains have
low average gallonage.
It does however consider that some allowance should be
made in defining the benchmark objective because of the relat
ively low present average gallonages in some States.
3 0 1
The Commission's proposals for the next five years
should be regarded as a first though major step towards rational
isation. There is a case for further rationalisation at the
conclusion of the first five year program and one of the steps
that should be taken is to raise the level of average gallons in the States with lower average gallonages to and beyond the
level of 35,000 gallons a month.
The benchmark level that the Commission recommends for
the various States are :-
New South Wales 35,000
Victoria 35,000
Queensland 28,000
South Australia 34,000
Western Australia 33,000
Tasmania. 32,000
30.6 How is it to be Done?
This disinvestment program is conceived to operate over
a term of five years, under the supervision of the Agency to be
set up in the manner described in Part XVII.
Quite obviously there will be many decisions that will
have to be made concerning the process. An essential part of
the process involves a nominee of the Agency which the Commission proposes to act as "honest broker" between the parties,
whose task will be to shape guidelines, check facts and figures
and perhaps, from time to time, receive representations or even
make representations to the parties about special problems.
After all, no one wants to see his suburb or town totally
stripped of outlets. Amongst the disinvestment programs offered,
some check will have to be maintained to keep the program in
balance.
302
The Commission proposes a program which would raise the
average gallonage of each company's company-owned outlets in
metropolitan and country towns of population greater than 10,000,
from a base at 31st December, 1975 to a target benchmark gallonage
of between 28,000 and 35,000 gallons a month by the end of 1980.
Country towns of population greater than 10,000 are included
because retail marketing in these towns closely resembles metro
politan marketing. The program has as its commencement date 1st
January, 1976 and proceeds in ten six-monthly intervals until 31st
December, 1980, by which time all companies are to have achieved
the benchmark target.
The benchmark figure is based on the Commission's studies
of the economics of service station operations, but modified by
its assessment of the present condition of each State market. It
reflects a level at which significant economies of scale are
available and, based on data supplied by the companies relating to their own disinvestment plans, it is a figure well within the
reach of those oil companies which have, of their own volition,
commenced significant disinvestment programs. Furthermore, it is a level which contemplates in present money values a significant price reduction. The required combined wholesale/retail margin
at 35,000 gallons a month is slightly over 18 cents a gallon, compared to approximately 25 cents a gallon at present throughput levels, indicating a theoretical price reduction of the order of 7 cents a gallon. From a community point of view, it involves
a level of outlet closure which will provide a sufficient number of remaining outlets to ensure the maintenance of a satisfactory
level of service to motorists in the various markets.
The basic operational principle underlying the program
is one of neutrality, which has as its objective the aim of non-interference with companies' market shares. Market shares
in the context of the program are expressed as the proportion of
gallons sold through company-owned outlets in metropolitan and designated provincial country towns by each company at the base period - 31st December, 1975 - for commencement of the program. Neutrality in this sense means that other things being
303
equal, the disinvestment program will not result in companies
arriving at the end of the program with different market shares to
those which prevailed at the beginning. As is discussed later,
there is an important qualification to the likelihood of this
result due to the occurrence of leakages. Also the program does
not preclude the possibility of fluctuations in market shares
during the course of the program by virtue of the operation of
competitive forces, including possible amalgamations of companies'
networks, exchange of networks, expansionary sales campaigns, and
normal market shifts.
The application of the program requires the calculation
of estimated market shares in the relevant sector in volume terms
for each company for the twelve months ended 31st December, 1980.
This information can be based either on forecasts supplied by the
companies themselves or by reference to official forecasts com
piled by the Hydrocarbons Division of the Department of National
Resources. The Commission has employed this latter data in an
exemplary way later in this section to illustrate the practical
procedures in the application of the program. It is noted however
that these forecasts are consistently the highest and in terms of
the level of disinvestment required, impose the minimum require
ments on companies. Use of the companies' own estimates would
suggest significantly higher closure rates.
The proportion of total forecast motor spirit sales
which would flow through company-owned metropolitan and designated provincial country town retail outlets in 1980 can be estimated by
assuming that the same proportions which apply in 1975 will also
apply in 1980. This is consistent with the policy of neutrality previously expounded. For example, if the focus of the program
is on company-owned outlets at the national or State marketing
level - which in fact will probably be a close approximation
to the actual target area of the program - then, based on the data the Commission has received from companies for the year ended 3-1st December, 1974 , the appropriate proportions to apply to
the 1980 total motor spirit forecast sales would be 72% to derive
304
the proportion of this total sold through retail outlets and 72%
of this sub-total to derive the proportion sold through company-
owned retail outlets. This calculation can be repeated on a State
basis to derive individual State totals for forecast sales through
company-owned retail outlets. These estimates on an individual
State basis and for total Australia are as follows :-TABLE 24
ESTIMATED RETAIL SALES OF MOTOR SPIRIT OF COMPANY-OWNED RETAIL OUTLETS 1980
New South Wales
Victoria
Queensland
South Australia (and Northern Territory)
Western Australia
Tasmania
709 million gallons
474 million gallons
280 million gallons
192 million gallons
142 million gallons
51 million gallons
Total Australia 1,848 million gallons
The next procedural step is to apply each company's base
date percentage market share to the total sales forecast figure
as just outlined in order to estimate what each company's market
share in volume terms in 1980 would be, given constant market
shares. Dividing this figure by the target benchmark gallonage
gives an estimate of the number of company outlets which each company would require at 31st December, 1980 to enable its total
company-owned outlets in the relevant sector to average 35,000 gallons (or as the case may be) a month. This figure has then to
be subtracted from the number of company-owned outlets at the
commencement of the program to give the estimated number of
company-owned outlets which each company would need to close in
order to reach the benchmark target.
An integral part of the program is the necessity for relevant data on the distribution of each company's company-owned
outlets in the relevant sector. Given information which sets out
the sales gallonage of every company-owned outlet in the company's
distribution network for the relevant sector, the actual
305
redistribution of gallons required of each company from the
target closures as outlined above can be represented graphically.
This graph is a simple cumulative frequency graph which, for each
company and for the relevant sector under examination, sets out
on one axis the cumulative number of company-owned outlets at the
commencing date of the program and on the other axis the cumulative
sales gallonage relating to these outlets. From the curve which
is thereby drawn it is possible to read off the gallonage which
would be put up for redistribution from the closure of a selected
number of these company-owned outlets, including any variations
in the level of this redistribution due to the gallonage size of
outlets chosen to be closed.
Redistribution brings up the complication of leakage
referred to earlier. Leakage is defined here as the extent to
which a company gains/loses market share as a result of the amount
of gallons it is required to put up for redistribution in order to
achieve a common benchmark target.
30.7 Estimating Leakage The steps in the program which have been outlined so far
have proceeded on the basis that whatever any one company puts up
for redistribution through closure of a certain number of its company-owned outlets, it regains somewhere else in its national company-owned marketing network. This assumption however, in
practice is certainly false. In fact, leakages would occur. They would occur not only from one company's company-owned network to
a rival company's same network, but also to rival companies' dealer-
owned networks and to their own dealer-owned networks.
The effect of leakage from the company's company-owned
outlets to its dealer-owned network has already been canvassed
and the discussion of leakage which follows deals only in terms of leakage to a rival company's company-owned network. The
logic can easily be extended to include leakage to the rival's
dealer-owned network.
306
A simple formula for calculating the absolute value of
these leakages for each company can be expressed as
li
xi - di
= di - ----------- . t! di
£xi - £di
where li = leakage relating to company "i" di = redistribution of company "i" (as per graph) xi = total sales of company "i"
£xi = total sales of all companies tdi = total redistribution of all companies.
This formula states that as a result of the closure of
a certain number of outlets, a company (i) will put up for redis
tribution a certain volume of motor spirit (di). Of this valume,
it will regain a certain proportion which is assumed in this
formula to be in the ratio of its adjusted market share before
redistribution is taken up. Furthermore, it will also gain a
proportion of the gallons made available for redistribution ty
all other companies. The amount of leakage (li) then will be the difference between redistribution (di) and gallons regained ( xi - di
(txi - tdi . tdij
The gallonage which they will in fact regain can be calculated in two ways :-
(i) on the assumption that it is regained in proportion to the adjusted market share for each company after taking out of the system gallons which are put up for redistri-bution. . This has been assumed in the above formula.
(ii) on the assumption that the gallons are regained in the proportion to each company's proportion of the
total number of company-owned outlets remaining after
the closures have been taken out of the total company- owned outlet population.
3 0 7
In actual practice, it is probable that a combination of
both would apply. Leaving this point aside, the critical point is
that after redistributing gallonage on either assumption, the
revised market shares cannot be the same as they were at the
commencemer.t of the period, except in one special case. For this
to occur would require adjustments to the benchmark target for
individual companies. Such a course of action would not be con
sistent with the rationale of the program and moreover in the
light of rhe Commission's pricing proposals, would be tantamount
to recommending uneconomic levels of operation for such companies
where a downward revision of the benchmark was implied.
What these leakages actually illustrate is the fact
that sone companies at the date of commencement of this program
will hcve already moved some considerable way towards achievement
of the benchmark level. Other companies, on the other hand, will not have made any progress in this direction and, indeed, will
have to some extent already benefited by capturing gallonage
from che closure of certain outlets by the former group. In fact,
the companies fall into two classes - Shell, Mobil, B.P., Caltex
and, to a lesser extent, Esso have all divested themselves of a
fai: number of outlets and have dispersed gallonage into the
marrcet, some of which must have already flowed to other markets as "leakage". However, Sleigh, Ampol, Total and Amoco have
eiiher very modest plans for disinvestment or none at all. Whilst
tie first group should have little or no trouble in reaching the Commission's target, the second group, having a much greater
distance to travel, will consequently have more difficulty. Additionally, having already received the advantage of "leakage"
from other companies' closures, they are now to have the dis advantage of losing something in their turn by the leakage mechanism. These factors will influence the absolute size and
dispersion of the leakages calculated from the application of the
formula, so that in absolute terms demonstrated leakages may represent a measure of the relative efficiencies of each company
(at the commencement of the disinvestment program).
308
30.8 Disinvestment Effects on the Least Efficient - Withdrawal from Market
The Commission discusses elsewhere the proposition that
solutions must necessarily be imperfect. One necessary imper
fection is that the rigours of disinvestment, even in a neutrally
adjusted program, will not fall evenly on the efficient and the
inefficient. No program can be set to meet the abilities of the
lamest dog and no company should expect it to be so.
The Commission considers that the objectives set herein
are moderate and conservative. With some emphasis the Commission
states that this modest program as it stands is already written
down to accommodate all the difficulties that should be tolerated
in the less effective marketers.
The industry is fragmented by nine separate marketing
systems. In the judgment of the Commission, four marketers are all that should ever be needed to provide adequate price competition
and five marketers more than plenty.
The remainder, in a capital intensive industry, are
doing little more than dissipate capital investment so that
economies of scale are the less attained.
A strong case can be made out for the withdrawal of some
marketer from some State markets, perhaps by exchange of markets or perhaps unilaterally. There is also a strong case for merger
of some of the smaller marketing chains particularly. The Commission recommends that every encouragement should be given to
companies to rationalise markets including the use of the Agency proposed to facilitate discussions and negotiations. Should any
marketer withdraw from any State market, obviously he should
obtain a corresponding benefit in the market upon which he chooses
to concentrate for the gallonage foregone. The Agency's approach
will have to be flexible.
309
30.9 Establishing the Data Base
The Agency will need to establish its own data base of
current volumes and throughputs in the geographic areas of metro
politan and designated country towns. This data base will be
available to it in administering the program. The intention in
this Report is to demonstrate the general procedures in an
exemplary fashion with the use of national data, which has been
interpreted as an approximation to the summation of individual
State market data for the company-owned metropolitan and
designated provincial towns sector. All companies have supplied
information setting out the distribution of their retail outlets by gallonage classes on a company-owned and dealer-owned basis
Australia-wide. This information has been graphed for the company-
owned sector and is included as Attachment 1 to this Part,
30.10 Calculating the Closures Required and the Gallonage * ( i ) to be Redistributed
Attachment 2 to this Part is a schedule setting out on a national basis for each company
(i) the average gallons a month per company-owned retail outlet for the year ended 31st December, 197 5;
(ii) the market share for each company in terms of
these sales as a percentage of total sales through company-owned outlets;
(iii) the forecast market share in volume terms for
each company in 1980 using the assumptions previously
outlined;
(iv) the number of outlets which would be required
as at 31st December, 1980 in order to reach a national benchmark target of 35,000 gallons;
3 1 0
(v) the number of company-owned retail outlets as
at 31st December, 197 5;
and
(vi) the number of closures which would be required
in order to achieve the target benchmark gallonage.
The number of closures required for each company and the
associated gallonage required to be redistributed has been
indicated on the graph employing for simplicity of exposition, the assumption that each company closes contemporaneously all the outlets they would be required to close over
the total duration of the program. In reality, the gallons to
be redistributed would depend on the sequential nature of the
program and for individual companies may be greater or less than
this snapshot representation. The calculation of actual leakages for each company is shown in Attachment 3 to this Part. In
summary and having regard to the exemplary nature of this illus
tration, they would be :-TABLE 25
LEAKAGES RESULTING FROM CLOSURE OF RETAIL OUTLETS
Losses Gains
in '000 As in '000 As
gals. percent gals. percent
per of market per of market
month share month share
Sleigh 1,504
CM
i—1
Shell 2,869 2.3
Ampol 1,152 0.9 Caltex 1,023
CO
o
Esso 1,103 0.9 Mobil 303 0.3
Total 346 0 .3
B.P. 54 NIL
Amoco 36
l—1
o
4,195 3.4 % 4,195 3 .4 %
311
and Dealer-owned and from Market to Market
The Commission has received from each company details of
the average sales of motor spirit through company-owned and dealer- owned outlets in metropolitan and country areas.(Annex."A",2.22-2.24)
There are very considerable disparities between companies, both
intra and inter-State and within individual companies between the
average gallons a month of metropolitan and of country company-
owned outlets. By way of example, average gallons a month as at 31st December, 1975 for metropolitan and country retail outlets
combined in New South Wales ranged from a low of approximately
13.000 gallons a month to a high of approximately 25,000 gallons a month. Dissecting these totals to show the relative throughputs
of metropolitan and country company-owned outlets reveals that
these figures fluctuate from a low of approximately 14,000 gallons
a month to a high of approximately 26,000 gallons a month in the case of metropolitan outlets and from a low of approximately
10.000 gallons a month to a high of approximately 25,000 gallons a month in the case of country outlets. Furthermore, the range
of variations between the throughputs of metropolitan and country
company-owned outlets for individual companies is quite wide.
Sleigh's, Total's, Esso's and Amoco's New South Wales country
company-owned outlets average from a little over half to a
maximum of three-quarters of the gallons of their metropolitan
counterparts. On the other hand, in the case of the larger companies, the average gallons of the country outlets were all
in excess of 75% of the average gallons of their metropolitan counterparts, with most of them pretty close together. The
disparate nature of these variations is even more pronounced when
interstate comparisons are made, both between companies and for the same company.
The implications of these variations between State markets could necessitate considerable adjustments to the national benchmark approach, as used by way of example in this section. But the more progressive companies will be approaching
targets of 35,000 gallons a month on a national basis by the end
of 1980.
30.11 Variations in Average Gallonages: Company-owned
312
This is taken as evidence that the target is an achievable one for
every company. This conclusion is also supported by the Commission's
work on service station economics which does not support the con
clusion that the economies of scale available from increased
gallonage would differ markedly from State to State. Any adjust
ment to the national benchmark figure to meet the needs of a
particular State should therefore be fairly minor.
30.12 Companies Disinvestment Plans: Gallonages Achieved bv 1980 The table below sets out on the basis of information
supplied by companies relating to their disinvestment plans, what
the Commission has estimated their company-owned outlets would be
achieving in throughput on a national basis by the end of 1980.
TABLE 26
ESTIMATED AVERAGE GALLONAGE OF
COMPANY-OWNED OUTLETS, 1980 (a)
COMPANY ' 000 GALLONS/MONTH
Shell 32.4
Caltex 32.3
Mobil 29.1
B.P. 29.0
Esso 19.1
Sleigh 19.0
Total 16.1
Amoco )
Ampol )
)
N.I. (b)
NOTE :
(a) Averages are national figures and are based either on the
company's own forecasts or on the low 1980 industry forecast sales
of motor spirit in those cases where the company did not supply a
company forecast. The use of these forecasts to establish bench
mark throughput levels produces the easiest disinvestment strategy for companies in terms of all the forecasts available to
313
the Commission. It is stressed that the averages need to be
adjusted to include as company-owned outlets those outlets which
have been or will be transferred from the company-owned to dealer-
owned category. For example, in the case of Esso, if such outlets
were to be recorded as closures, the average gallonage of company-
owned outlets in 1980 would be shown as 25.3 thousand gallons a
month.
(b) N.I. = no information.
The Commission has also, in the case of Shell, which is
one of the companies whose metropolitan and country company-owned
outlets exhibit little difference in average throughputs, estimated
the average gallonage of company-owned outlets in 1980 on a State
basis in order to get an indication of what can be achieved in
terms of the disinvestment aims of the more progressive companies.
The average gallonage for each State is estimated to be as
follows :-
TABLE 27
COMMISSION'S ESTIMATE OF SHELL'S SALES OF MOTOR SPIRIT TO COMPANY-OWNED OUTLETS
STATE 'JDJ/0 GALLONS PER MONTH
New South Wales Victoria (incl. Tasmania)
Queensland South Australia/ Northern Territory Western Australia
Shell did not provide a company forecast and so these
estimates are calculated with reference to the low industry fore
cast of motor spirit sales in 1980. These figures show, except
perhaps for the Queensland market, that a conclusion that sub stantial adjustments would be required to the national benchmark target for individual States or between country and metropolitan
outlets in individual States is not justified.
34.1
32.0 26.3
34.8
34.9
314
30.13 The Administrative Proposal
What follows is not a detailed administrative program.
That will have to be prepared by the Agency. The Commission sets
out hereunder the type of program it considers necessary.
STEP 1: The precise geographic areas for disinvestment in each
State will have to be defined. These will be metropolitan areas, together with urban centres with a population of more than
10,000. This severs rural areas which, as stated previously
(29.5 and 29.6) should not be included in the disinvestment
programs.
STEP 2: Each oil company must furnish a complete list of all
outlets, including depots, within the defined areas and the latest particulars of gallonage.
STEP 3: Each company must prepare a half yearly plan forward
from a given date which shows :-
(a) location and gallonage of proposed outlet
closures, the number of which must be sufficient
to raise the company's average within the defined area by one-tenth of the difference between its average at the commencement of the program and
the benchmark gallonage. ( b )
(b) proposed approximate date of closures.
315
STEP 4: Each program shall be lodged in writing three months
before the nominated day for the commencement of the six monthly program.
STEP 5 : After satisfying himself as to the apparent effective
ness of the proposal and receiving from the proposing company any
additional information he may require, the "honest broker", at
least two months before the commencing date should publish all
proposals.
STEP 6: Each company can during the ensuing month make any objections to the proposals of other companies on the ground that
proposals are unfair or inadequate. â
STEP 7 : After hearing or conferring with the parties, the "honest
broker" will direct the implementation of the proposals over the
ensuing six months.
STEP 8: In the event of any company failing to meet its obliga
tion to present suitable programs or its obligation under the
approved program, the Agency may cause the licences of the
company's outlets to be withdrawn to a degree commensurate with the default.
Under the scheme each company is at liberty to choose the outlets it will close.
Some companies in some places will be able to close outlets so as to gain "leakage" from the closed site to one of its retained sites. This is a feature of the Shell Perpetual
Network Plan. The Commission however considers that such
316
opportunities will become increasingly rare as disinvestment
proceeds and does not consider that "leakage" in this sense will
alter the basic effects of redistribution.
The Commission has referred to the possible "leakage"
from the company-owned service station sector to owner dealers
and a relative increase in the gallonage of such dealer-owned outlets as the company-owned outlets drop in number. The
Commission however emphasises that its recommendations about
licensing (and the closure of service stations of inadequate standards), about the price structure (including the compression
of prices) and about the prevention of price discrimination are
all designed to dovetail with and support, by market pressures,
the type of disinvestment here proposed. Shortly put, licensing,
price compression and non-discriminatory price competition
should contain the dealer-owned section of the industry to a
degree commensurate with the constraints placed on the company-
owned centres.
317
Attachment I to part XIV National cumulative distribution for company owned retail outlets 1975
Cumulative sales volume/month (mil. gals.)
ATTACHMENT 2 TO PART XIV
AN EXAMPLE OF THE COMMISSION'S RATIONALISATION PLAN AS APPLIED TO ALL AUSTRALIA
1 .
1975 Base Average Gallons per Company- owned Retail Outlets
2 .
Percentage Market Share 1975 Retail Sales through Ccmpany- cwned Outlets
3.
Total Forecast Sales 1980 through Company- cwned Retail Outlets
4.
Market Share 1980
5. 6.
Benchmark No. of Gallons Outlets 19 80 Required
Î00 gals/mnth mill gals. mill. gals. 000 gals/
month
AMOCO 18.3 4.8% ) 88.7 35.0 211
AMPOL 14.8 10.5%
/
194.0 35.0 461/
B.P. 18.6 20.5% 378.9 35.0 902
CALTEX 20.9 13.1%
\ 1848
242.2 35.0 577
ESSO 14.8 5.3% 97.9 35.0 233
MOBIL 17.8 10.9% 201.5 35.0 480
SHELL 20.8 24.7% 456.4 35.0 1088
SLEIGH 13.2 7.4%
J
136.7 35.0 325
TOTAL(a) 13.1 2.8% 51.7 35.0 123
100.0% 1848.0 4400
7.
Total No. of Outlets 1975
8.
No. of Outlets with Average Monthly
Gallonage 0-5,000
9.
Total No. of Outlets 1975
(excluding 0-5,000)
10.
No. of
Outlet Closures Required (excluding
0-5,000)
323 4 319 108
880 75 805 344
1354 26 1328 426
776 0 776 199
445 13 432 199
757 37 720 240
1469 38 1431 343
696 59 637 312
248 29 219 96
6948 281 6667 2267
(a) Estimated
ATTACHMENT 3 TO PARI XIV
an EXAMPLE OF CALCULATION OF LEAKAGES OCCURRING UNDER COMMISSION'S RATIONALISATION PLAN
(1 )
Motor Spirit Sales to Ccmpany-owned Outlets, 1975
(2)
Gallonage Redistributed (000's gals
(3)
xi-di
(000's gals/month) xi per month) di
AMOCO 5,900 1,100 4,800
AMPOL 13,000 3,300 9,700
B.P. 25,400 4,650 20,750
CALTEX 16,200 2,100 14,100
ESSO 6,600 2,100 4,500
MOBIL 13,500 2,200 11,300
SHELL 30,600 3,200 27,400
SLEIGH 9,200 2,900 6,300
TOTAL 3,400 900 2,500
ÎÏί =123,800 irdi=2 2,450 -srxi~s±L= 101,350
(4)
xi - di
ÎÎÏί - STdi '
1,063
2,147
4,596
3,123
996
2,503
6,069
1,395
553
(5) li
(000's gals/ month)
36
1,152
54
-1,023
1,103
- 303
-2,869
1,504
346
PART XV
PROBLEMS WITH CURRENT MOTOR SPIRIT PRICING PRACTICES
31. CROSS SUBSIDIES
31.1 In large part due to the way petroleum product prices
have been controlled in Australia, current pricing practices are
confusing, anomalous and sometimes non-economic. In particular, the pricing structure has acquired, for reasons now historic
rather than actual, mechanisms whereby one product, geographic area, or class of consumers subsidises others. The reasons why these cross subsidies exist, the policies which called them forth,
the effects which they were intended to achieve are forgotten, unknown and sometimes unknowable. The structure of pricing is
just a mess.
31.2 Cross Subsidy: City v Country There is a price differential between city and country
areas; country prices do not fully recognise the higher costs, such as agents' commissions, of marketing relatively small volumes in the country areas. Mr. J.B. Leslie, Managing Director
in Australia for Mobil (Exhibit 229B, p.7) notes that price
control had led to distortion in the total price structure. In particular, metropolitan area trading has offered greater scope
321
for profitability than country trading. At p.11 and p.12 of the
same document, Mr. Leslie says that :-
"The historic wholesale pricing structure understates country selling costs versus capital city areas. This is because some country selling expenses such as agents' commissions and coastal transportation expenses to out- ports such as Townsville, are averaged with capital city
costs when determining prices."
Mr. Leslie considered that this situation gave a dis
torted incentive to invest in metropolitan motor spirit retail
outlets. Data provided by Shell (Exhibit 244B, Part 2) indicates
the country "subsidy" in the metropolitan price is about 1 cent
a gallon.
31.3 Cross Subsidy: Motor Spirit Supports the Rest of the Barrel Studies of market behaviour suggest that distillates and
similar products were, at least prior to 1974, discounted below
the prices set by the South Australian Prices Commissioner to a much greater extent than motor spirit prices were discounted below
the set prices.
The motorist for many years has paid significantly more
than he should to support the less profitable of the industry's
activities, the marketing of distillates and residuals and the
building of sub-economic outlets.
31.4 Cross Subsidy: Rent Disguises Price
Motor spirit is priced in a multi-tiered structure. The
dealer in a company-owned outlet generally pays the highest price, the maximum established wholesale price, also called the dealer
tankwagon price. A part of this high price is disguised rent because the nominal rent paid to the oil company by lessee/licensee
dealers is far below the level required to provide an economic
return on the value of the real estate.
322
The independent dealer generally pays a lower price than
the dealer in a company-owned station. The companies claim that
they are able to give the independent dealer a discount because
they do not have an investment in the site. There is a real
question, however, whether the average discount to independent
stations is, in fact, as large as the hidden rental absorption cost
in the dealer tankwagon price. For example, Esso, in South
Australia, at the same time as it introduced economic rents (see
13.3) reduced dealer tankwagon prices by 6 cents a gallon, making
possible the inference that the effective rent was about 6 cents a gallon. This is generally higher than the average discount
given to dealer-owned stations of 2 to 3 cents a gallon. Thus, it
might actually be that independent dealers are subsidising invest
ments in company-owned stations (see Part III) .
Therefore, the South Australian Prices Commissioner, and now the Prices Justification Tribunal, have been setting not just maximum wholesale prices, but wholesale prices plus an element
(real estate costs and rental) of retailing costs.
Other pricing tiers include jobbers, depots, commercial/
industrial accounts and government accounts. Some of these tiers,
especially government accounts and commercial accounts, may be
priced on a marginal cost basis as they are reasonably segmented
from other markets which are expected to recover the company's
average costs.
31.5 Cross Subsidy: Melbourne and the Rest This pattern can be further distorted if intense price
competition is confined to one market. In this case, the consumer
in all other markets could be said to be subsidising the consumers in the "price war" market. If all retail motor spirit in the Melbourne area was sold at an average discount of 5 cents a gallon,
this would be equivalent to a nationwide subsidy from all other markets of 1.4 cents a gallon to the Melbourne consumers. (That is, if the same amount of money represented by the Melbourne discount was divided by total Australian motor spirit consumption, the
resulting implied subsidy is 1.4 cents a gallon.)
323
Within the retail outlet chain of each marketer, the
economic stations subsidise the uneconomic. The rent paid directly
by the dealers is not an economic rent for the company's real
estate investment. A substantial part of the economic rent for
company-owned stations is buried in the wholesale (dealer tankwagon)
price. Companies, on reviewing the profitability of individual
outlets, may be expected to close only those which lose money on a
marginal (cash out-of-pocket) basis, thus leaving it to the other
outlets in the chain to earn an economic rate of return on the
total company retail marketing investment.
31.7 High Dealer Margins Support Everybody
Recommended dealer margins are generally set at a level
sufficient to keep the marginal operator in business and are
obviously higher than required by the efficient operator. Mr. J.B.
Leslie, in his Proof of Evidence (Mobil Exhibit 229B, p.11)
states that the higher the retail margin, the greater the options
and temptations for some efficient dealers to lower their prices
and attempt to increase sales and profits. The fact that this phenomenon takes place implies that the recommended dealer margin
is higher than can be sustained by the free forces of competition.
Dealers with very high gallonages who recover the full
margin in sales are making very substantial profits while dealers
on low gallonages struggle to keep going.
31.8 Price Discrimination * ( i )
Another important set of problems in the current pricing
structure relates to a number of "unfair" pricing practices.
Particularly disturbing, in the view of the Commission, are the practices of suppliers :-
(i) selling motor spirit at different net selling
prices to their branded resellers in the same markets, ·
and
31.6 Cross Subsidy: The Economic Support the Uneconomic
324
(ii) selling similar quality unbranded product at
lower selling prices, not justified by cost savings to
unbranded resellers competing in the same market with
their branded dealers.
These practices particularly affect dealers operating
company-owned stations. For example, when a dealer sees a com
peting station selling product to the public at the pump at a
price lower than his own wholesale purchase price from his supply
ing oil company, he has legitimate cause to complain. These
practices are seen by dealers as both discriminatory and predatory, (see examples 16.7)
31.9 A New Motor Spirit Pricing Structure ( i )
The Commission as a matter of substantial importance
recommends a restructuring of motor spirit pricing practices in order to :-
(i) place pricing on a rational economically-
based and examinable basis;
(ii) eliminate cross subsidies;
(iii) remove discrimination and aspects of unfair
competition which are inherent in the current multi tiered price structures practised by the companies.
The Commission proposes that there should be a mandatory
public posting of motor spirit selling prices at all important points of distribution, including refinery racks, terminals and
bulk plants. At a minimum, these prices should be posted for three classes of trade, as follows
1. Bulk at Plant Bulk at plant postings would be applicable to all
wholesale sales delivered into customer's own trans
portation at the selling plant. There could be
325
separate prices for branded sales to branded jobbers
and for unbranded sales to large wholesale bulk buyers.
The unbranded price would, in effect, be the base plant
price from which, if the supplier wished, he could
offer discounts. He could also discount from the
branded jobber price. However the posted price would
be the price at which the oil company would have to
sell product to any bona fide buyer, assuming that he
has product available. This would provide a base price
publicly examinable.
Product designed to be turned directly on to the
retail market would not be included in this area. If a so-called jobber was merely acting as a further
party between supplier and service station, he would
ordinarily pay dealer tankwagon price less the cost of delivery.
2. Delivered Consumer Tankwagon Price This price would apply to all sales delivered by
the oil company to direct consumers; that is product
delivered which would not be resold to the public.
This price could vary by delivery size to reflect
the economics of drop sizes. It could also be dis
counted in specific instances to meet competition or for large volume, long-term contracts. 3
3. Delivered Dealer Tankwagon Price
This price would apply for all sales delivered to
retail outlets. No discounts or rebates would be
permitted. Thus, all retail outlets would have product delivered to them at the same net selling price. This
would eliminate the discriminatory pricing practices described in the previous section. This price should
be based on full load deliveries. An increment could be added for smaller volume deliveries to reflect the
extra cost involved in such deliveries. An increment
326
could also be added for higher delivery costs if the
retail outlet is beyond a certain distance from the
plant and if the additional costs of delivery beyond
the base delivery zone are truly quantifiable.
As the net sales price to dealer-owned stations
will be the same as to company station tenants or
licensees, this will effectively eliminate the company
rent recovery currently hidden in the dealer tankwagon
prices. This will force the companies to obtain economic
rents from the lessee dealers. Where such recovery is
not possible because of low sales volumes, it will add
an incentive to the companies to disinvest the site
pursuant to the Commission's proposed policy for the
rationalisation of outlets.
It can be expected that the delivered tankwagon prices
will be set by the companies low enough to prevent a competitor selling at a lower delivered tankwagon price in the same area,
thus taking volume by virtue of lower pump prices. If, however,
surplus imported product is dumped on any Australian market, it may be necessary to permit suppliers to discount off the delivered
tankwagon price to meet that competition in the specific area
affected.
In the event that a supplier sells to a customer and
such customer resells the motor spirit to retailers, the volume so
sold at retail must be purchased at the delivered tankwagon price
with, if necessary, due allowance for any lessened cost of trans
portations. The supplier who buys at one price level and redelivers
to retail outlets could be deemed to have committed an unfair trade
practice. This should adversely affect any licence he holds, as well as the licence of his purchaser. Additionally, the volume
concerned would attract additional tax in accordance with the system of tax exemptions operating in support of the licensing system. This provision will eliminate the practice whereby certain consumers or resellers make use of the extra discounts available to
327
these classes of trade to subsidise retail sales, thereby putting
dealers of regular service stations at a competitive disadvantage.
Consumers or agents selling directly to the public will have to
use separate pumps for this purpose. These will require a regular
retail pump licence. The volumes through these pumps can be
checked, if necessary, against the volumes of product invoiced at
the delivered tankwagon price to ensure that all sales to the
public are based on the delivered dealer tankwagon price, rather than consumer or agent prices.
The price control authorities should set ceiling prices
for motor spirit in each geographical area reflecting the actual
cost of marketing in each area. Thus, the current subsidy to
country motor spirit sales buried in the metropolitan dealer tank-
wagon prices will have to be removed. As stated earlier, the
Commission estimates this subsidy at approximately 1 cent a
gallon. If it is necessary to provide subsidies to certain
classes of consumers, such as consumers in rural areas, it is
preferable to do this by a direct subsidy such as a reduction in
the motor spirit excise tax in those areas or by tax rebates,
rather than indirectly through distortions to the pricing system.
The Commission expects that these three tiers of price will be controlled and will be far closer together than corres
ponding differentials are today. At the present time the dealer
tankwagon price is up to 12 or 14 cents higher than the price
paid by wholesale purchasers (some of whom are then turning the supply back upon the retail market). Under the system preferred
by the Commission, there would be a fall in the dealer tankwagon price and possibly a rise in the commercial and industrial price,
introducing a degree of price compression and considerably
lowering the present differential between tiers.
31.10 Engender Retail Competition
Competition in the retailing of motor spirit, within the limits and controls set forth in this Report, is viewed by the
Commission as a positive force acting to ensure high standards of
328
efficiency and low prices to consumers. Competitors such as XL
and other independents have a positive role to play. It is
important that they have access to product supply on competitive
terms. The Commission proposes that prices should be publicly
posted at terminals. This means that companies such as XL and
other smaller companies should be able to obtain supplies at the
posted price, which will at least be monitored by the authorities
and will be no higher than the price available to others. Refusal
to sell at posted prices if supply is available should be con
sidered anti-competitive and in restraint of trade. No oil company can be forced to sell to any particular customer, but the burden
of proof of a refusal to sell should rest on the oil company if a
potential customer files a documented complaint. No supplying
company should expect to continue to supply its own licensed
outlets at a time when it denies available product to other licensed outlets at a similar price.
329
PART XVI
PETROLEUM PRODUCT PRICE CONTROLS
32. HISTORY OF PRICE CONTROL 32.1 Petroleum products have been subject to a ceiling price
control system in Australia since World War II. The price control system has been based on the passing through of costs over a
base level. Provided they could be shown to have been incurred, in general the increases were accepted. Increases were not
critically examined to see whether price increases ought to have
occurred. Thus, the whole expensive structure of proliferation
and unecomomic fragmentation was brought as a cost raising factor
into the price structure. So too were the diseconomies of very
competitive bulk contracts as companies competed in the con tracting field for ever larger volumes. As these diseconomies
were fed into the pricing structure, the price to the motorist
rose to compensate for them.
As the base has never been critically re-examined, this
system has perpetuated a price structure based on a mixture of relatively inefficient stations and in this way has contributed
to the proliferation of stations. The price control system has
also contributed to the problems of the pricing structure which
330
have been described. The Commission's review of price controls in
Australia commences with a brief history of price controls, followed
by analysis of the reasons why price control is desirable and con
cludes with an examination of alternative price control approaches
and the Commission's recommendations.
32.2 War and Post War Controls Wartime Control Price control over petroleum products in Australia dates
back to World War II. The outbreak of war led to the introduction
of rationing in 1940. At that time the Commonwealth Government set up a Prices Commission as a wartime measure to control inflation
and profiteering. During the rest of World War II, and the
immediate post-war period, prices determined by the Commission
were observed by all oil companies and, while it operated, by Pool Petroleum Pty. Limited. The Commonwealth Government relinquished
price control in September 1948. The formula employed by the Commonwealth Government to determine maximum wholesale prices was based on the landed cost of refined petroleum products (not crude),
on the Australian seaboard (import parity value) and the cost of
distribution.
After the Commonwealth Government relinquished its
price control authority in 1948, all the States continued price
controls, following the Commonwealth's formula. Gradually all
the States except South Australia abandoned price controls.
South Australian Prices Commission's Control At least since 1954, the South Australian price control
system has been the de facto price control system for Australia.
By general understanding, and with a few minor modifications,
the determinations of the South Australian Prices Commissioner and his predecessors have been followed in other States. Maximum
allowable selling prices were determined at the wholesale level.
One or two States also determined motor spirit pump prices, thereby also determining the allowable dealer margin. The South Australian Premier's Department submitted a lengthy statement
331
(Exhibit 320) providing a detailed description of the procedures
used by the South Australian Prices Commissioner to determine
maximum wholesale prices. The South Australian Price Control
System, as operated, was comprehensive and it covered the maximum
wholesale prices, including country freight differentials and
package price differentials, of the major fuel products. As a
means of controlling prices over the whole of Australia it was
of course without any effective sanctions.
The landed cost of a product was calculated by taking
the average value per gallon or per ton of product of three
months' stock of each of the oil marketing companies, those on
hand at the end of a particular month plus the anticipated stock
arrivals over the following two months. Adjustment was made for
any errors in the forecast estimate in the two months before.
As the oil companies differ considerably in size, the landed cost
statements submitted by each oil company were weighted when the average landed cost for the whole of Australia was compiled.
The compilation of this information, by a full-time employee of the Oil Industry Prices Committee (OIPC) was done at bimonthly
intervals. The component costs of landed costs were the f.o.b.
price, ocean freight costs to Australia, customs duty on entry,
primage and landing charges, The f.o.b. price of a finished
product was normally taken as the posted price at the Persian Gulf refinery ports of Bandar Mah Shar in Iran or Ras Tanura
in Saudi Arabia. Customs duty was, and still is, payable only on motor spirit, automotive distillate and automotive diesel oil.
For a while during the 1950's the growing local refining industry was protected by differentials between the customs duty for
imported products and the excise tax on products refined in
Australia. Import duty was one and a half pence a gallon greater than the internal excise tax for motor spirit. In addition,
there was a 10% primage duty (one and one-quarter pence an imported gallon) which was also applied to most other refined products. Some companies, before constructing a local refinery, attempted to secure a guarantee that this protection would be
retained. But, on principle, the Commonwealth Government would
332
not promise anticipatory duties. In any event, and subsequent to
the various Tariff Board proceedings, the Government removed the
primage protection (1957), lowered the import duty differential
by a halfpenny (1959) , and finally removed the remaining one penny
a gallon import duty differential on motor spirit in 1961, thus
finally eliminating all protection for Australian refineries.
Ocean freight costs were calculated in accordance with
AFRA (Average Freight Rate Assessment). These were widely quoted
freight rates which were frequently used by both official govern
ment bodies and by oil companies. Freight rates were averaged
to give the same import parity for all Australian ports. The AFRA rate used was that for general purpose (GP) vessels. This
rate covered tankers ranging from 13,500 to 25,000 DWT. Wharfage
and other port duties were the applicable rates for the product on entry into the country.
The distribution costs applied in the formula represented
a weighted average of the oil companies' costs a gallon or a ton for each of the controlled products and were calculated on an
annual basis. These costs, together with the landed costs and the oil companies’ profit margins, determined the maximum wholesale
price fixed for each of the controlled products. Distribution
costs, with the exception of "inland freight differential" (the cost of transporting refined products from the Australian seaboard to inland bulk storage installations), covered all costs beyond
ocean terminals right through to the sale of products to the
end customer and included administration, storage, handling and all marketing costs and transportation by coastal tankers to
subsidiary bulk terminals on the coast, or by road tankers to
service stations and customers. The system required net profit
margin targets. These targets were established by the States as
early as July 1953.
Over time, the system required a certain number of
modifications in order to take cognizance of changing circum stances. The two most important changes were in regard to
333
the introduction of Australian flag tankers for coastal trans
portation and, especially since 1970, the significant use of
Australian crude oil. With certain adjustments, the higher cost
of Australian flag tankers was passed through to be recovered in
the wholesale ceiling prices. The cost of Australian crude oil
was also explicitly recognised.
From early 1970, Gippsland crude oil became a very
important factor in the pricing situation. By establishing
specific obligations to absorb indigenous crude at specific prices,
related to the situation in October 1968, the Australian Government
effectively froze the raw material cost related to a growing
volume of crude oil stocks and isolated these from rises or falls
in international oil prices. It was therefore agreed that landed
costs should continue to be reported by individual companies as
before, except that values for the proportion of products being
met from indigenous crude would be frozen at the product import
parities applicable to the period September/October 1968. To the extent that some imported crude oils, feedstocks and products
were still necessary to meet the Australian demand for petroleum
products, the proportion of products not being met from indigenous
crude would be costed at the then current import parity. Hence
composite landed costs for products were calculated based on the
proportions of indigenous crude oil and imported crude oil and
products required to meet the total Australian demand for products
subject to price control. Indigenous crude oil production is
related to domestic product needs on the basis of a standard
yield formula called the Nelson Formula. Furnace oil (fuel oil) is deemed to be 100% imported as indigenous crude oils yield
only minor quantities of this product.
As noted previously, target net margins before tax were
utilised by the South Australian Prices Commissioner in making
his price determinations. In arriving at these margins, the South Australian Prices Commissioner required the industry to submit financial information to him each year. The basis was consistent from year to year and changed very little over time.
334
The main objective was to arrive at average funds employed and
adjusted profits of marketing companies only, so that the profit
movement from period to period could be established. The average
funds employed by each company were aggregated to get the industry
totals. The adjusted profits of each company were also aggregated to get the industry total and from this total was deducted income
tax at the rate current for the year (irrespective of income tax
actually paid by individual companies) to arrive at the adjusted profits after tax of the industry.
The Prices Justification Tribunal
From May 1974 the South Australian Prices Commissioner
has accepted the implementation in South Australia of prices
approved by the Prices Justification Tribunal. The Prices
Justification Tribunal was set up pursuant to the Prices Justif
ication Act. The first oil industry application for price
increases to come before the Prices Justification Tribunal was the Shell application in March 1974. The Prices Justification Tribunal issued its report on the Shell application in May 1974. The
Prices Justification Tribunal did not attempt to develop a new
pricing basis different from that used by the South Australian Prices Commissioner. In essence, it accepted as a starting point
the prices established by the South Australian Prices Commissioner and reviewed the oil companies' presentation of additional
justifiable costs. There were several departures from the procedures followed by the South Australian Prices Commissioner, including the determination of prices on an individual company
basis as required by the Prices Justification Act. In the Shell
case, the Prices Justification Tribunal noted that the origin of
the target margins was not known. Based on an analysis of
Shell's profitability, the Prices Justification Tribunal deter mined that there was room for absorption of approximately 20%
of the cost increases claimed by Shell and accepted by the Tribunal, thus effectively reducing allowable margins.
335
The second case reported upon by the Tribunal was that of
Caltex in February 1975. The Caltex application included a
proposed method of allocating the increased costs among products.
Basically, this was to calculate the increase of each cost item
on an annual basis and to reduce this by various recoveries and
exclusions, thereby arriving at total net costs to be recovered.
This amount was then allocated among products on a unit sales
basis, with products being grouped for purposes of the allocation
into three groups: white products, fuels and black products.
Within each of these groups, the proposed price increase was
uniform. The effect of this method of allocation was to maintain
the profit contribution of each of these groups. The method did
not, however, necessarily reflect market demand forces. The
Tribunal accepted the basis of allocation proposed by Caltex.
The next application considered by the Tribunal was from
Ampol, and a report was issued on 5th May, 1975. The method of
allocation proposed by Ampol followed the approach which had
been put forward and accepted by the Tribunal in the Caltex case.
The Tribunal recommended cost increases considerably below those
applied for by Ampol; however, Ampol, at that time, elected not
to increase its prices by the full extent of the Tribunal's
decision. This presumably reflected that these prices would have
made Ampol non-competitive and were therefore not prices which could be recovered in the market.
Without extensive hearings, most other oil companies
applied for, and were granted, increases similar to those deter
mined in the major Shell, Caltex and Ampol cases.
There have more recently been public hearings into
applications for price increases by Sleigh (December 1975) and B.P. (February 1976). These followed the by now well developed
procedures of the earlier cases and were concluded quite
promptly. Although it had been reported earlier that the B.P. application would be taken as an opportunity to throw open the
whole question of the basic approach to determination of petroleum products, this in fact did not eventuate.
336
The following table sets out the current (April 1976) maximum wholesale price of motor spirit for each company as
determined by the Prices Justification Tribunal and based on the Sydney reseller price.
TABLE 2 8
WHOLESALE PRICES OF MOTOR SPIRIT
Premium Regular
Motor Spirit Motor Spirit
Φ per gallon Φ per gallon
Amoco 61.19 57.96
Ampol 61.92 58.73
B.P . 61.19 58.00
Caltex 61.32 58.14
Esso 61.32 58.14
Mobil 61.46 58.28
Shell 61.28 58.10
Sleigh 62.05 58.87
Total 61.14 57.96
COMMISSION'S OBSERVATIONS The Commission has several observations on price
control as practised in Australia. The most important obser vation is that the fundamental basis for calculating ceiling
prices, that is the import parity cost of products from the Persian Gulf at posted prices plus GP AFRA freight, has never
been critically examined. Very fundamental changes have taken place in the international oil industry since World War II.
In the 1950's and accelerating throughout the 1960's, the posted prices of product in the Persian Gulf were not represe- tative of the prices at which products were actually sold.
This was also true of crude oil posted prices. Furthermore, the introduction of increasingly larger tankers made the trans
portation of crude oil, and to a lesser extent of product, increasingly more economic. Thus, the use of GP tankers as a
337
basis for calculating freight to Australia has become increasingly
out of date.
The use of AFRA (Average Freight Rate Assessment) is also
questionable, although it is not easy to devise an acceptable
substitute. The rate provides an index which reflects average
freight rates of both relevant and non-relevant classes of
freight. In no sense is it the equivalent of a long term charter
rate which is the rate bearing closest resemblance to the market rate. Currently tanker rates have been borne down heavily so
that AFRA almost certainly overstates present rates.
Also, in establishing target net margins, the Prices
Commissioner in South Australia had to rely upon Industry-submitted
figures as to marketing profitability. These figures were pre
sumably very difficult to check for the South Australian Prices
Commissioner and undoubtedly involved various allocations of cost
to marketing, including distribution, administration and general.
That this system of price control in fact really did not establish
effective price control is evidenced by the fact that large
volumes of all products have been sold at significant discounts off the ceiling prices established by the price control system.
The South Australian Government submission (Exhibit 320, p .22)
states :-
"In the case of diesel and fuel oil, both products have been subjected to heavy discounting until the latter part of 1973 , when the landed cost of imported crude and furnace oil started to rise substantially."
From 1966, especially in Victoria, and increasing in recent years,
the discounting of motor spirit has become increasingly wide spread .
A more rational price control system would be based upon
examination of the actual elements of cost: the cost of crude oil, both imported and domestic, the actual cost of ocean freight
in appropriately sized vessels, refining costs and capital
338
recovery, marketing and distribution costs, and a profit margin.
32.4 General Considerations in Regard to Price Control
Almost all countries today have some form of price control
on petroleum products and/or domestically produced crude oil.
Governments have justified the need for such controls, at least on
a standby basis, on the grounds that there is a strong possibility
of monopoly profits in this industry. The economic argument goes
that demand for oil is relatively price inelastic (that is there is relatively little decrease in demand for large increases in
price) and that supply is controlled by a relatively few companies with more or less identical interests. Thus, in theory, by
restricting supply these companies could generate profits well
in excess of anything justified by costs. That these concerns
were valid can be seen by the massive increases in crude price
engineered by the OPEC member countries beginning in late 1973.
It must be noted, however, that on a global basis the oil com
panies themselves did not operate as an effective cartel as evidenced by the steadily falling price of crude oil ard the
relatively modest worldwide profits of the companies. is one
observer noted, if there was a cartel, it was the worst run cartel in history.
While the case is probably strong that the companies have not exercised monopoly power on a global basis, there is
still the suspicion that they might do so at the local level, that is in individual countries where competitive pressures are small. Price controls are one way of containing such price
actions within specific ceiling levels as well as (if wisely
administered) providing governments with knowledge of the real
cost elements involved in supplying the oil requirements of a nation.
It must also be noted that under oligopoly conditions active collusion is not necessary. Recognised price leadership
and conscious parallelism may lead to a situation where without monopoly and without collusion a market situation develops not
339
very different to the market situation that would be expected
from collusion.
At the national level, the governments have little control
over the imported component of oil supply other than to ensure
that oil is imported at prices consistent with those paid by
other countries. National control over prices therefore is
primarily exercised at the level of domestic crude oil production,
local refining and marketing. Price control generally takes one of the following forms :-
1. Cost recovery over and above a set of base period
prices (that is United States of America, Australia);
2. Built-up costs (most European countries, Africa)
cased on one of the following systems:
a) landed crude oil costs, plus refining, plus
marketing and distribution.
b) product import parity, plus marketing and distribution.
c) combinations where either (a) or (b) sets
the ceiling price, whichever is lower.
3. Regulated return on investment. This is not, to
the Commission's knowledge, practised in the oil industry, but is the basis for utility regulation
in the United States and often underlies the pricing policy of nationalised industries. It tends to be
used principally where there is a monopoly granted by the government.
The first thing to be said is that all these forms of price control are "cost based". In the absence of competition,
340
if the prices are set "too high", they provide little incentive
to reduce costs or introduce innovation since theoretically any
reduction in cost would result in a reduction in price. This is
particularly true in (3) above where an investment incentive is
created to earn the regulated return (to the extent that the
regulated return is above the companies' cost of capital). Thus
a price control system is not in itself a substitute for competiton.
In fact, in most European countries and in the United States of
America, except in periods of shortage and rapidly increasing
world prices as in 1973 and 1974, real prices have been below the
controlled prices for most avenues of trade. In Australia in the retail area, the high combined wholesale/retail margin has resulted
in comparably high costs created in large part by overinvestment
in service stations. Thus setting "too high" a price can in the
absence of competition result in inefficiency, lack of innovation
and high costs.
On the other hand, setting "too low" a price has equally
undesirable side effects. In the extreme, if the controlled price
does not cover variable costs, there will be no supply. This situation did actually happen for a period in Belgium and Italy where the authorities were slow to allow the increase in crude
prices to pass through. In a less obvious way, too low prices
can discourage new investment while encouraging consumption ard thus lead to premature shortages. This has been the criticism
put forth regarding Federal Power Commission control of natural
gas prices in the United States of America. In this instance prices were controlled on the basis rf historic costs, whereas current replacement costs had escalated due to poorer exploration
prospects (smaller, deeper, offshore) combined with rapid
inflation. The impact can be sudden when existing discoveries found at low cost can no longer support demand. This in turn leads to a requirement administratively to ration existing supplies.
The problems caused by too low a price ceiling can apply
to any element in the chain of costs from the wellhead to the
pump. Thus there is currently spare refining capacity in Australia
built at low historic cost. When this spare capacity is taken up,
341
new capacity will be much more expensive and will require a much
higher refinery margin than is now required. Similarly, Australian
crude oil production is controlled at prices well below inter
national parity and probably below the cost of finding and develop
ing new reserves. In this case the price of existing crude could
be allowed to rise to international levels with a special tax to
siphon off excess profits. The justification for this procedure
is better resource allocation; the argument against is the
inflationary impact. Finally, at the retail level there is con
siderable excess capacity; here price controls could be used to
squeeze out surplus capacity and force costs to accommodate to new and lower retail/wholesale margins. This could be done by
reducing margins or by a margins freeze allowing inflation to
force out uneconomic stations. The Commission has pointed out it
sees this form of economic pressure supplementing the effects of the administrative program of site reduction.
In summary, price controls are not a panacea. Prices
set too high in a non-competitive environment lead either to high profits or excessive costs and investments. Prices set too
low, particularly with a strong historic cost bias, lead to shortages and the need to ration or allocate new higher cost
supplies with all the problems of equity associated with any
system of allocation of a scarce resource.
32.5 Justification for Price Control
Notwithstanding the difficulty in establishing and operating an effective price control system, the Commission believes that petroleum product price controls are desirable.
In evidence several companies argued forceably for the abandon ment of price control. Much of the argument was based upon the companies' views on the failure of the South Australian Prices
Commissioner's particular brand of administration of controls but there are several important justifications for the continuation of a price control system. As already pointed out there has been a petroleum product price control system operative in Australia since World War II. Thus, even if the Prices Justification Tribunal
342
were to be dissolved, there are historic precedents for maintaining
petroleum product price controls even if price controls are not
applied generally throughout the economy.
Three reasons for the maintenance of a price control system are :-
(i) The prevention of windfall profits due to the
pricing of Australian crude oil below international
parity;
(ii) Some concern over the amount of effective com
petition that takes place in the Australian petroleum
industry;
(iii) As a tool to accomplish certain objectives of
public policy, such as service station rationalisation.
As long as Australian crude oil is priced below inter national parity, the absence of a price control system could enable
windfall profits to be earned by pricing all products at the level
of import parity. It is possible that competitive forces would
force prices down to levels reflecting the actual mix of crude costs, both imported and domestic, but there is no assurance that
this would take place. Furthermore, an indigenous crude oil allo cation system will be required as long as indigenous crude oil is priced below international parity.
There is some public concern over the level of effective
competition that takes place in the petroleum industry, especially
in regard to the marketing of motor spirit. The industry may be
classically defined as oligopolistic. Price control will prevent
windfall profits from occurring either as a result of monopoly
action or at those times when shortages emerge in some aspect of the system, thereby creating a situation whereby demand exceeds supply.
343
A third justification for the maintenance of a petroleum
product price control system is that such a system will be a useful
tool for the implementation of government policies. It will be one
of the structural tools available to government to induce desired forms of behaviour from the oil industry. An important example
would be the use of margin controls or reductions in motor spirit
marketing margins to encourage and provide an economic driving
force for the rationalisation of the service station network.
Depending on the levels in the distribution chain at which ceiling
prices are established, the price control system can also be
utilised to remove cross subsidies and other non-economic distor
tions in the pricing system.
32.6 Alternative Price Control Systems
There are two major alternative price control systems
that may be considered. The import parity system attempts to
price products at realistic import parity values, and would then
adjust those values downward to reflect the proportion of indigenous crude oil in the total crude mix used to produce products for
Australian consumption. This adjustment process would be necessary
as long as indigenous crude oil is priced at a price level different from world crude oil prices.
The other approach to price control would be based on
refining in Australia and would attempt to build up the final
cost of product through a procedure that would attempt to evaluate
the cost of each aspect of producing products, that is crude oil cost, transportation, refining.
To illustrate these systems, price controls at the refinery level will be discussed, together with methods of allocating costs
to individual products. The ex-refinery price for purposes of this
discussion is defined as the price into refinery storage, excluding terminal and working capital costs which are assumed to be the
responsibility of the marketing company. This is consistent with
the assumption that the refinery operates on a processing fee
344
basis which, in fact, is the predominant basis on which Australian
refineries operate. The methods will be illustrated with costs reflecting mid-1975 levels, that is before the October 1975
Organisation of Petroleum Exporting Countries' (OPEC) crude oil
price increase.
In describing each of these methods, the methodological and
data collection difficulty associated with operating a price control
system will be emphasised. With any system chosen for implementation,
it will be necessary to hold consultations between the government
Agency charged with operating the price control system and the oil
companies in order to jointly agree, as much as possible, on the
methods and data to be used in operating the price control system.
The use of each of the two methods of price control is
illustrated quantitatively in Attachment 1 of this Part, together
with some of the problems encountered in utilising each system.
1. Import Parity Method This was the historic method used by government authorities
and companies throughout the eastern hemisphere. It began to lose
significance as local refining industries developed at costs under import parity and as product price postings at the export refineries
in the Caribbean, Persian Gulf and Far East increasingly reflected fiscal prices (prices on which taxes were based) rather than
commercial prices. For import parity to be meaningful, the prices
must be commercial and a viable product source must be identified.
A special problem arises in adjusting for low-price indigenous
crude and its associated system of allocation since product
prices in export centres are based on high-cost international
crudes. Schematically the system is :-
345
F.O.B. price (US$)
+ freight
+ insurance and loss
= C.I.F. price (US$)
x $A/$US (exchange rate)
= C.I.F. price (A$)
+ wharfage
= import parity (A$)
- indigenous crude oil entitlement value
= adjusted import parity (A$)
The advantage of this system is that the companies invented
it and should be prepared to accept it in principle. The disad vantages are : -
(i) the difficulty of identifying a bona fide export price;
(ii) selecting an appropriate freight rate;
and
(iii) determining the entitlement value of indigenous
crude oil.
The entitlement value of indigenous crude oil is the difference between its value and the value of international crudes in meeting
the Australian demand for products. It is difficult to identify
accurate commercial export prices. Posted prices at export refining
centres generally do not reflect actual transaction prices except perhaps in times of product shortages. For example, as shown in Attachment 1, premium motor spirit prices were discounted in the
spot buying price by A3.6 cents a gallon off the posted prices in April 1975.
346
The selection of an appropriate freight rate is also a
problem. Under current market conditions, AFRA freight rates
are well above spot or new time charter rates. Questions of ship
size and multiple port discharge must also be resolved.
Import parity prices must be adjusted for the entitlement
value of indigenous crude oil. This involves the determination of
the cost to replace a barrel of indigenous crude with a barrel of
imported crude oil having the same or similar properties.
Indonesian crude oil would be an example of a comparable substitute
or Arabian Light values could be adjusted for the quality differ
ences. The determination of the entitlement value also requires
a projection of the relationship between local crude production
and consumption of Category "A" products, (see Commission's Second
Report, para. 13.2) The difficulties in establishing the
entitlement value and the impact this value has on price and refinery margin determination are illustrated in Attachment 1
of this Part.
2. Local Refining Method
Whereas the import parity method determines the value of individual products directly (with the refinery margin determined by difference), the local refining method incorporates local
refining costs explicitly. Total costs are defined as the sum of crude costs plus refining costs and it is this aggregate
that is price controlled. The principal problem becomes one of allocating this aggregate cost to individual products which, as the companies have pointed out, poses difficult conceptual
problems. Nevertheless this method is used overseas in several
countries, including Belgium (with the allocation to products based on Rotterdam and Italian cargo prices) and Spain (with
the allocation based on Caribbean and Persian Gulf postings).
The local refining method can selectively penalise companies without access to low cost local refining and which must
import since it can result in product prices below import parity. Sleigh, for example, would be a company in this category if it
347
did not have a processing agreement reflecting local refining
costs. Also to the extent that the refining cost is based on
historic investment, it is not reflective of the cost of new
refining. Use of the method could thus deter the construction of
new refining capacity although the same problem can arise from use
of spot or even posted prices at overseas export refining centres
when demand is below potential supply capacity. The problem of
the marginal importer and new refinery construction can be admin
istratively overcome by a system of allocation of imports and
refining (not unlike that used to allocate indigenous crude)
designed to average costs across the industry. Any such system
would be met by vigorous protests from the low cost refiners.
Another approach might be to subsidise new refining by low cost
finance, tax relief, extra indigenous crude entitlement or some
mixture giving some off-set relief against the new and high level of refining cost.
Finally, refinery margins sufficient to justify the
construction of new refineries could be included in the calcula
tion. This last approach would give high profits to existing refiners (based on historic and non-revalued investments) and
adequate profits to new refiners. To the extent that the refinery margin is increased to permit product imports or new
refining, the local refining method approaches the import parity method.
To apply the local refining method, a number of elements must be fixed as follows
(a) Crude Mixture
This could be the actual crudes processed (as in Belgium) or typical crudes processed (as will be illustrated here) . ( b )
(b) Product Mixture
This could be the actual demand pattern adjusted for minor products (as in Belgium) or the yields from
348
typical crudes processed in a typical refinery con
figuration (as will be illustrated here).
(c) Crude Costs
These are the delivered cost of crude oil using
actual f.o.b. prices plus a freight element. For
illustration the Commission will use the prices used
earlier (A$8.95 a barrel for Arabian Light and A$2.52
a barrel for indigenous crude).
(d ) Refining Costs
These could be average refining costs, the cost
of a new refinery (as in Belgium), the cost of the
highest cost refinery or commercial processing fees.
For illustration here, the Commission will use as one
element an assumed processing fee of A$1.01 a barrel
shown earlier and a fee of double this amount which
might reflect the cost of a new refinery.
(e) Cost Allocation
A method to allocate costs to individual products
is required. There are a number of possibilities as
follows :~
(1) import parity (as in Belgium)
(2) export market prices (as in Spain)
(3) another competitive market having a similar demand
pattern - for example, the United States of America
(4) the implied product price differentials built into
commercial processing agreements
(5) linear programming methods of cost allocation
349
(6) crude substitution methods (this is really an
extension of (5) above) as utilised by at least
one company in Australia.
The principal difficulties with the local refining method are : -(a) the determination of the allowed refining margin.
Should this be based on average costs, new refinery costs, or some other basis?
(b) the method of allocation of costs to individual
products. Care needs to be taken to give refinery incentives
consistent with national policy objectives.
32.7 CONCLUSIONS AND RECOMMENDATIONS
The Commission concludes that some form of price control system is desirable at the ex-refinery level which would then be
extended to other levels by adding appropriate cost and geographic differentials. The ceiling prices at the refinery level should
probably be set fairly high to provide an incentive for additional
refinery investment. Competition should be encouraged at all
trade levels both to engender efficiency and to keep actual prices below ceiling levels.
Analysis and consultation between the government and the
oil companies is required to determine the exact form such a
system should take and to assess the impact on the different com
panies and their refining and marketing operations. Consideration
must also be given to the way the system would operate if indig enous crude prices increased to international levels.
The Commission's analysis and review indicates that the
local refining method is probably the best in that, unlike the
import parity method, it deals explicitly with local Australian refining costs and avoids, although not entirely, the attribution
of an indigenous crude oil entitlement value to the import parity values of products.
The Table on the next page summarises the ex-refinery prices obtained by the illustrative examples presented in Attachment 1.
350
— LOCAL REFINING METHOD--REFINERY MARGIN
AT $1.01/Ββί 3 ^ AT $ 2.0 0/BEsi4 ^ POSTED SPOT
21.1
17.4
15.3 15.0 13.4
11. 7 9.1
6.1
20.3
16.7 17.4 17.4
13.0
11. 5 11.9
7.7
(1) Based on data submitted by an oil company (USi per US gallon); see Attachment 1, Table C.
(2) Based on Indonesian (USt per US gallon); values in Attachment 1, Table C, reduced by 2.9ΑΦ per gallon.
(3) Based on assumed processing cost; see Attachment 1, Table D.
(4) Illustrative of a nev; refinery cost; see Attachment 1, Table D.
As can be seen, the import parity method is very
sensitive to the crude oil entitlement value and whether posted
or spot prices are used. It should be noted that spot prices
are not published on a regular basis. The local refining
method is sensitive to the level of refining costs as well as
the crude oil price, but the latter is fairly easy to determine,
and the differentials between products are sensitive to the method used to allocate costs between refined products. The
import parity method and the local refining method become
identical when the refinery margin calculated (by difference)
in the import parity method is the same as that set in the local refining method (compare column 2 and column 8 of Table 29)
352
ATTACHMENT
TO
PART XVI
EXAMPLES OF PRODUCT PRICE CONTROL SYSTEMS
Import Parity System
Large export refining capacity exists in the Persian
Gulf and Singapore. These are the most economical sources of refined product imports to Australia except for occasional
distress cargoes. The following Table on the next page shows
the prices posted in these locations in early April 1975 and reported in the Petroleum Economist and the spot price
assessment made by Petroleum Intelligence Weekly on 28th April, 1975.
353
TABLE A
REFINING MARGIN PERSIAN GULF v SINGAPORE
EARLY APRIL 1975
(US Cents per US Gallon)
Persian Gulf Singapore
Arab Light Yield (Vol %) Posting Spot Posting Spot
LPG (1) 1.0 20.8 20.8 25.0 25.0
PMS(2^ (98 RON) 19.0 40.8 37.0 42.0 38.0
RMS ' ; (ARON) 4.7 36.4 33.0 37.9 34.0
AVTUR 4.7 35.5) 35.3)
) 33.0 ) 34.5
a o
1.7 34.5) 35.0)
ADO(5 ' 15.6 31.5 29.0 33.1 29.5
IDO 3.7 29.9 27.4 ^ 31.2 27.9 ^
F.O.(6^ 43.6 23.6 22.4 25.2 23.9
96.0 28.24 26.21 29.57 27.33
TOTAL ($/BBL) 11.86 11.01 12.42 11.48
CRUDE COST ($/BBL) 10.46 10.46 10.89 4 5 6 7 (8) 10.89 (8)
REFINERY MARGIN 1.40 .55 1.53 0.59
NOTES:
(1) 4.6 lb./Gal. = 480 US Gal/ton at $100/ton = 20.89/Gal in the PG and at $120/ton in Singapore = 259/Gal
(2) Premium Motor Spirit 97 RON + . 69/Gal in the PG and Singapore (3) Regular Motor Spirit 90 RON - 0.49/Gal in the PG; PG + 1.59/ Gal = 37.99 Singapore (or 85 RON + 1.69 = 37.6 9/Gal)
(4) Regular Kerosene
(5) 53 Cetane in PG; 50 Cetane in Singapore
(6) Medium Fuel Oil High Sulphur (7) 29 - (31.5 - 29.9) = 27.4 in PG; 29.5 - (31.5 - 29.9) = 27.9 in Singapore (8) VLCC AFRA .57 8 x Worldscale flat of $4.91 t- 7.45 bbls per LT
= .38 + 10.46 = $10.84 + insurance and loss at 0.5% = $10.89/ BBL
354
Also shown is the yield from Arabian Light crude oil in a hydro-
skimming refinery which is typical of these locations. When the
product prices and yields are multiplied and added they give a
total refinery revenue which can then be compared to the crude
cost to give a refinery margin. The posted prices yield a
refinery margin of U .S.$1.40 to $1.53 a barrel which seems much
too high given current market conditions. The spot prices give
a margin of U.S. $0.55 to $0.59 a barrel which is more reasonable. This suggests that posted prices are in the aggregate U.S. $0.85
a barrel to $0.95 a barrel (Al.8 cents a gallon to A2.0 cents
a gallon) too high under current market conditions.
Delivering the products assumed purchased at the export
prices shown in Table A to Sydney and adjusting for indigenous
crude entitlement gives the import parity values shown in the
Table on the following page.
355
TABLE B
IMPORT PARITY VALUES BASED ON SINGAPORE EXPORT PRICES
APRIL 1975
B/LT
PMS 8.66
RMS 8.81
AVTUR 8.05 H.O. 7.86 ADO 7.65
IDO 7.55
HSFO 6.88 LSFO 6.88
Posted Spot AFrA1^ Whari-^ Total^^ Spot Price Price GP age Posting
(US CENTS PER US GALLON)
42.0 38.0 2.28 .74 45.2 41.2
37.9 34.0 2.34 .74 41.1 37.2
35.3 34.5 2.45 .74 38.7 37.9
35.0 34.5 2.51 .74 38.4 37.9
33.1 29.5 2.58 . 7 4 36.6 33.0
31.2 27.9 2.61 .74 34.7 31.4
25.2 23.9 2.86 . 25 28.4 27.1
28.6 (5) 28.6 2.86 .25 31.8 31.8
M)
En- Adjusted title- Parity
ment Posting Spot Value
18.4 26.8 22.8
18.4 22.7 18.8
18.4 20.3 19.5
18.4 20.0 19.5
18.4 18.2 14.6
18.4 16.3 13.0
18.4 10.0 8.7
18.4 13.4 13.4
Adjusted Parity(5)
Posting Spot (A cents
24.0 per gal) 20.4
20.3 16.8
18.2 17.5
17.9 17.5
16.3 31.1
14.6 11.6
9.0 7.8
12.0 12.0
NOTES:
(1) May quotation worldscale 132.8 for general purpose vessels (2) As per B.P. October 1974
(3) Includes 0.5% insurance and freight on white products and 0.3% on black (4) Indicated by an oil company in a confidential submission (5) Based on exchange rate of 1.34 US$/A$
The following table uses these values to calculate the
refinery margin using yields based on an assumed processing
agreement and a crude mix of 85% indigenous crude delivered at
A$2.52 a barrel and 15% Arabian Light delivered at A$8.95 a barrel,
which are representative values drawn from material before the
Commission and relating to December 1974 to January 1975.
TABLE C
AUSTRALIAN REFINERY MARGINS BASED ON IMPORT PARITY
APRIL 1975
(3)
Yields (Volume %) Adjusted Import Parity BASS ARAB AVERAGE(1) 2 3 LT Posted
(ΑΦ/gal)
Spot
PMS 43.2 29.0 41.1 24.0 20.4
RMS 10.8 13.0 11.1 20.3 16.8
AVTUR 7.9 10.0 8.2 18.2 17.5
H.O. 2.6 5.6 3.1 17.9 17.5
ADO 21.1 12.0 19.7 16.3 13.1
IDO - 1.0 0.2 14.6 11.6
LSFO 6.3 - 5.4 12.0 12.0
HSFO - 20.7 3.1 9.0 7.8
Total 91.9 91. 9 91.9 18.3 15.7
Total A$/BBL 6.39 5.50
Crude Cost A$/BBL(2) 3.48 3.48
Margin 2.91 2.02
(1) 85% Bass, 15% Arabian Light (2) Bass Strait at $2.52 and Arabian Light at $8.95 delivered to
Australian port
(3) From Table B
357
The yields are based on a high conversion refinery and thus show
a higher light products yield than those shown in Table A for
a hydroskimming refinery. The indigenous crude yields are based
on maximum premium, maximum gasoline and minimum fuel oil as per
an assumed processing agreement. The additional processing cost
for this yield pattern over the base yield is Α8.5Φ a barrel.
This would give a processing cost calculated as follows
.85 indigenous at .924 + .085 = $1,009
.15 Arabian Light at $0,974 a barrel
AVERAGE = A$1.004 a barrel
This compares with calculated margins on an import
parity basis of A$2.91 a barrel on the basis of postings and
A$2.02 a barrel on the basis of spot prices. Both of these
refinery margins seem high when compared with some material the
Commission has inspected. The $8.95 a barrel for Arabian Light
delivered to an Australian port also seems high as shown below
Arabian Light f.o.b. US$ 10.46 a barrel
AFRA LR-1 Freight 1.05
Cargo, Insurance and Loss (0.4%) 0.05
Total US$ 11.56 a barrel
A$ 8.62 a barrel
Wharfage 0.11
Total A$ 8.73
These figures may be based on the use of medium range or
even GP tankers. However, if LR-2 vessels (80 MDWT to 160 MDWT)
were used the cost shown above would be reduced by A$0.18 a
barrel. Part of the explanation in the high apparent refinery
margin could lie in the entitlement value assumed which may have
been based on different (perhaps earlier) crude costs. For
example, if the quality advantage of Bass Strait crude is A$0.75
a barrel and the indigenous crude percent of Category "A" products
358
is 85%, the entitlement value can be calculated as shown below
Arabian Light c.i.f. A$
Quality premium Bass Strait
Equivalent value Bass Strait Actual value
8.73
0.75
9. 48
2.52
Difference
Value at 85%
A$
A$
USi/US gal.
6.96 a barrel
5.92 a barrel 18.9
This compares to the assumed entitlement value of
US18.4C a US gallon. The net effect of this would be to reduce
the refinery margins calculated above by about A$0.13 a barrel.
The higher the quality premium, the higher the reduction would be. For example, if Indonesian crude was assumed as the
substitute crude the entitlement value would US20.5Φ a US gallon as shown below :-
Indonesian f.o.b. US$ 12.60 a barrel
Freight AFRA LR-1 0.72
Insuranee/Loss 0.05
Total US$ 13.37 a barrel
Total = A$ 9.98 a barrel
Wharfage 0.11
Total A$ 10.09
Bass Strait delivered cost 2.52
Difference A$ 7.57 a barrel
Value at 85% A$ 6.43 a barrel
us If this value were used in place of the assumed entit lement value it would reduce the refinery margins shown in Table C by A$0.66 a barrel. 359 Local Refining System An illustration of the application of the local refining method with costs allocated to products on the basis of import parity is shown in the following table. TABLE D CALCULATION OF EX REFINERY PRICES BY THE LOCAL REFINING METHOD APRIL 1975 Product P r i c e . Ex Refinery Prices (ΑΦ/gal) Differential 'Refinery Margin Refinery Margin Yield (ΑΦ/gal) $1.01/B (3) $2.00/B (4) (Vol. %) Posting Spot Posting Spot Posting Spot PMS 41.1 15.0 12.6 18.0 17.2 21.1 20.3 RMS i —1 1 -1 i —1 11.3 9.0 14.3 13.6 17.4 16.7 AVTUR 8.2 9.2 9.7 12.2 14.3 15.3 17.4 H.O. 3.1 8.9 9.7 11.9 14.3 15.0 17.4 ADO 19.7 7.3 5.3 10.3 9.9 13.4 13.0 IDO 0.2 5.6 3.8 8.6 8.4 11.7 11.5 LSFO 5.4 3.0 4.2 6.0 8.8 9.1 11.9 HSFO 3.1 - - 3.0 4.6 6.1 7.7 Total 91.9 10.06 8.55 12.8 12.8 15.7 15.7 (1) Average 15% Arabian Light, 85% Local (see Table C) (2) Differential relative to high sulphur fuel based on import parity from Table C . For example the differential for PMS (posting basis) is 24-9 = 15£/gallon. (3) Sample calculation for refinery margin of A$1.01 a barrel and delivered average crude cost of A$3.48 a barrel (see Table C) as follows :-Crude cost + refining cost = Product cost = A12.8i/gallon product cost = average differential + .919 x Fuel Oil 12.8 = 10.06 + .919 x fuel oil; fuel oil = A3.09/gallon. All other products equal the fuel oil value plus the differential, i.e. PMS = 3 . 0 + 15.0 = A18.ÎΦ/gallon. 360 (4) Assumed refinery margin increased to A$2.00 a barrel. All other assumptions and calculations are the same as for the A$1.01 barrel refinery margin case. The yields used and product value differentials (relative to fuel oil) are those shown in Table c. When posted product prices are used, the price spread between products is larger than when spot prices are used. This results in a relatively high motor spirit price and a relatively low fuel oil price. This has the effect of encouraging high yields of gasoline at the expense of fuel oil which the Commission considers to be in the national interest given the available substitutes for fuel oil. It has the countervailing effect of potentially stimulating fuel oil demand (although this could be remedied by a fuel oil tax) or alternatively encouraging exports. When the refinery margin is increased by A$1.00 a barrel it adds Α3.1Φ a gallon to all product prices, that is 1.00 35 x .919 361 PART XVII A SYSTEM OF ADMINISTRATION 33.1 In the course of this Report, the Commission has referred to the existence in all other countries it has visited of a degree of public administration at a national level of the oil industry, in some cases involving comprehensive public control from production through to marketing. Reference has been made to the administrative system employed in the United States of America through the Federal Energy Administration. Reference has also been made to the New Zealand history, where the market has been fashioned in terms of what was thought to suit the New Zealand people rather than what suited the oil marketers, and the system in France where conditional licensing is used as the principal administration mode. There is in all countries, outside Australia, a general tendency in government to seek to have available to it the means of knowing precisely how this industry operates so that policy options can be evolved and governments can legislate to regulate or control. The significant price increase and changes in control over crude oil since October 1973 with its profound implications for the future of the world and this nation and the potential role 362 of oil as a political weapon have made the oil industry simply too important to be ignored by governments around the world. "While every attempt has been made to be as objective as possible, this subject area is extremely complex. The situation in a given country can change rapidly and unexpectedly. Data is often unavailable or inadequate and analysis necessarily subjective. While varying interpretations may be given to individual cases, we believe the growing role of governments in the oil industry is a clear and unmistakable trend which holds enormous implications for the future of the international petroleum system." Melvin A. Conant, Assistant Administrator, International Energy Affairs, in his Introduction to the Federal Energy Administration publication "The Relationship of Oil Companies and Foreign Governments, June 1975. In Australia, except in very limited areas, control and knowledge of the industry is lacking on a national and State level. Witness for example the letter received by the Commission from the then Minister for Minerals and Energy in response to the Commission's questionnaire on marketing (see 6.7). Until the Prices Justification Tribunal was constituted price control had, after the abandonment of the war time controls, been left entirely to the investigation and decision of one State Authority, a situation which, with proper respect to those who laboured in it, was wholly inappropriate. That price control in this industry was felt on a national basis to be necessary is illustrated by the tacit acceptance throughout the Commonwealth of the prices fixed by the South Australian Prices Commissioner. Obviously such a State Authority suffered from the complete lack of international information and a substantial lack of national information which would normally be available to a national government which sought it. The very limited base from which the South Australian Prices Commissioner operated prevented effective supervision of the industry and the effective supervision of price. Today Australia must be one of the very few countries in the world that does not on a price basis monitor the arm's length cost of imported crude. 363 In view of the vertically integrated nature of the industry's operations from offshore production to internal retailing, it is surely an extraordinary thing that for 35 years Australia has had systems of price control which never effectively challenged offshore transfer prices - the very area where the companies took their profits. Anybody who thinks that there has not been an appropriate area for concern on prices should look at the cases referred to at 16.7 and ponder the implications for price which the cases disclose. All other countries, including New Zealand, which the Commission visited were actively concerned in the area of transfer prices, not only on a taxation basis but also on price. Should the Commission be permitted the time, the Commission proposes as its next Report but one to report upon transfer prices and their implications for Australian costs. During the course of this inquiry, the Commission has been able to probe into many aspects of the oil industry. The Commission is firmly of the view that it is quite essential that government retain a flow of organised and regular information relating to all aspects of the industry from all oil companies and other organisations within the industry, so that government is in a position to understand and evaluate the needs and problems of the industry from the point of view of the Australian community as a whole. From a citizen's viewpoint the industry is a vital basic commodity industry and for governments the continued flow of energy in convenient form and at minimum cost is essential to the prosperity and safety of the nation. The Commission recommends that the function of collecting and disseminating information be entrusted not to a department of State but to an autonomous body or Agency set up by but independent of government, with a duty to report to government generally and with respect to such industry matters as the government requires. By this means it should be possible to 364 achieve continuity and to build up a permanent staff of officers experienced and well versed in industry matters. Apart from data collection, the Agency would be involved in this aspect of its work in policy analysis and evaluation. This leaves open the question of the future function of existing agencies and sections within departments of State, as for example the Petroleum Branch of the Department of Natural Resources. The Commission envisages that the data collection and information dissemination functions of these agencies could well be merged with the functions of the proposed body. However, it is recognised that Ministers and departments may well require their own expertise within the department. Duplication of function is obviously undesirable. The Commission believes that the task proposed for the independent body should be insulated from the vicissitudes of changing governments and government styles. The Commission is only concerned with the oil industry but it seems likely that the functions it has in mind with respect to the industry could well be undertaken by an Agency exercising overall supervision with respect to energy. There are many precedents for the type of body to be established. Following these precedents it would be a body corporate with a Chairman and stipulated number of members appointed by the Governor-General with regard to qualifications and experience in the industry. It would be staffed in such a way as to enable people to build up a knowledge of the industry which, with time, would be available for the benefit of the agency. In the United States of America, the Federal Energy Administration has drawn a part of its staff from the industry. Furthermore, it encourages interchange between its staff and staffs of other similar organisations in other countries. 365 The function of collecting and disseminating information is only the starting point. The oil industry, Australia-wide, is in need of reform in areas which have been described else where in this Report. They may be summarised as follows :- 1. A re-structuring of the pricing system; 2. A rationalisation of retail outlets with a consequent reduction in numbers; 3. Regulation of dealer company relationships; 4. A program of crude oil conservation. In all these areas, the Commission recommends that a system of public administration should be introduced at a national level. In all of them there is a body of opinion in favour of such intervention. In the area of service station rationalisation, it is generally acknowledged that a program must be adopted and it is recognised by some of the oil companies themselves that this can only be done under government super vision. Some of the functions which the Commission suggests the Agency should undertake are quite new. These are ;- 1. The establishment, regulation and enforcement of a rationalisation system to achieve the goals proposed in this Report. 2. The licensing of all refineries, terminals, depots, service stations and other market outlets. 3. The re-structuring of the pricing system. 366 4. The monitoring of landed costs and transfer prices. 5. The standardisation of the lease agreements between oil companies and their dealers, and the establishment of a suitable degree of contractual independence for dealers. 6. The establishment of a conservation program. 7. The provision of conciliation and arbitration services contemplated by the proposed company dealer contracts and leases. 8. The determination of prices of all petroleum products. This function, petroleum products price and control, has been undertaken in the Australian community during the last 35 years. The approach to price control will be greatly changed in the light of the restructuring of the system proposed and in the light of market information obtained and disseminated by the Agency. At the time of writing, the precise future form of the Prices Justification Tribunal is in doubt. The Commission recommends that since the determination of price in this industry in many respects depends upon factors peculiar to it, the Agency undertake the function of price control along the same lines as that currently exercised by the Prices Justification Tribunal. Rostering can provide significant economies and is another matter which may, in due course, have to be supervised by the Agency. The Commission considers that the roster systems established in Western Australia, Tasmania and Queensland by the respective State Governments and the general regulation of hours established in South Australia, should be left in the hands of those Governments. It considers that the market in Victoria and to a lesser extent New South Wales, is currently so chaotic as to make the imposition of a rostering system almost impossible. 367 However, the Commission is firmly of the view, for reasons already stated, that a rostering system should apply nationwide in metro politan and large provincial centres. Accordingly, while it is to be hoped that such system would be introduced within Victoria and New South Wales by State authorities, if this does not happen, it is something that the Agency could establish and enforce by means of its power to grant licences. It is entirely desirable that the Agency should cooperate with State Governments, the oil companies and other members of the oil industry. It is hoped and indeed is quite possible, having regard to the evidence which the Commission has received, that the Agency will operate with the expectation of the goodwill of State Governments and the industry and of the support of public opinion. However if ultimately its effectiveness in areas where sanctions are necessary must depend upon the existence of power derived within the Constitution from the Commonwealth, the source, as discussed by the Commission when recommending a system of licensing fundamental to the rationalisation of the industry (30.2) may be the taxation power (Section 51 (ii) of the Constitution). Products sold from unlicensed installations or outlets would bear higher tax. Licences would only be granted subject to adherence to conditions relating to divestment, price structure, pricing and dealer agreements. 33.2 Data Collection The Commission intends to publish a form of report for completion by the oil companies designed to obtain at appropriate intervals of time a flow of-relevant information necessary to enable industry behaviour and patterns, particularly in areas of cost data, to be monitored by the Agency. The Commission has studied the proposed form published in the United States of America by the Federal Energy Administration in September 1975 as a Petroleum Company Financial Report. The Commission will prepare its form of report with the assistance of this and of similar forms currently used by other government agencies in Australia and publish it as part of its Report on Refining. 368 SUMMARY 1. The Commission's Fourth Report concerns the marketing, distribution and pricing of petroleum products, in Australia, with the emphasis on motor spirit. (1.0) The industry's marketing methods have been the subject of substantial criticisms in many countries and the object of many official enquiries. The criticisms include -(a) There are far too many service stations; the industry and through it the community are burdened by immense over-investment in retail outlets: (b) Motor spirit and other petroleum products are over-priced; both wholesale and retail margins are excessively high; (c) There are too many oil company marketers; the petroleum market in Australia is irrationally fragmented by up to nine parallel marketers; (d) The market is sometimes chaotic and often not price competitive: 369 (e) Unfair competition and especially discriminatory pricing practices are rife: (f) The "tiers" of price and the pricing structure generally are archaic and irrational: (g) Dealers are sometimes dealt with oppressively. The Commission finds affirmatively that all the complaints listed contain significant elements of truth. (2.3) 2. The Commission by its Terms of Reference is required to report upon "all aspects of the marketing and pricing in Australia of all types of petroleum." This generality is extended by three further paragraphs. " (c) whether the prices of such fuels and other by-products are excessive and the extent to which the marketing, management and trading practices, prolifera tion of service stations and other retail outlets, and the granting of secret or other discounts, and the maintenance of a multi-tiered price structure by refiners and wholesalers of such fuels, are contributing thereto; " (d) whether, and if so, to what extent, the policies and objectives of any of the refiners of wholesalers of such fuels have contributed to price-cutting wars in any one retail sector to the detriment of any other sectors; and "(e) to what extent fuel pricing by companies operating in Australia which are subsidiaries of foreign corporations has been influenced or determined by the decisions of their overseas principals in such matters as inflating original prices paid to overseas crude oil producers and shipping freight thereon thus creating an artificially high landed price to the detriment of Australian consumers." 3. The Commission held forty two days of public hearings in Melbourne and fourteen days in Sydney. It conducted extensive service station inspections and interviews in Melbourne and Geelong, Brisbane, Toowoomba and the Gold Coast, in Adelaide, Perth and Bunbury. It has received very extensive written 3 7 0 submissions. 4. The most distinctive feature of the industry in Australia is that its evolution and development has been almost untouched by the rational and integrated policy requirements of government. This policy vacuum is matched by the paucity in the public domain of published material which seriously analyses the industry's problem. (6.3, 6.7, 6.18, 6.19) 5. This absence of effective public administration contrasts strongly with the experience of countries overseas such as Canada, the United States of America, United Kingdom, Norway, France and New Zealand. The administrative systems of all these countries have been studied by the Commission. In each country the question whether public administration had to take a substantial executive role in distribution and marketing (including prices) has long since been decided affirmatively. (6.5) 6. Underlying all overseas governments' policies was the view that security of supply, balance of payments, price to consumers, social utility of investment and basic industrial organisation were too important to be left to the commercial rivalries of foreign-owned corporations. (6.5, 6.6) 7. The real question that emerges is this - has Australia suffered adversely when compared to other countries with sophisticated administrations by the apparent neglect of its organs of public administration to intervene in this field of industry in any effective way? The answer regretfully must be a strong and definite affirmative. There can be no doubt at all that Australia's present system of distribution and marketing was not inevitable, could be and should be less wasteful and more efficient and that its products most certainly, tax considerations put aside, could and should in the future, be cheaper to the consumer. 371 8. To put a simple example by way of illustration - in the first part of 1975, at a time when Australian and New Zealand currency, tax and motor spirit price were all near parity, the cost of retailing to the motorist from service stations in New Zealand was 11.3% of the ex tax price of 56.2 cents. In Victoria it was 44% of the ex tax price of 65.4 cents and in New South Wales 42.8% of the ex tax price. (6.10 - 6.16) The comparison suggests that retail costs in Australia are very much too high and that the Australian consumer may well have paid a high price for lack of effective governmental intervention in this area. 9. Despite market fragmentation by nine parallel marketers and despite their common policies of "brand loyalty" "service" "magical" additives and the paraphernalia of product differentia tion it is apparent that all marketers sell what is basically an undifferentiated product. These products are staple products produced by what would be a utility industry by most normal tests. In its socio economic context motor spirit as a staple consumer product resembles electricity, town gas, meat, milk, postal and communication services, bread supply. All these areas have acquired distinctive forms of regulation. The policy objectives of regulation include security and comprehensiveness of supply, availability to the public, public pricing and market costing, cheapness and standardisation. The observed style of marketing with high emphasis on product differentiation - differentiating the undifferentiatable - remains unexplained by any evidence before the Commission and is seemingly inappropriate. 10. This absence of governmental intervention has resulted in the growth of the industry largely unmodified by the force of public opinion except tenuously through the marketing mechanism. 372 The present shape of the industry is therefore a product the commercial exigencies and rivalries of the major oil impanies. In the Commission's Terms of Reference there is some .phasis placed upon the role that overseas principals may have d on the policies of local subsidiaries. The answer perhaps more profound than the question - the overseas principals have fact exported to Australia their marketing style and structure, e industry today represents not so much an indigenous industry ich has evolved in response to the organic needs of the stralian community; rather it is an imposition upon the stralian community of a convenient marketing strategy exported the international oil companies and utilised by them in stralia. â During the last seventy five years six of the seven the world's biggest oil companies have entered the Australian rket. This relatively small market is divided amongst nine jor companies with identical market styles. (7.18) The mmission considers that four companies would be sufficient furnish adequate competition and that the presence of nine mpanies has the effect of robbing aspects of the industry of sential economies of scale. A strong case can be made for e withdrawal of some marketers from some State markets, rhaps by an exchange of markets, perhaps unilaterally. The mmission recommends that encouragement be given to marketers, eluding the assistance of the industry Agency which the mmission recommends be set up to facilitate discussion and gotiations. (30.8) . "Probably the biggest change in marketing policy we have ever had in the oil industry at least in my time," (evidence before the High Court in 1961 in B.P. (Australia) Limited v. Federal Commissioner of Taxation 110 CLR 387) s this transition by the companies in 1951 to solus (one brand) rketing. The Companies' broad claim is that this step was 3 7 3 necessary to provide secure markets to justify refining expansion. The Commission rejects this explanation. It considers that the companies well knew the type of developments that would occur with the introduction of the solus system and quotes Mr. Justice W.A. Macdonald’s report on this industry in British Columbia in October 1936 :- "23. Extravagant wholesale and retail costs are mainly due to company ownership and control of service stations and to the integrated structure of the oil companies. "24. There are about five times too many service stations and retail outlets in the Province of British Columbia." The companies when they introduced solus trading had the experience of Canada, United States and the United Kingdom behind them and were well aware from that experience what the results would be. 13. The Commission considers the solus (one brand) system was introduced by the companies in 1951 to secure control over the retail sector of the industry. This gave the international companies a vertically integrated industry structure commencing with Middle East production and continuing through international transportation to local refining to distribution and marketing. (8.1.-8.5, 8.7) Partly as a consequence of the introduction of solus trading there has been a marked decline in the influence and role of the independent dealer: (8.7, 8.15) a very large investment in retail sites and excessive overbuilding of service stations (8.5, 8.6) and evolution of non-price competition rather than price competition. (8.8) 14. Vertically integrated industries acquire the ability 374 to take profits or losses at the most convenient level of the integrated operations. The decision where to take a profit or loss is not dictated by market forces but by management preference. (8.6, 8.13) As most of the companies trading in Australia are international, that is to say subsidiaries of foreign parents and affiliated with other foreign companies, this ability enables them to choose the country in which profit will be taken or loss sustained. 15. Oil company managements preferred to take profits at the production stage as profits were thus taken in a convenient tax environment. The function of the Australian marketing end of the integrated structure was to emphasise consumption; the more product consumed the more crude needed to be raised in a favourable profit and tax environment in the Middle East. (8.11, 8.12, 8.16) Within a reasonable range of acceptable prices, international companies tend to maximise taxable profit in the country with the lower rate. (8.13) This is achieved in a number of ways, for instance by bearing in Australia a high landed cost of product or freight or technical or other services payable to an overseas affiliate. The process is sometimes referred to as "global tax minimisation." These practices are not confined to the oil industry. Any international company trading in Australia may engage in them. The Commission's researches into decided and published cases suggests that the Commissioner of Taxation has taken account of these circumstances using Section 136 of the Income Tax Assessment Act. It appears however that although "transfer" or "clearance" prices may have been so reviewed for tax purposes that they have never been reviewed for pricing purposes. All systems of administration in other countries, including New Zealand have a Department or Agency which monitors transfer prices and which, in general, approved the submitted 375 price for price control purposes only if it could be confirmed as reasonable when compared with arms-length transactions concerning similar parcels of crude on the international market. Should the work of this Commission continue the Commission proposes to deal with the problems posed by transfer prices. As Sleigh (an Australian company) pointed out in discuss ing some of its marketing problems:- "Marketers who have overseas affiliations and enjoy a profit in the production function of petroleum products can probably afford to ignore in at least a relative sense, the necessity for some profits in the (Australian) market place." 16. During the 1950 and 1960's the South Australian Prices Commission acted as the price fixing authority for the whole of Australia as each State adopted its findings. The data obtained by the Prices Commissioner however was insufficient in detail to permit meaningful analysis. In particular the Prices Commission could not adequately monitor transfer prices of crude, that is the prices at which the international companies sold to local affiliates and at which crude was imported into Australia. The official posted prices have notoriously not provided a guide for the real prices. It is remarkable that with price control systems operating within Australia for about 35 years the administrative systems concentrated on examining price factors within Australia, where profit considerations were not so important and did not examine in serious depth the prices at which crude was transferred into Australia from the Middle East where the true profits of the integrated operations were taken. (8.14) 17. Under the pressure to sell more product so as to raise Middle Eastern production and profit,marketing within Australia was strongly influenced by the drive for "gallonage" even at the expense of profit. This was the essence of Sleigh's complaint quote above. This led to a "representational" type of marketing 376 in which competing companies felt the necessity to be represented in a marketing district even though their commercial rivals were already abundantly present. (8.5, 8.6) There was a high correlation between number of outlets and market share. These factors led directly to a proliferation of retail sites and an immense overinvestment. (9.1 and Annexure "A" No. 2) 18. The Commission considers the present is the moment most fit for the industry to assess its future. The actions of OPEC of October 1973 disrupted the basis of the international vertically integrated system of operation. In recasting this system refining, distribution and marketing in Australia must be seen to pay their way in a manner that they have never been required to do before. (6.1, 62.) This will require substantial amendment of the industry in any event. The direction of that amendment should be influenced by the established requirements of the Australian community. The Commission's conclusions are :- (8.16) (i) The conscious decision made initially by some of the international companies marketing in Australia and ultimately by all the companies so marketing to introduce the solus system has in large measure given the retail market the character it has today. (ii) The transition to solus marketing constituted a final step in the vertical integration of the inter national companies. (iii) As a consequence since 1951 there has been a marked decline in the influence of the independent dealer either alone or collectively through his trade associations. (iv) Solus trading and high margins led directly to a vast investment in retail outlets with the con sequent excessive overbuilding of service stations. 377 (v) Price competition was much less evident than non-price competition which was promoted essentially in terms of "brand image". (vi) In retail areas of trade, the companies flourish ed under an umbrella of prices fixed without regard to the profits earned by the vertically integrated group of affiliates. (vii) The industry before 1951 had experience of solus trading in other countries such as Canada and must have known that the results which followed from its introduction were exactly as the events have demonstrated them to be. The international companies which imported this system into Australia to suit their marketing needs as they saw them, bear the responsibility for its consequences. 19. In 1975, 2000 million gallons of motor spirit was sold through 16,300 retail outlets which had a resulting average gallonage of 10,200 gallons a month. (9.1 and Annexure "A" No. 2) This is very low. There is a noticeable correlation between outlets numbers and market share. The more outlets a company has the more it sells. 20. Outlets are principally of two kinds:- (a) Company owned and operated by lessee dealers. These sites sometimes referred to as "mainline" sites average between 16,000 and 17,000 gallons per month. (b) Dealer owned. Dealer owned outlets represent 57% of all outlets but sell only 28% of all motor spirit. (9.2) Lessee dealers are a product of the transition to 378 solus trading. Before the introduction of solus trading in 1951 lessee dealers were unknown. All dealers were small independent proprietors. In New Zealand today almost all service stations are owned by similar proprietors. The company dealer relationship therefore is of central importance. Most motor spirit in Australia is sold through such outlets. There is a very high turnover of dealers, varying from 15.8% per annum for Amoco co 39.4% for Sleigh. (9.7) 21. Essentially dealers complain of lack of true independence. Their particular complaints, upon which the Commission has heard extensive evidence includes, the nature of company control, insecurity of tenure, long working hours, an excessive number of service stations, price discrimination and company product promotions. (10.2 - 10.9) 22. The companies submitted that the dealers were "independent businessmen". The leases and licences contain terms which on a fair reading are one sided and largely detract from any suggestion that the lessee or licensee is an independent businessman. The lessee dealer can be evicted for any one of hundreds of alleged breaches. The companies say that they do not administer the lease with anything like full rigour. (11.6, 11.8) 23. There is a notable confusion concerning the use of the word "rent" within the industry. (13.1) Where "rent" appears in service station accounts it is mostly charged as a flat rate of 1 - 2 cents a gallon. Calculations suggest that in terms of average gallonages such a level of "rent" would barely pay real estate costs, rates, land tax etc. (13.2) The true "rent" is buried in the wholesale price although not dissected as such and amounts to about 7 cents a gallon. (13.3) Low capital cost sites which do large gallonage 379 sales therefore pay very large rents indeed while high capital cost sites with low gallonage sales pay little. The better sites directly subsidise the poorer sites. (13.5) Very many outlets would close if they had to pay a "true" rent. (13.5) (and see Table 4) 24. The Commission inquired into Depot retail trading which was the subject of a very large volume of complaints. Depots exist today mostly to retail in bulk to industrial and rural consumers. Frequently there is a pump on the premises and as the Depots buying price is often less than the dealers, it regularly undersells the service station. The Queensland Government has legislated to prohibit this type of trading. The New South Wales Government has sought undertakings from the companies that they would not encourage it. The Commission believes that the solution to the very real problem of depot trading is the same as it proffers for all classes of discriminatory trading, a restructured pricing system with a degree of price compression. (14.8) 25. Almost all the complaints about forms of trading based on price discrimination start from the position that the price at which the lessee dealer buys his product is the highest in all the tiers of price. As the price "spread" is wide anyone else who can buy wholesale, buys more cheaply and can turn this supply back to compete in the retail market with a cheaper supply than the dealer can command. By contrast, in New Zealand the dealer buys at the lowest price in all the tiers of price. (14.7) 26. One undesirable result of the method of levying rentals is that it gives dealer and company contradictory incentives. The companies' return on service station investment is in the form of "rent" at 7 cents a gallon buried in the wholesale price. Every 380 [gallon sold gives the company a return. It does not matter mow unprofitable it is for the dealer to sell. The dealer wants to trade in profitable hours only, where he can avoid penalty payments in wages, big lighting bills mnd slow and unprofitable trade at night, on Sundays etc. Therefore the companies incremental economics are j ropposed to the dealers incremental economics. 111. The Commission has separately studied each State market. They have many common characteristics but the histories do differ. [ lit finds essentially that the problems of the industry cannot be I .successfully managed on a local basis and that the majority of i SJtate Government interventions have ended in partial or complete I failure. (15.4) "Price war" so called is a feature of many markets. »uch phenomena have been a regularly recurring feature of marketing in many countries over many years. The conditions for rheir emergence have been well studied. The Victorian market therefore is no isolated aberration. The advent and continuance »f price war was predetermined by the nature of marketing in that Utate and indeed in Australia as a whole. (15.4) If the gap between the refinery gate price and the pump arice becomes too large, it will pay someone to cut price to 1 ^ain gallonage. Wholesale and retail margins in Australia are roo high and price cutting, without price.discrimination, is meritorious. (15.5) If this competition is based upon efficiency in the larket place it can only be applauded. If it is based upon infair competitive practices founded upon price discrimination it j -S to be condemned. Most of the characteristics of price competition in the retail market are based upon discriminatory tricing practice, buying in on one tier of price and turning f-t back into the highest priced market, the retail market. 3 8 1 28. The Victorian Market (Part VI - 16.0 - 16.7) The market is characterised by confusionprice discrimination and unfair practices. (16.1, 16.2) The Commission has traced the development of the "price war" its cause and effects, and has given twelve actual examples of contractual arrangements which it considers part of the "price war" situation. (16.7) The major mechanism involves buying from the oil companies in bulk at prices ranging down to 12.5 cents a gallon below the price at which the companies sell in bulk to their own dealers and turning this supply back into the retail market. In at least one case a party to this type of contract could make as a profit the full recommended V.A.C.C. margin of 12.2 cents a gallon and sell at a retail price less than the wholesale price at which lessee dealers have to pay their supplying companies. The contracts sometimes provide for very heavy discounts off the price; sometimes for large payments to be made by the companies to the dealers to support their price cutting, some times for loans with the loans being repaid by a discount offset against them and sometimes a combination of advantages. The examples given cover contracts with "taxi" service stations (Example 1); exceptionally cheap discounts (Example 111); contracts giving owner-dealers margins of 18.95 cents a gallon (Example V); repaying loans (Example VI); "jobber" contracts such as ACTU Solo (Example XI); and cooperative type companies trading extensively in separate chains of service stations (Example Xll). The Commission in its conclusions (16.2) found that in Victoria widespread price discrimination has existed for many years. Dealers in company owned sites paid the highest price on a wholesale basis of any tier of price in the industry. All other classes of bulk buyers were able to purchase far more advantageously. These other classes include government and semi government purchasers, large commercial and industrial firms, 382 depots and distribution agents, discounting retailers, specialised outlets such as taxi companies, tyre companies and jobbers so called. (16.2) At the same time the service station lessee is bound by his lease to buy at list price. The Commission also considered in its analysis of Ampol's contract with Southern Cross Petroleum Pty. Limited whether the indigenous crude allocation system was having the unintended effect of creating pressure against oil companies to ensure that market share is maintained even at high commercial cost in order to maintain access to much cheaper indigenous crude and avoid the added cost of laying down an additional inventory of imported crude. Such a pressure would help explain some of the more unusual manoeuvres in the Victorian market. The Victorian Government made no submission to the Commission. On the evidence^ unlike all other State Government it does not seem to have moved to rectify any of the observed deficiencies of the industry in Victoria. (17.1) 29. The New South Wales Market (17 - 17.10) This market is similar to the Victorian market. Price competition is not so extensive because of a ban by the Transport Workers Union on the display of price boards. This is an unfortunate way to influence the market and motor spirit is dearer in New South Wales than it might be because of the actions of the Union. The New South Wales Government has investigated prices, trading hours, company dealer relations and attempted a disinvestment program. 383 The Commission considers that the initiatives taken by the New South Wales Government concerning prices, rationalisa tion, and hours and company-dealer relations while demonstrating the Government's concern have failed to achieve significant objectives. This is principally because reform of the industry requires reassessment of its general nation-wide structure rather than piecemeal attempts to control local manifestations. The Commissions conclusions on the New South Wales market are as follows:- In New South Wales Governments of all parties have recognised the need for administrative intervention in this industry. The interventions have been aimed at problems that the Commission can identify as being present in the industry in all the Australian markets. Despite this intervention, there are in New South Wales too many service stations and there is no program to reduce the numbers, the price of motor spirit is still too high and there are still dealers operating over long hours for poor returns. In short, all the problems remain. This suggests that real solutions have yet to be found. The 1975 average throughput for all New South Wales retail outlets was only 12,300 gallons a month and company-owned service stations 20,700 gallons a month. These averages are far too low. The economies of scale, which would result to the benefit of dealers and the community if the station throughputs were lifted to an average of 35,000 gallons a month are described later in this Summary. The reason advanced by the companies for the abandonment of the New South Wales Government's rationalisation program was the imminent introduction of the provisions of the Trade Practices Act. The fear that industry rationalisation is impeded by a 384 Federal Act of Parliament demonstrates the need for coherent national policy rather than competing State and Federal policies. A study of the New South Wales market leads inevitably to the conclusion that reform of the industry requires reassess ment of its general nationwide structure rather than piecemeal attempts to control local manifestations. (17.10) 30. The South Australian Market (19.1 - 19.6) Of all State Governments, the South Australian Govern ment has the longest and most comprehensive history of interaction with this section of the oil industry. South Australia administered price control from 1948 to 1974. Mr Don Dunstan introduced a private members bill in 1954 proposing rationalisation of service stations. The State Government has supervised an attempt at rationalisation and has secured a closure of service station sites rather similar to that of the New South Wales Government. Seventy outlets were closed in the program which terminated on 30th September 1975. Legislation also exists for restricted trading hours in some metropolitan areas. The South Australian market has a long history of price cutting, due to the usual reasons, wholesale and retail margins are too high. As in most other States the price competition that exists is based upon discriminatory supply, taxi outlets, depots, jobbers, bulk contracts at low prices. Much of this supply turns up in the retail market. The degree of market instability is equalled only by Victoria. The remedy for the South Australian market is the 385 same as for the other markets, disinvestment, lower margins, a restructured pricing system with posted prices and some compression of price. These policies cannot be developed locally. 31. The Western Australian Market (18.1 - 18.7) This market is isolated from other markets. There is no significant price cutting in Perth but price cutting has crept into some provincial cities. It is a stable high cost market. There is however an excessive number of outlets and high margins. The Commission considers that extensive price cutting will invade this market and is inevitable. It has already appeared in some provincial centres. The Western Australian Government in January, 1956 set up an Honorary Royal Commission to inquire into matters of the Retailing of Motor Spirit and Accessories. Although its principal recommendations were not translated into legislation, its recommendations concerning trading hours and rostering were adopted. The scheme works well, reduces operating costs, and provides an added level of amenity in the industry. Although it is not suitable to be transferred to other States and cities, there is much to be gained from a study of the schemes' operations. It has the support of all sectors of the industry. The Commission's conclusions in the Western Australian market are as follows:- Western Australia typifies a market currently stable, satisfactory to both the motor spirit wholesale and retail industry but expensive, in terms of motor spirit prices to the community. Not far beneath the surface are powerful forces likely 386 to contribute to instability, such as service station proliferation coupled with high wholesale and retail margins. A price war situation will inevitably develop in Western Australia if present parameters are maintained. In these areas in this State, as in other States, there is need for reform under the control and guidance of an administrative authority. On the other hand, a successful rostering system has been introduced which has benefited both the industry and the community. While the Commission does not wish it to be inferred that any other State could "pick up" the Western Australian rostering system and uncritically transfer it, nevertheless the rostering system contains features well worth emulating in other States. (18.7) 32. The Queensland Market (20.1 - 20.8) This market exhibits the same range of problems of over building and low gallonages as Victoria and South Australia. In particular price cutting from high margins is common on the Gold Coast where boards offering deep discounts are displayed and on an under-the-canopy basis in Brisbane itself. The Commission has received many bitter complaints in all States concerning retail trading from depot sites, but none more critical than those from Queensland. Many service station proprietors were interviewed on their own forecourts and this complaint was all but universal. The Queensland Government has passed legislation prohibiting depot retail trading but the legislation is being evaded by a number of stratagems. Much of Queensland has limits on trading hours and a roster system. The State market has in recent months been plagued by product shortages and the Commission as part of the evidence of proliferation, was told that recently when half the service stations were closed because of product shortages, the 387 remaining half had no trouble in providing an adequate service to the public. All dealers addressed by the Commission said that there were far too many service'stations. When it was pointed out to them that in any rationalisation by way of disinvestment they might well be in that part of the industry closed down, all said that they would still favour rationalisation if those that remained could make a reasonable living. The Commission concluded The Queensland market demonstrates a trend towards deeper levels of price cutting and has produced a growing concern amongst dealers about practices in the market which are unfair and harmful. The State Government has recognised the validity of some of these complaints and the need for legislative solution. But the necessary limitations of the solution indicates the need for more comprehensive reform striking at the roots of the problem. Additionally the Queensland experience emphasises the benefit the community and the industry gain from a well administered system of rostered trading hours. (20.8) 33. The Tasmanian Market (21.1, 21.2) In 1960 , a Joint Committee of both Houses of the Tasman ian Parliament was appointed to inquire into and report upon, inter alia:- (i) marketing of motor spirit and petroleum products in Tasmania with a view to seeking a method to stabilise the market; (ii) the matters relating to trading hours in 388 relation to petroleum products. In its report of 29th November, 1960 the Committee recommended, amongst other things, that legislation should be introduced for the establishment of a marketing and licencing authority to stabilise the marketing and distribution of petroleum products, and that such authority be empowered to determine prices, including a wholesale price below which no deliveries should be made, and to licence agents, resellers, reseller sites and commercial pumps. It further recommended provision in the legislation for suppressing under-cutting, special discounts, commissions and gifts and direct selling by oil companies other than to registered buyers, licensed resellers and licensed consumers. These recommendations were not implemented. Once again however, they demonstrate an authoritative recognition of problems occurring in Tasmania in 1960, which the Commission finds have continued for many years and are now present in Australia as a whole. However the Tasmanian Government does limit trading hours and provide a rostering scheme. 34. The Commission has, in some detail, traced the evolution of a system of distribution and marketing which reflected the commercial policies of the major oil companies, exported to and deployed throughout this country. It has described the sub stantial over-investment in retail sites, the under-utilisation of assets, the high costs associated with a fragmented market, and widespread discriminatory pricing practices. (22.1) The transition to solus trading, as an expression of the competitive rivalries of the international companies, which lies at the bottom of much of the observed problems of the industry, coupled with the failure of the nation's organs of public administration to evolve any comprehensive remedies for 389 the problems, has meant that for 25 years there has been a progressively larger investment in a wasteful and expensive system of distribution and marketing contrary to the best interests of the Australian community. This excessive investment, and all that it has produced, both in material structures and social terms, is still there in the midst of the nation's commercial and industrial life, demand ing service, attention and money. Its very existence represents the greatest single constraint on reform. This load of invest ment and what it has procured will not go away. However conven ient it might be, it is simply not possible, even on a limited scale, to start all over again. The reformer must grapple with what is there, however inappropriate. 35. The task then is one of amendment and change, not one of re-establishment. This being so, it must then be said that many reforms, however desirable they may be, are not in practical terms achievable. There are some areas that cry out for reform but are so large and consolidated that effectively there are no practical solutions or only limited and partial solutions. The very problem of proliferation of outlets is in fact, as a matter of practicality, only partly solvable, and needs to be attacked not by one but a series of interlocking policy initiatives. Similarly, it is not possible to turn the clock back and reinstate independent owner dealers as the principal retailers as they were in the pre-1951 pre-solus days, however socially or economically desirable such a course may appear. The Commission's conclusion is that the solutions are necessarily partial only, are severely limited by what is already in place on the ground and must be sought by amendment and re direction rather than frank and outright change. (22.2) 36. The present system of marketing, based on excessive numbers of service stations and a distorted price structure, is wholly unsuitable for the needs of the consuming public. The 390 1973 OPEC price rises are leading to the abandonment by the international oil companies of market strategies which emphasised expanding sales of product at almost any cost. Some oil companies in Australia have been slow to react but some are now moving to divest themselves of uneconomic service stations. However the marketing system as it exists has evolved under the pressure of enormous investment for a quarter of a century and has developed its own now unwanted internal dynamics. It is not possible to amend it on a "do this" or "do that" basis. The only hope of securing beneficial reform and amend ments lies in the evolution of on-going and continuing programs of reform, intelligently and perceptively administered. The problems that call for reform can be defined; the data that indicates a starting point can be defined; the future in which these reforms will be operating can be investigated and defined; the policy objectives can be defined and the necessary administra tive structures can be discussed. There is a managerial problem. Oil company management has been taught for most of this century that sales, gallonage, market share - call it what you will - is what they are there to achieve. Large scale disinvestment which has to come, brings the spectre of loss of market share to competitors. Competition for market share, which is the traditional form of competition in the industry, thus inhibits disinvestment. An authority or agency with an "honest broker" approach to disinvestment within guidelines, can provide a proper and useful vehicle for channelling the oil companies' own momentum towards disinvestment. (22.3) 37. The essentials of any reforms must be incorporated in the form of on-going program designed to operate for a term of years. These programs must contain within themselves the ability to evaluate policy alternatives, to change, adapt and evolve, in a word - to administer. No list of "dos" and donts" 391 can truly be said to have a serious prospect of anticipating the conditions of the industry in 1985 or even 1980. What has to be set in motion, within defined parameters and aimed at defined problems, is an administrative machine that can evolve of itself to modify the old problems and meet the new. There are no pre-packaged solutions. (22.4) 38. Almost every country in the world has some agency or Department of State designed specifically to deal with this industry in the areas of distribution, marketing and pricing. The division of public authority in Australia makes emulation of most of such agencies or departments difficult. In Australia, no agency is likely to operate effectively unless it can secure the cooperation of State governments and the oil companies. To avoid unnecessary conflicts, an agency so structured to impinge as little as possible on areas of State responsibility would be prudent. It is not an accident that whoever in Australia the Commission has listened to, people or organisations who hoped for improvement and reform, all proposed some type of authority to inform and supervise the process of adaption and change.(22.5) 39. There remains the question of enlisting the cooperation of oil companies. During some past periods it would be doubtful whether effective cooperation could be achieved. More recently, however, the administration of the Indigenous Crude Oil Absorption Policy and the applications by oil companies to the Prices Justification Tribunal provide examples of cooperation between the oil companies and government or government agencies. In other countries, examples of close and mutually beneficial cooperation are the rule and not the exception. Having looked at a number of countries' administrative systems, the Commission has no doubt that this industry can work and thrive, while at the same time accepting public objectives enunciated by governments.^ 392 40. The Commission itself provides another example of such ' cooperation. The Commission wishes to record that it has received assistance from all oil companies. In particular, Shell has unfailingly moved to assist the Commission when requested to a degree well beyond that which a merely conventional response would require. The Commission has received substantial assist ance from Mobil, not only in Australia, but in New Zealand and Singapore. The Commission has been assisted to a notable degree by Esso, in Australia, Canada, the United Kingdom and Norway and by Total, especially in France. There is no reason why an agency established by the Australian Government would not receive sub stantial cooperation from the industry as a whole. (22.6) The Commission considers that an independent agency would have advantages over other administrative forms. It would be freer than Government departments to engage the cooperation of other parties, agencies and governments; its development would have a degree of continuity that is essential to orderly administration and perhaps, a more flexible personnel structure. Such an agency could expect to recruit from the ranks of oil company executives. Such recruitment should fairly quickly lead to the accretion of that expertise in the industry which now is so obviously lacking in Australia1 s governmental structure, while the continuity of the agency would remain independently of changes in government. Such an agency structure would also accommodate one of the major criticisms made of present governmental arrangements by oil company managements, namely that in the few areas of government-industry relations no sooner are public servants educated in the reality of policy alternatives than they are likely to be transferred to some other department or area of responsibility. At times the structures of departments them selves are changed with a similar loss to industry of trained experts with whom to deal. (22.7) 42. In order to assess the balance between future demand 393 and supply it is necessary to form some conclusions about the source of Australia's future supply of crude and its cost. (23) Australia is at present passing through a period during which the crude being used to supply the Australian market is predominantly indigenous and by world standards artificially cheap. This period is shortly to end. Thereafter Australia and the world faces an energy future characterised by uncertainty. Crude oil will be imported at high cost with the prospect that both the crude and the money to pay for it will be scarce. By the end of this century world supply will be failing and ever higher prices will prevail. The Commission adopts 1985 as its "horizon" but does extend some prospects out to 1990. Beyond that time no useful generalisations can be made. 43. The Commission notes that demand is rising. It estimates the demand for motor spirit to rise between 2.9% (low estimate) and 4.7% (high, estimate) per annum to 1984/85. The shift in demand pattern is likely to be towards the lighter end of the barrel. 44. Domestic resources will not be adequate to meet this demand. The Commission expects that indigenous production will remain level until about 1980, although it will provide a dec lining proportion of consumption. After 1980 production will fall off. By 1984/85 indigenous crude will supply between 32% to 45% of the necessary crude (depending upon whether the high or low forecasts prove the more accurate) and by 1990 indigenous supply as presently estimated will be down to about 15%. (23.8) 45. Four things could help supply - 394 (a) further finds of indigenous crude (b) "stretching" crude supply by the use of other hydrocarbons (natural gas, L.P.G. and gas liquids). The Commission if time permits proposes to report on the prospects of economic use of L.P.G. as a transportation fuel. (c) conservation (d) by new generation of syncrude of some kind from shale or coal. This is considered not to be commercially feasible to a significant extent until 1990. This leaves two areas - further finds of indigenous crude, and conservation. (23.9) 46. The Commission is pessimistic concerning major finds of indigenous crude, which are the only finds worth considering. Australia is not an attractive oil province. Exploratory drill ing has dropped precipitously since 1970 and policies which will re-start exploration have not yet succeeded. The most likely areas for further discoveries are offshore in deep water involving development at the limits of current technology and very large investment. The Commission is aware of some of the problems involved from its investigations in the United Kingdom and Norway of the problems facing governments and companies in the North Sea. As a broad guide the Commission considers that onshore discoveries would require approximately six years from the date of initial discovery to be brought to market as product and offshore discoveries approximately 10 years. 395 47. The Commission has discussed the cost of imported crude with governments and agencies of many countries. All were pessimistic on the trend of future prices. Some authorities in the United Kingdom saw some medium term softening in price on a constant money value basis but then postulated increases. Other governments were less optimistic. 48. The Commission had discussions with Dr Jamshid Amouzegar presently Minister for the Interior of the Government of Iran and his country's senior delegate to OPEC. While stressing the uncertainty of the future and the difficulty in assessing the rate of development of alternative sources of energy - the fast breeder reactor, the fusion reactor, shale and coal - Dr Amouzegar postulated that for the next ten years at least the world would be dependent upon the oil and gas of the Middle East. Putting the Iranian Government's view, Dr Amouzegar stressed that his country had no motive in its approach to price other than its protection of the relative purchasing power of income derived from oil. This meant that the present price required regular adjustment to allow for the diminishing purchasing power of money caused by inflation. The inflation rates have however been assessed against the increase in costs of imported commodities rather than by consulting statistical indices of cost of living and similar related data. (24.2) 49. There is one area of uncertainty about future supply in Australia. There does not seem to be any specific consideration of the price position of crude already discovered but not developed, nor of the price of crude recovered by secondary or tertiary recovery methods. The price paid will determine at least partly the volume delivered. The Commission discusses in the Report the policies of the United States Government and Canada in relation to crude pricing. 396 In summary, both Canada and the U.S.A. are pursuing or proposing to pursue programs to price crude in their domestic markets at international parity so as to restrain consumption and avoid misallocation of scarce resources. Potential windfall profits to producers are to be taken by Governments in both cases. Canada has for some time also applied this policy to energy exports. 50. Assuming no increase in cost and on a constant money value basis the Commission estimates Australia's import bill in 1984/85 to be between $1,749 and $2,367 million depending on consumption trends. This estimate is almost certainly too conservative. However the present cost of imported crude oil, although it has quadrupled over the last three years, is still well under the alternate cost of other fuels such as those derived from shale and the hydrogenisation of coal. "The likelihood is that the apparent cost of imported crude will at least increase at. a rate approximately equivalent to that of inflation and, on constant money values, may also increase to just under the alternate cost of other fuels." This must raise doubts as to any major importing countries ability to pay for these imports. (24.4) 51. Governments must actively interest themselves in the conservation of resources, both indigenous and imported, and in measures designed to discourage and restrict all but necessary consumption. The Commission considers that a deliberate campaign of public education on the scarcity of energy resources, together with practical advice as to how motor spirit may be conserved, is an essential precondition for public acceptance of policies of conservation, which will have to be implemented and which are likely to prove unpopular. 397 52. The basic mechanism of conservation, however, remains that of price. Australian crude oil at $2.33 a barrel is the cheapest in the world and motor spirit derived substantially from it, even with present levels of taxation, encourages consumption and the misallocation of energy resources. For reasons of conservation alone, the price of Australian crude should be increased by the imposition of excise to at least world parity price and the price of product modified accordingly. In short, governments should act to discourage consumption by the price route. Most importing countries have already done this and the price inclusive of taxation of motor spirit around the world is generally far higher than in Australia. (24.6) 53. Unfortunately, it is a characteristic of the market for motor spirit that it is "price inelastic", that is increases in price do not, to a proportionate degree, inhibit consumption. This does not mean however that there is no consumer response to price increases. In the United Kingdom, particularly, and in France, the Commission had discussions with officials who were monitoring the effects of the substantial rises in price consequent upon the OPEC price increases. In most cases consumption had turned down significantly although at markedly different rates for different products. Although qualitative studies had not been done there was a general estimate that the downturn in consumption derived from the current recession rather more than from the pressures on prices. The renewal of prosperous conditions it was expected would bring an increase in consumption although the trend line might be lower. Price, therefore, can only be considered one weapon amongst others in the armoury of weapons which government will 398 need to apply to discourage consumption. (24.8) 54. The Report of the (U.S.) National Petroleum Council recommends five measures as offering the greatest conservation potential. (i) Smaller cars. This was expected to become the largest single factor in reducing fuel consumption; (ii) Improved vehicle maintenance: (iii) Modification of exhaust emission and gasoline lead regulators· (iv) Speed limits; (v) Improved automobile design. 55. The Commission considers the following specific recomme dations on conservation should be implemented :- (a) to educate the public of Australia to an awareness of the need to conserve energy especially in the transportation sector; (b) to implement practical programs to discourage the use of vehicles with large engines and vehicle components which require the avoidable use of trans portation fuel (c) alternatively, to encourage the use of small and very small engines; (d) to levy high to punitive sales tax on large sized engines and fuel using components; (e) to raise substantially the cost of transpor tation fuels to all consumers except the public sectors of transportation, by the imposition of taxation; 399 (f) to attract the cooperation of the public, State Governments, oil companies and vehicle manufacturers and importers in achieving these ends. (25.6) 56. In considering reforming dealer company relations the Commission adopts as its objective the statement appearing in the Fair Marketing of Petroleum Act executed in 1975 by the Senate and House of Representatives of the United States of America in Congress assembled :- "Declaration of Policy Sec. 2 Competition, non discriminatory practices and equal access to supplies for all retailers and distributors are essential to the fair and efficient functioning of a free market economy. Gasoline and other petroleum products should be produced, distributed and marketed in the manner most beneficial to the consumer. It is the policy of Congress to assist consumers and marketers achieve these goals." (26) No relationship in this industry with the exception of the producer consumer relationship itself is more fundamental than the relationship between companies and lessee dealers. That relationship is unsatisfactory and calls for reform. (26.1) In many countries minimum standards for dealer contracts have been set by legislation. In regard to dealers on company-owned sites, the Commission finds the following major faults with present arrangements :- (i) It is common to find dealers with no current written lease or licence. 4 0 0 (ii) On occasions, the dealer is only a licensee, that is the holder of no more than a personal right to occupy the premises. He has no estate or interest in the premises and no security of tenure. (iii) Where the dealer has a written lease, most of the terms are for the benefit of the companies and to the burden of the dealers. (iv) There are under the lease, many reasons, some of the most trivial kind, for which the dealer can be dispossessed and his term ended. Thus, even when he has a lease for a term of years, the reality is that the dealer is there during the company's pleasure. He has no effective term. In particular, some leases contain several pages of provisions of a housekeeping nature, such as sweeping; repairing; cleaning; opening; shutting; performing; checking; or refer to or incorporate other documents containing the same lists of imperatives. The omission to perform any one of these provisions is sufficient, according to the terms of the lease, to empower the company to evict him.(26.5) Other clauses require the dealer to run his business to the satisfaction of the companies "in every respect". The effect of these provisions is that the dealer's lease can in many cases be terminated at any time at the will of the lessor. Put alternatively, although the lease may be for a three year term, the number of causes which give the company the right to dispossess the dealer are so many that he can be dispossessed at any time for insignificant reasons. His tenure is in reality no more secure than that of a tenant at will. The companies strongly denied that they would dispossess tenants for trivial causes. The Commission suggests this is not the point. 401 Every time a representative of an oil company walks on to the forecourt of a lessee dealer, both know that the lessee can, according to the terms of his lease, be dispossessed for any one of a number of minor causes. 57. The Commission recommends:- (i) The dealer should have a three year lease with a stipulation that parties could terminate the lease on 30 days' notice during the initial year. (ii) Otherwise notice should be a minimum of six months and should ordinarily be "evergreen". (iii) Hours of trading should be the concern of the dealer provided the business is open for reasonable hours. (iv) A lease should be capable of assignment. (v) The Commission believes that there should be an amendment to S49 of the Trade Practices Act 1974 in cases where price discrimination is not such as substantially lessens competition in the market as a whole. The Commission believes that Section 49 should be amended to come into line with Section 2 of the Clayton Act, as amended, so as to render illegal dis criminations in price which have the effect of injuring destroying or preventing competition with any person who either -(a) grants; (b) or knowingly receives the benefit of such discrimination; (c) or who is a customer of either of them. (vi) The Commission considers that an opening for conciliation and arbitration needs to be established. (26.10) 402 In the first place it should be possible to refer any dispute between a dealer and his oil company to a conciliator, who can deal with it on an informal round- the-table basis. The aim is to provide a cheap simple and speedy method of solving minor difficulties. The lease should contain a clause providing that if any difference arises between them, it may on the motion of either party be submitted to conciliation. The conciliator will be nominated by the Government or by the Agency to which reference elsewhere has been made, proceedings will be relatively informal, with the dealer representing himself or, at his option, being represented by an officer of his trade association, and the company being represented by one of its staff. Legal representation would not be permitted and costs would not be awarded. Decisions would be binding on the parties unless arbitration was invoked. If conciliation does not solve the problem, the parties should be able then to resort to arbitration. Again the lease would contain a submission to arbitration and the arbitrator would be appointed by the government or the Agency. Again, the procedure should be as informal as possible but the decision of the arbitrator should bind the parties and should not be open to any further appeal. As complicated issues may well have to be canvassed, legal representation should be allowed the parties. The proceedings would be conducted very much as an industrial arbitration might be conducted. The arbitrator should have a discretion to award costs but the Commission would not expect him ordinarily to award costs against dealers. The Commission furnishes an Annexure to this Report which sets out clauses which the Commission feels should be appropriate for a form of lease. (Annexure B") (26.11) 58. The Commission has no doubt that extensive over building of service stations has occurred which has resulted in 403 average through-puts so very much below capacity as to amount to a gross under utilization of assets. (27.1) Although the average gallonage per month of all Australian outlets was under 10,000 gallons a month the Commission saw small poorly furnished sites doing in one case of over 300,000 gallons a month. Australian service station through-puts compare unfavourably with United States and Canada. 1974 Australia Canada United States Total Retail Outlets (000) 17.1 30.8 250.0 Estimated Total Sales to Retail Outlets (million gals/year) 1990 6800 85900 Average Monthly Sales per Outlet (000 gals) 9.7 18.4 28.6 The cost of marketing through a 50,000 gallon a month station is only 62% of the cost a gallon of marketing through the same station if it be selling only 25,000 gallons a month. In summary, a program of rationalisation of service stations could help to provide adequate returns on capital investments to oil companies and dealers, provide good dealer incomes and make possible reductions in the cost of motor spirit to motorists. 59. The Companies have traditionally competed for market share by numbers of outlets rather than by price. There is a high correlation between market share and outlet numbers. (27.3) High dealer margins have protected the inefficient low gallonage sites. Both New South Wales and South Australian Governments have introduced rationalisation schemes but both have failed. Neither presently operates. (27.9) 4 0 4 12% 60. The State Government schemes which involved a 10 - percentage closure worked to the extent they did because it enabled the companies to close their chronically unprofitable ("dog") sites. Some have since been reopened. If further "bites" had been taken the essential inequalities of the "10% closure approach" which does not specify the content of the 10% would have shown up. 61. Despite this history, the Commission believes that the objectives of rationalisation are valid. A significant program of service station rationalisation can have the following advantages:- (a) Lower margins, both wholesale and retail, will be required for the economic viability of dealers and companies; (b) The capital investments in those stations that remain will be more fully utilized; (c) There will be reduced scope for ruinous price competition as disparities in economies of scale will be reduced; (d) Nevertheless, the average real price of motor spirit to the Australian public could be reduced; (e) Dealer incomes may be improved, or at least the problems of low volume, low income dealers can be mitigatfd; however, some unemployment in the industry will probably occur; (f) There may be an aesthetic improvement as service stations are removed. 405 62. That powerful economies of scale are available in the marketing of motor spirit as service station throughputs increase are shown in the following table. The total marketing costs including return on capital investment and required motor spirit margins for the same service station at various throughput levels are summarised. Margins refer not merely to the dealer margin but to the total wholesale plus retail margin available from the refinery or primary terminal gate through to the retail pump. MOTOR SPIRIT MARKETING COSTS AND REQUIRED MARGINS 1975 Average Station Throughput in Gallons per Month (ί/gal) . 10000 20000 30000 40000 50000 60000 Total costs per gallon 69.7b 39.7b 29.0b 23.3b 20.5b 18.7b Less non-motor spirit income 14.0b 10.0b 8.0b 7.0b 6.0b 5.2b Required motor spirit margin (wholesale and retail) 55.7b 29.7b 21.0b 16.3b 14.5b 13.5b 63. The Commission identified four broad sectors of retail trading. Although many of the proposals made by the Commission will have substantial effects on all areas, a formal program of disinvestment is recommended for one sector only - trading in metropolitan areas and provincial towns and cities with populations over 10,000 people. The Commission considers metropolitan and provincial trading as defined to be substantially similar. (29.4) 64. Rural Outlets: Dealer-Owned These are often pumps outside stores, post offices and the like. Gallonage is often very low, income small and supple mentary to the main business of the site. Such sites are 406 a convenience in isolated areas. The Commission does not recommend a rationalisation program with respect to such sites except to the following extent: (i) These outlets should conform to the pattern of economic rationality. Product should be sold at a true economic price reflecting in particular the distance through which product is transported, the size of the drop, economic rental for pumps and maintenance costs. This will undoubtedly mean that product sold under these circumstances from sites lacking convenience and the economies of scale will be higher. No one should expect otherwise. If, under these modest pressures, some outlets do close this should not be regretted. (ii) There is probably a case for observing some criteria for continued licensing pertaining to the condition of premises and certainly so where public safety might be involved. Basically, however, the case for these outlets is based upon convenience in isolated locations, preferably at low capital cost. 65. Rural Outlets: Company-Owned, including Depots Company-owned service stations in rural areas in categories similar to those described in the previous paragraph are not, relatively speaking, very numerous. The Commission would not propose any program of rationalisation with respect to them. The economics of such outlets would be affected and determined by the general reforms of marketing and pricing which the Commission proposes. (29.5) There has been strong, sustained and bitter opposition to retail pump sales to the public at depots. The Commission 407 understands and sympathises with these objections as present trading is based upon quite unfair price discrimination, favour ing the depot at the expense of the service station dealer. Should the reforms in marketing and pricing discussed herein take place, then outlets and depots would be competing on an equal price-competition basis, the service station outlet having the advantage of convenience and service and the depot perhaps a small advantage in price. The Commission sees the competition inherent in that type of situation as desirable and does not propose any rationalisation in rural areas as defined for depots. 66. The Commission does not propose a specific disinvestment program for dealer-owned metropolitan outlets. It considers that the economic measures, coupled with the licensing standards pro posed, will tend to reduce those numbers. A specific disinvest ment program is proposed for company-owned outlets in metropolitan and provincial areas. In proposing this disinvestment program the Commission has been guided by two principles. The aim of the Commission is to amend the present system so that fair price competition based on rational and proper invest ment can protect the Australian public against excessive prices. The method of the Commission is to adopt that style of rationalisation which it considers the more forward looking com pany managements would adopt for themselves if they were not con strained by the presence of their competitors; that is to act to reinforce the trends in the industry which both here and overseas are moving towards reorganisation of the retail market to a form both profitable and price competitive. Licensing is a fundamental instrument of policy and the first step to take. Without licensing very little can be done to assist this industry with its problems and the Commission's proposals are dependent upon licensing as the foundation of its approach to reforming the industry. The Commission has observed other licensing systems 408 in operation in countries such as New Zealand and France. The French system particularly furnished in part the model for the proposal now put. The Commission considers that a simple system with a minimum of bureaucratic involvement is the most desirable. The Commission proposes that additional excise be placed on products but be rebated where the outlet is licensed upon conditions which are found to be suitable. One condition would be that leased premises are held on a lease in an approved form. 67. In practical terms the Commission sees advantages flowing from licensing:- 1. Minimum standards for safety, comfort and convenience can be established, tending against such things as kerbside pumps, inadequate product tanks, unsealed forecourts, queues across pavements and along streets. Outlets not meeting elementary standards would receive only temporary permits subject to the premises being upgraded. Outlets in rural areas or where special circumstances exist can be wholly or partly exempt from standards. 2. Requirements for new licences for new service stations can be stringently defined. It would be necessary to demonstrate that the proposed trading area was not already adequately serviced by existing outlets. 3. Licences of closed outlets would be withdrawn and cancelled. Outlets would not be licensed to reopen to circumvent the objectives of rationalisation. 4. Depots, industrial premises, jobbers who buy to turn product into the retail market, taxi stations 409 and others wishing to retail motor spirit to the general public would have to be licensed. They would have to meet the established physical standards required to obtain a retailing licence. Product would have to be purchased from the supplying oil company at the posted delivered dealer tankwagon price. Thus licensing would enable the elimination of "unfair" retail competition from depots, taxi stations and the like, based upon price discrimination. 5. A licensing program will provide data and machinery necessary to monitor the companies' progress toward their rationalisation objectives. 6. It will provide standby machinery necessary to implement an administrative rationalisation program, should it prove necessary, through a progressive administratively-determined program of licence cancellation. 7 . By means of the imposition of conditions on licence government will be able to implement rational policies so conspicuously lacking in this field. It is suggested that the days have long since passed wherein governments could ignore this area of industry. 68. The Commission considers it entirely reasonable to set as an objective, at the end of a five year program, the raising of the standard of operation of company-owned mainline service stations in metropolitan and provincial areas to 35,000 gallons average throughput a month, with slightly lesser objectives for South Australia, Vie stern Australia and Tasmania and 28,000 for Queensland. (30.5) This figure of 35,000 gallons is seen as an average for each chain. The Commission's expectation would be that the better "neighbourhood" type stations with throughputs in the range from 20,000 gallons a month would remain viable and form 410 the bottom half of the "average" range, while a number of larger stations upon highway locations, and hopefully self serve outlets, perhaps of the "gas and go" type would be found in the upper range of the average. 69. Companies are essentially unequal in terms of present average gallonage. Some companies have been unilaterally disinvesting and therefore have already moved significantly towards the "benchmark" level. Other companies have done little or nothing at all. Broadly speaking, Shell, Mobil, Caltex and B.P. should not experience any significant difficulty in reaching the objectives set. Esso may have some difficulty but has impressed the Commission as being a marketer which is likely to compete successfully within any set of reasonable rules Amoco presents difficulties because of its small size, although the quality of its outlets is superior. Total is also relatively small and has poorer outlets. Sleigh's averages in some States, especially Queensland, are very low. Ampol is pursuing a radically different marketing policy to other companies, emphasising the supply of secondary chains, such as Southern Cross, Target Tyres, XL and Yellow Cabs at large discounts while its own service stations, many of which are on large well positioned sites and well designed, are atrophying. This means that companies which have lagged in disinvest ment and consequently have many more low gallonage sites, will have to close far more sites than those companies which have had the prudence to initiate programs over recent years. The Commission's proposals for the next five years should be regarded as a first though major step towards rational isation. There is a case for further rationalisation at the conclusion of the first five year program and one of the steps that should be taken is to raise the level of average gallons in the States with lower average gallonages to and beyond the 411 level of 35,000 gallons a month. (30.5) 70. The 'benchmark' figure is based on the Commission's studies of the economics of service station operations, but modified by its assessment of the present condition of each State market. It reflects a level at which significant economies of scale are available and, based on data supplied by the companies relat ing to their own disinvestment plans, it is a figure well within the reach of those oil companies which have, of their own volition, commenced significant disinvestment programs. Furthermore, it is a level which contemplates in present money values a significant price reduction. The required combined wholesale/ retail margin at 35,000 gallons a month is slightly over 18 cents a gallon, compared to approximately 25 cents a gallon at present throughput levels, indicating a theoretical price reduction of the order of 7 cents a gallon. From a community point of view, it involves a level of outlet closure which will provide a more than sufficient number of remaining outlets to ensure the maintenance of a satisfactory level of service to motorists in the various markets. (30.6) 71. The Commission sets out hereunder the type of program it considers necessary. (30.13) STEP 1: The precise geographic areas for disinvestment in each State will have to be defined. These will be metropolitan areas, together with urban centres with a population of more than 10,000. This severs rural areas which, as stated previously (29.5 and 29.6) should not be included in the disinvestment programs. STEP 2: Each oil company must furnish a complete list of all outlets, including depots, within the defined areas and the latest particulars of gallonage. STEP 3: Each company must prepare a half yearly plan forward from a given date, which shows:- 412 (a) location and gallonage of proposed outlet closures, the number of which must be sufficient to raise the company's average within the defined area by one-tenth of the difference between its average at the commencement of the program and the bench mark gallonage. (b) proposed approximate date of closures. STEP 4: Each program shall be lodged in writing three months before the nominated day for the commencement of the six monthly program. STEP 5: After satisfying himself as to the apparent effective ness of the proposal and receiving from the proposing company any additional information he may require, the "honest broker" at least two months before the commencing date should publish all proposals. STEP 6: Each company can during the ensuing month make any objections to the proposals of other companies on the ground that proposals are unfair or inadequate. STEP 7: After hearing or conferring with the parties, the "honest broker" will direct the implementation of the proposals over the ensuing six months. 413 STEP 8: In the event of any company failing to meet its obliga tion to present suitable programs or its obligation under the approved program, the Agency may cause the licences of the company's outlets to be withdrawn to a degree commensurate with the default. Under the scheme each company is at liberty to choose the outlets it will close. Some companies in some places will be able to close outlets so as to gain "leakage" from the closed site to one of its retained sites. This is a feature of the Shell Perpetual Network Plan. The Commission however considers that such opportunities will become increasingly rare as disinvestment proceeds and does not consider that "leakage" in this sense will alter the basic effects of redistribution. 72. An important set of problems in the current pricing structure relates to a number of "unfair" pricing practices. Particularly disturbing, in the view of the Commission, are the practices of suppliers:- (i) selling motor spirit at different net selling prices to their branded resellers in the same markets; and (ii) selling similar quality unbranded product at lower selling prices, not justified by cost savings to unbranded resellers competing in the same market with their branded dealers. These practices particularly affect dealers operating company-owned stations. For example, when a dealer sees a compet ing station selling product to the public at the pump at a 414 price lower than his own wholesale purchase price from his supplying oil company, he has legitimate cause to complain. These practices are seen by dealers as both discriminatory and predatory. The Commission as a matter of substantial importance recommends a restructuring of motor spirit pricing practices in order to:- (i) place pricing on a rational economically- based and examinable basis; (ii) eliminate cross subsidies; (iii) remove discrimination and aspects of unfair competition which are inherent in the current multi tiered price structures practised by the companies. The Commission proposes that there should be a mandatory public posting ,of motor spirit selling prices at all important points of distribution, including refinery racks, terminals and bulk plants. At a minimum, these prices should be posted for three classes of trade, as follows:- 1. Bulk at Plant Bulk at plant postings would be applicable to all wholesale sales delivered into customer's own transportation at the selling plant. There could be separate prices for branded sales to branded jobbers and for unbranded sales to large wholesale bulk buyers. The unbranded price would, in effect, be the base plant price from which, if the supplier wished, he could offer discounts. He could also discount from the branded jobber price. However the posted price would be the price at which the oil company would have to sell product to any bona fide buyer, assuming that he has product available. This would provide a base 415 price publicly examinable. Product designed to be turned directly on to the . retail market would not be included in this area. If a so-called jobber was merely acting as a further party between supplier and service station, he would ordinarily pay dealer tankwagon price less the cost of delivery. 2. Delivered Consumer Tankwagon Price This price would apply to all sales delivered by the oil company to direct consumers; that is product delivered which would not be resold to the public. This price could vary by delivery size to reflect the economics of drop sizes. It could also be discounted in specific instances to meet competition or for large volume, long-term contracts. . 3. Delivered Dealer Tankwagon Price This price would apply for all sales delivered to retail outlets. No discounts or rebates would be permitted. Thus, all retail outlets in each chain would have product delivered to them at the same net selling price. This would eliminate the discriminatory pricing practices described in the previous section. This price should be based on full load deliveries. An increment could be added for smaller volume deliveries to reflect the extra cost involved in such deliveries. An increment could also be added for higher delivery costs if the retail outlet is beyond a certain distance from the plant and if the additional costs of delivery beyond the base delivery zone are truly quantifiable. 416 As the net sales price to dealer-owned stations will be the same as to company station tenants or licensees, this will effectively eliminate the company rent recovery currently hidden in the dealer tankwagon prices. This will force the companies to obtain economic rents from the lessee dealers. Where such recovery is not possible because of low sales volumes, it will add an incentive to the companies to disinvest the site pursuant to the Commission's proposed policy for the rationalisation of outlets. Competition in the retailing of motor spirit, within the limits and controls set forth in this Report, is viewed by the Commission as a positive force acting to ensure high standards of efficiency and low prices to consumers. Competitors such as XL and other independents have a positive role to play. It is important that they have access to product supply on competitive terms. The Commission proposes that prices should be publicly posted at terminals. This means that companies such as XL and other smaller companies should be able to obtain supplies at the posted price, which will at least be monitored by the authorities and will be no higher than the price available to others. Refusal to sell at posted prices if supply is available should be considered anti-competitive and in restraint of trade. No oil company can be forced to sell to any particular customer, but the burden of proof of a refusal to sell should rest on the oil company if a potential customer files a documented comptaint. No supplying company should expect to continue to supply its own licensed outlets at a time when it denies available product to other licensed outlets at a similar price. 417 73. Petroleum products have been subject to a ceiling price control system in Australia since World War II. The price control system has been based on the passing through of costs over a base level. Provided they could be shown to have been incurred, in general the increases were accepted. Increases were not critically examined to see whether price increases ought to have occurred. Thus, the whole expensive structure of proliferation and uneconomic fragmentation was brought as a cost raising factor into the price structure. So too was the low profitibility of very competitive bulk contracts as companies competed in the con tracting field for ever larger volumes. As this low profitibility was fed into the pricing structure, the price to the motorist rose to compensate for it. As the base has never been critically re-examined, this system has perpetuated a price structure based on a mixture of relatively inefficient stations and in this way has contributed to the proliferation of stations. The price control system has also contributed to the problems of the pricing structure which have been describedâ 74. The Prices Justification Tribunal was set up pursuant to the Prices Justification Act. The first oil industry application for price increases to come before the Prices Justification Tribunal was the Shell application in March 1974. The Prices Justification Tribunal issued its report on the Shell application in May 197 4. The Prices Justification Tribunal did not attempt to develop a new pricing basis different from that used by the South Australian Prices Commissioner. In essence, it accepted as a starting point the prices established by the South Australian Prices Commissioner and reviewed the oil companies' presentation of additional justifiable costs. There were several departures from the procedures followed by the South Australian Prices Commissioner, including the determination of prices on an individual company basis as required by the 418 Prices Justification Act. In the Shell case, the Prices Justification Tribunal noted that the origin of the target margins was not known. Without extensive hearings, most other oil companies applied for, and were granted, increases similar to those determined in the major Shell, Caltex and Ampol cases. There have more recently been public hearings into applications for price increases by Sleigh (December 1975) and B.P. (February 1976). These followed the by now well developed procedures of the earlier cases and were concluded quite promptly. Although it had been reported earlier that the B.P. application would be taken as an opportunity to throw open the whole question of the basic approach to determination of petroleum products, this in fact did not eventuate. 75. The Commission has several observations on price control. The most important observation is that the fundamental basis for calculating ceiling prices, that is the import parity cost of products from the Persian Gulf at posted prices plus GP AFRA freight, has never been critically examined. Very fundamental changes have taken place in the international oil industry since World War II. In the 1950's and accelerating throughout the 1960's, the posted prices of product in the Persian Gulf were not representative of the prices at which products were actually sold. This was also true of crude oil posted prices. Furthermore, the introduction of increasingly large tankers made the transportation of crude oil, and to a lesser extent of product, more economic. Thus, the use of GP tankers as a basis for calculating freight to Australia has become out of date. The use of AFRA (Average Freight Rate Assessment) is also questionable, although it is not easy to devise an 419 acceptable substitute. Currently tanker rates have been borne down heavily so that AFRA almost certainly overstates present rates. Also, in establishing target net margins, the Prices Commissioner in South Australia had to rely upon industry- submitted figures as to marketing profitability. These figures were presumably very difficult to check for the South Australian Prices Commissioner and undoubtedly involved various allocations of cost to marketing, including distribution, administration and general. That this system of price control in fact really did not establish effective price control is evidenced by the fact that large volumes of all products have been sold at significant discounts off the ceiling prices established by the price control system. The South Australian Government submission (Exhibit 320, p .22) states:- "In the case of diesel and fuel oil, both products have been subjected to heavy discounting until the latter part of 1973, when the landed cost of imported crude and furnace oil started to rise substantially." From 1966, especially in Victoria, and increasing in recent years, the discounting of motor spirit has become more widespread. A more rational price control system would be based upon examination of the actual elements of cost: the cost of crude oil, both imported and domestic, the actual cost of ocean freight in appropriately sized vessels, refining costs and capital recovery, marketing and distribution costs, and a profit margin. 76. Almost all countries today have some form of price control on petroleum products and/or domestically produced crude oil. Governments have justified the need for such controls, at least on a standby basis, on the grounds that 420 there is a strong possibility of monopoly profits in this industry. It must also be noted that under oligopoly conditions active collusion is not necessary. Recognised price leadership and conscious parallelism may lead to a situation where without monopoly and without collusion a market situation develops not very different to the market situation that would be expected from collusion. At the national level, the governments have little control over the imported component of oil supply other than to ensure that oil is imported at prices consistent with those paid by other countries. National control over prices therefore is primarily exercised at the level of domestic crude oil production, local refining and marketing. 77. Price control generally takes one of the following forms:- 1. Cost recovery over and above a set of base period prices (that is United States of America, Australia); 2. Built-up costs (most European countries, Africa) based on one of the following systems: a) landed crude oil costs, plus marketing and distribution. b) product import parity, plus marketing and distribution. c) combinations where either (a) or (b) sets the ceiling price, whichever is lower. 421 3. Regulated return on investment. This is not, to the Commission's knowledge, practised in the oil industry, but is the basis for utility regulation in the United States and often underlies the pricing policy of nationalised industries. It tends to be used principally where there is a monopoly granted by the government. Price controls are not a panacea. Prices set too high in a non-competitive environment lead either to high profits or excessive costs and investments. Prices set too low, particularly with a strong historic cost bias, lead to shortages and the need to ration or allocate new higher cost supplies with all the problems of equity associated with any system of allocation of a scarce resource. (32.4) 78. Notwithstanding the difficulty in establishing and operating an effective price control system, the Commission believes that petroleum product price controls are desirable. In evidence several companies argued forcibly for the abandon ment of price control. Much of the argument was based upon the companies' views on the failure of the South Australian Prices Commissioner's particular brand of administration of controls but there are several important justifications for the continuation of a price control system. As already pointed out there has been a petroleum product price control system operative in Australia since World War II. Thus, even if the Prices Justification Tribunal were to be dissolved, there are historic precedents for maintaining petroleum product price controls even if price controls are not applied generally throughout the economy. 79. The Commission considered alternative price control systems, their advantages and disadvantages. The methods included the import parity method and the local refining 422 method and prefers the latter. In Attachment I of Part XVI the Commission furnishes examples of product price control systems. 80. In the course of this Summary, the Commission has referred to the existence in all other countries it has visited of a degree of public administration at a national level of the oil industry, in some cases involving comprehensive public control from production through to marketing. There is in all countries, outside Australia, a general tendency in government to seek to have available to it the means of knowing precisely how this industry operates so that policy options can be evolved and governments can legislate to regulate or control. In Australia, except in very limited areas, control and knowledge of the industry is lacking on a national and State level. Witness for example the letter received by the Commission from the then Minister for Minerals and Energy in response to the Commission's questionnaire on marketing (see 6.7). Until the Prices Justification Tribunal was constituted price control had, after the abandonment of the war time controls, been left entirely to the investigation and decision of one State Authority, a situation which, with proper respect to those who laboured in it, was wholly inappropriate. That price control in this industry was felt on a national basis to be necessary is illustrated by the tacit acceptance throughout the Commonwealth of the prices fixed by the South Australian Prices Commissioner. The very limited base from which the South Australian Prices Commissioner operated prevented effective supervision of 423 the industry and the effective supervision of price. Today Australia must be one of the very few countries in the world that does not on a price basis monitor the arm's length cost of imported crude. In view of the vertically integrated nature of the industry's operations from offshore production to internal retailing, it is surely an extraordinary thing that for 35 years Australia has had systems of price control which never effectively challenged offshore transfer prices - the very area where the companies took their profits. Anybody who thinks that there has not been an appropriate area for concern on price should look at the cases referred to at 8.13 and ponder the implications for price which the cases dis close. All other countries, including New Zealand, which the Commission visited were actively concerned in the area of transfer prices, not only on a taxation basis but also on price. The Commission is firmly of the view that it is quite essential that government retain a flow of organised and regular information relating to all aspects of the industry from all oil companies and other organisations within the industry, so that government is in a position to understand and evaluate the needs and problems of the industry from the point of view of the Australian community as a whole. From a citizen's viewpoint the industry is a vital basic commodity industry and for governments the continued flow of energy in convenient form and at minimum cost is essential to the prosperity and safety of the nation. The function of collecting and disseminating information is only the starting point. The oil industry, Australia-wide, is in need of reform in areas which have been described elsewhere in this Report. They may be summarised 424 as follows:- 1. A re-structuring of the pricing system; 2. A rationalisation of retail outlets with a consequent reduction in numbers; 3. Regulation of dealer company relationships; 4. A program of crude oil conservation. (33.1) In all these areas, the Commission recommends that a system of public administration should be introduced at a national level. In all of them there is a body of opinion in favour of such intervention. In the area of service station rationalisation, it is generally acknowledged that a program must be adopted and it is recognised by some of the oil companies themselves that this can only be done under government supervision. Some of the functions which the Commission suggests the Agency should undertake are quite new. These are:- 1. The establishment, regulation and enforcement of a rationalisation system to achieve the goals proposed in this Report. 2. The licensing of all refineries, terminals, depots, service stations and other market outlets. 425 3. The re-structuring of the pricing system. 4. The monitoring of landed costs and transfer prices. 5. The standardisation of the lease agreements between oil companies and their dealers, and the establishment of a suitable degree of contractual independence for dealers. 6. The establishment of a conservation program. 7. The provision of conciliation and arbitration services contemplated by the proposed company dealer contracts and leases. 8. The determination of prices of all petroleum products. At the time of writing, the precise future form of the Prices Justification Tribunal is in doubt. The Commission recommends that since the determination of price in this industry in many respects depends upon factors peculiar to it, the Agency undertake the function of price control along the same lines as that currently exercised by the Prices Justification Tribunal. 426 ANNEXURE "A" NO. 1 RANGE OF MOTOR SPIRIT ADDITIVES TYPE OF ADDITIVE CLAIMED ADVANTAGES ADDITIVE EXAMPLES Anti-knock Increases octane rating Tetraethyl lead to suit engine compress- Tetramethyl lead ion ratios. Methylcyclopentadien manganese tricarbon Anti-icing Reduces formation in Alcohols carburettors of ice Glycols deposits which lead to Patented surface stalling of engine. active materials Carburettor detergent Prevents build up of gum Patented surface deposits on carburettor active materials surfaces. Solvent Oils Carries in solution or Light straight run suspension gum through Naphthenic oils carburettor, inlet valves and manifolds so that gum deposits are not formed. Anti-oxidant Retards oxidation/poly- Phenols merisation of motor Amino-compounds spirit compounds to form gum particularly during storage. Metal deactivators Renders metal surfaces Commercial products passive or dissolved many with amine or metal inactive. Such diamine compounds metals contribute to gum formation. Deposit modifiers Reduces tendency to mis- Phosphorous fire and pre-ignition compounds from combustion chamber Boron compounds and spark plug deposits. Manganese compounds Anti-corrosion Alleviates rust in fuel Surface active distribution systems. materials Anti-wear Lubricates upper Light lubricating cylinder parts. oils ANNEXURE "A" NO. 1 p. 2 TYPE OF ADDITIVE CLAIMED ADVANTAGES Dispersants When reaching the lubri cating oils below cylinders it assists in dispersing sludge in the lubricant. Dyes For identification and sales appeal. REFERENCE "Modern Petroleum Technology" 4th Edited by G.D. Hobson & W. Pohl: Science Publishers 1973. ADDITIVE EXAMPLES Surface active materials Edition. Applied ANNEXURE "A" NO. 2.1 MOTOR SPIRIT SALES BY COMPANIES TO ALL AUSTRALIAN OUTLETS YEAR 1974 Thousands of Gallons NEW SOUTH WALES Ccnpany owned retail Dealer owned retail Depots State total* VICTORIA Company owned retail Dealer owned retail Depots State total* QUEENSLAND Company owned retail Dealer owned retail Depots State total* SOUTH AUSTRALIA & N.T. Company owned retail Dealer owned retail Depots State total* WESTERS! AUSTRALIA Ccnpany owned retail Dealer owned retail Depots State total* TASMANIA Company owned retail Dealer owned retail Depots State total* AUSTRALIA Company owned retail Dealer owned retail Depots Other sales Australia total 19872 2456 5152 27480 4730 4459 8120 25276 6772 7898 "39946 9542 3874 5719 14688 9854 8133' 32675 4150 5103 4518 6601 1027 3713 1134]. AMOCO AMPOL B.P. CALTEX ESSO MOBIL 21985 59179 111526 79863 37622 62502 4666 18688 43026 26131 9921 23241 17426 21204 27739 37049 19727 28283 44077 99071 182291 143043 67270 114026 17302 24834 65045 48303 18156 38754 3914 29846 30814 20830 18306 29105 11321 13050 27605 17170 14608 29415 32537 67730 123464 86303 51070 97274 11620 26477 37550 20975 10586 19524 2976 7468 11499 13943 6587 15295 11062 11775 16803 16266 8021 22627 25658 45720 65852 51184 25194 57446 7512 14448 35825 14412 8722 16012 4339 5265 8337 6514 770 11429 4048 426 5826 7229 2836 15839 15899 20139 49988 28155 12328 43280 SHELL SLEIGH TOTAL 14676 11306 12445 38427 5502 2975 4524 17309 19135 13771 13001 58419 149540 284764 182391 81687 156970 15895 68182 104322 82375 36611 93351 43857 59727 91590 90365 48905 113133 3912 3724 13855 - 41127 - 122083 281173 494531 355131 208330 363454 128848 24540 32707 186095 76599 27420 44280 148299 51835 17865 25681 "95381 41700 11083 18061 70844 33576 15399 19373 68348 14590 4097 11070 "29757 347148 100404 151172 598724 46153 11716 11941 69810 30022 21730 12425 64177 14333 4184 6167 24684 9243 3514 3892 '16649 8538 1732 4058 14328 5140 1276 3036 9452 113429 44152 41519 29588 228688 26039 7492 11169 44700 10343 3267 954 14564 3375 902 231 ~ 4508 39757 11661 12355 16053 79826 ** Includes 15,700,000 gallons for sales by XL and other companies * Excludes other sales as shown for Australia ALL COMPANIES 573717 169421 20725 950383 329358 185232 170828 685418 196275 80719 118633 395627 147874 51251 58157 257282 123227 48546 60772 232545 43654 21784 36987 102425 1429825** 556953 652623 118259 2-747660* * AMOCO NEW SOUTH WALES Company owned retail Dealer owned retail Total VICTORIA Company owned retail Dealer owned retail Total QUEENSLAND Company owned retail Dealer owned retail Total SOUTH AUSTRALIA & N.T. Company owned retail Dealer owned retail Total WESTERN AUSTRALIA Company owned retail Dealer owned retail Total 105 37 142 107 35 142 69 36 105 42 31 73 TASMANIA Company owned retail Dealer owned retail Total AUSTRALIA Company owned retail 323 Dealer owned retail 139 Total 462 ANNEXURE "A" NO. 2.2 NUMBERS OF RETAIL OUTLETS SUPPLIED BY COMPANIES YEAR 1974 AMPOL B.P. CALTEX ESSO MOBIL SHELL 331 446 280 185 253 509 327 503 364 287 446 431 658 949 644 472 699 940 223 358 230 117 203 370 293 409 225 306 431 464 516 767 455 423 634 834 148 208 115 89 125 246 154 374 317 155 339 498 302 582 432 244 464 744 79 165 64 50 75 181 129 218 137 24 231 320 208 383 201 74 306 501 98 135 69 42 75 145 48 212 134 35 178 306 146 347 203 77 253 451 34 46 22 - 33 53 65 97 69 - 75 113 99 143 91 - 108 166 913 1368 780 483 764 1504 1016 1813 1246 807 1700 2132 1929 3181 2026 1290 2464 3636 SLEIGH 232 370 602 217 270 487 129 167 296 67 108 175 56 35 91 33 47 80 734 997 1731 TOTAL 166 91 257 71 42 113 16 9 25 253 142 395 ALL COMPANIES 2507 2856 5363 1896 2475 4371 1145 2049 3194 723 1198 1921 620 948 1568 231 466 697 7122 9992 17114 ANNEXURE "A" NO. 2.3 AVERAGE MONTHLY M O T O R SPIRIT SALES BY COMPANIES TO RETAIL OUTLETS YEAR 1974 NEW SOUTH WALES Company owned retail 17400 14900 Dealer owned retail 10500 4760 _______________________ AMOCO AMPOL VICTORIA Company owned retail 13480 9280 Dealer owned retail 9320 8490 QUEENSLAND Company owned retail 14030 14910 Dealer owned retail 6890 4040 SOUTH AUSTRALIA & N.T. Company owned retail 14900 16490 Dealer owned retail 11660 3690 WESTERN AUSTRALIA Company owned retail - 16200 Dealer owned retail - 4260 TASMANIA Company owned retail - 11590* Dealer owned retail - 5720* AUSTRALIA Company owned retail 15070 13650 Dealer owned retail 9530 5590 B.P. CALTEX ESSO MOBIL 20840 23770 16900 20600 7130 5980 2880 4340 15140 17500 12930 15910 6280 7720 4990 5630 15050 15200 9910 13020 2560 3660 3540 3760 19390 18770 14540 18790 3680 3960 2670 4450 15600 17740 13100 16310 2660 6130 2440 5290 14200 15720 5502 3330 6160 ' 2975 17350 19490 14090 17120 4790 5510 3780 4680 SHELL SLEIGH TOTAL ALL COMPANIES 2 1 1 0 0 16600 12600 19070 4740 2640 6860 4940 17250* 11530 12140 14080 4920* 6710 6480 5960 17560 9260 17580 14280 2990 2090 8350 3280 19200 11500 17550 2890 2710 3740 19300 12700 16560 4190 4120 ' 4270 14590* 5140 20440 4097* 1276 5140 19230 12880 13100 16730 3920 3690 6840 4645 Estimated averages SALES RANGE 'OOP GALS/MONTH Canpany owned 0 - 5 5 - ].0 10 - 16 16 - 20 20 - 30 30 - 40 40 - 60 60 & over Total Dealer owned 0 - 5 5 - 1 0 10 - 16 16 - 20 20 - 30 30 - 40 40 - 60 60 & over Total Grand Total ANNEXURE "A" NO. 2.4 reran. OUTLETS a c c o r d i n g t o l e v e l o f m o t o r s p i r i t s a l e s y e a r 1973 AMOCO AMPOL B.p. CALTEX ESSO MOBIL SHELL SLEIGH TOTAL ALL COMPANIES 12 60 51 59 281 231 158 345 522 41 123 240 27 107 259 7 20 66 3 13 34 1 7 6 308 956 1409 6 22 49 79 129 185 261 183 214 157 69 105 210 69 116 51 18 34 23 10 23 - 6 11 78^ 506 787 39 79 31 511 260 77 171 262 83 311 65 30 343 48 28 .104 15 4 53 14 6 13 4 - 1545 747 259 349 1812 2199 1.141 1207 319 179 48 7304 71 955 1680 39 134 245 17 39 90 7 7 30 18 10 22 2 1 7 1 - 4 - - 3 155 1146 2081 468 2102 3490 866 607 1458 222 168 235 136 57 119 32 12 22 30 24 19 9 8 10 4 6 4 4 3 10 1303 885 1877 2090 1391 2664 1682 905 135 431 117 47 34 29 29 50 9 1 34 6 2 10 3 3 4 7 i 5 2 4 2250 1078 222 3795 1825 481 8359 1638 550 170 165 53 31 31 10997 18301 SALES RANGE 1 OOP GALS/MONTH Corpany owned 0 - 5 5 - 1 0 10 - 16 16 - 20 20 - 30 30 - 40 40 - 60 60 & over Total Dealer cwned 0 - 5 5 - 1 0 10 - 16 16 - 20 20 - 30 30 - 40 40 - 60 60 & over 'total Grand total ANNEXURE "A" NO. 2.5 NUMBERS OF AUSTRALIAN RETAIL OUTLETS ACCORDING TO LEVEL OF MOTOR SPIRIT SALES YEAR 1975 AMOCO AMPOL B.P. CALTEX ESSO* MOBIL_____SHELL SLEIGH TOTAL 4 75 26 - 13 37 38 44 227 158 67 81 160 128 119 304 406 254 136 238 601 50 103 248 157 59 106 214 65 114 317 209 66 120 294 11 33 104 50 19 46 99 5 19 61 23 12 32 73 5 5 34 - 3 18 22 303 880 1354 760 389 757 1469 59 246 246 57 49 20 16 3 696 29 68 76 28 33 7 6 1 248 59 786 32 139 14 50 11 7 9 14 5 2 1 1 - 4 131 1003 434 1883 1324 610 238 221 88 134 34 31 23 29 8 8 3 4 7 4 1725 1041 3079 1801 99 1102 63 216 38 126 10 29 11 22 6 13 1 12 1 10 229 1530 618* 2287 1421 729 271 114 186 43 33 13 24 6 9 4 7 4 6 5 1957 918 3426 1614 73 26 17 1 5 125 373 NOTE: Due to differences in reporting the numbers recorded in this table are not completely ccxnparable with those recorded in ANNEXURE "A" NO. 2.6. * Excludes 48 corpany cwned and 572 dealer cwned sites supplied by distributors. ALL COMPANIES 281 1179 2380 1022 1267 389 247 91 6856 6203 1320 696 171 139 55 33 42 8659 15515 SLEIGH TOTAL OTHERS ALL COMPANIES 225 161 7 2453 345 91 - 2723 570 252 __7 5176 193 62 12 1831 230 25 - 2255 423 87 12 4086 128 16 1136 151 8 - 1938 279 24 3074 62 711 106 - - 1138 168 1849 55 610 37 - - 878 92 1488 33 230 49 - - 427 82 657 696 239 19 6971 918 124 - 9359 1614 363 19 16330 ANNEXURE "A" NO. 2.7 NUMBER OF RETAIL OUTLETS SUPPLIED BY COMPANIES YEAR 1975 METROPOLITAN AMOCO AMPOL B.P. CALTEX ESSO MOBIL SHELL NEW SOUTH WALES Corpany cwned retail 96 176 248 178 95 153 290 Dealer cwned retail 15 98 50 56 50 90 39 Total 111 274 298 234 145 243 329 VICTORIA Company owned retail 91 136 254 175 60 155 236 Dealer cwned retail 7 45 87 46 58 87 53 Total 98 181 341 221 118 242 289 QUEENSLAND Corpany cwned retail 52 87 113 56 39 55 121 Dealer owned retail 17 30 22 19 14 30 29 Total 69 117 135 75 53 85 150 SOUTH AUSTRALIA/N.T. Corpany cwned retail 36 58 107 49 35 56 124 Dealer cwned retail 16 9 22 10 5 40 31 Total 52 67 129 59 40 96 155 WESTERN AUSTRALIA Corpany owned retail - 63 89 62 33 57 122 Dealer cwned retail - 7 16 30 1 56 40 Total 70 105 92 34 113 162 TASMANIA Corpany owned retail - 15 20 11 - 11 20 Dealer owned retail - 1 6 11 - 7 5 Total 16 26 22 18 25 TOTAL AUSTRALIA Corpany owned retail 275 535 831 531 262 487 913 Dealer owned retail 55 190 203 172 128 310 197 Total 330 725 1034 703 390 797 1110 SLEIGH 115 47 162 128 48 176 66 19 85 34 21 55 33 __8 41 16 _ i 20 392 147 539 TOTAL OTHERS ALL COMPANIES 120 5 1476 28 - 473 148 5 1949 57 10 1302 16 - 447 73 10 1749 16 - 605 4 - 184 20 - 789 - 499 154 653 - - 459 - - 158 617 - 93 - - 34 127 193 15 4434 48 - 1450 241 15 5884 ANNEXURE "A" NO, 2,8 NUMBER OF RETAIL CUTLETS SUPPLIED BY COMPANIES YEAR 1975 .... COUNTRY " ---- -— AMOCO NEW SOUTH WALES Conpany cwned retail 11 Dealer cwned retail 30 Total 41 VICTORIA Ccxipany cwned retail 15 Dealer cwned retail 24 Total 39 QUEENSLAND Corpany cwned retail 16 Dealer cwned retail 15 Total 31 SOOTH AUSTRALIA/N.T. Corpany owned retail 6 Dealer owned retail 13 Total 29 WESTERN AUSTRALIA Corpany owned retail Dealer cwned retail Total - TASMANIA Corpany owned retail Dealer cwned retail Total - TOTAL AUSTRALIA Corpany cwned retail 48 Dealer ovned retail 82 TOTAL 130 AMPOL B.P. 136 198 225 434 361 632 73 108 229 334 302 442 59 94 121 343 180 437 22 56 126 192 148 248 36 44 53 165 89 209 19 36 59 92 78 128 345 536 813 1560 1158 2096 CALTEX ESSO MOBIL SHELL SLEIGH 102 79 96 202 110 276 240 316 368 298 378 319 412 570 408 53 35 53 120 65 104 247 291 388 182 157 282 344 508 247 59 47 70 124 62 282 138 263 456 132 341 185 333 580 194 14 13 19 54 28 105 20 180 263 85 119 33 199 317 113 6 9 11 23 22 105 35 116 217 29 111 44 127 240 51 11 - 21 33 17 46 - 54 97 45 57 75 130 62 245 183 270 556 304 918 680 1220 1789 771 1163 863 1490 2345 1075 TOTAL 41 63 104 5 _9 14 4 4 46 76 122 OTHERS ALL COMPANIES 2 977 2250 2 3227 2 529 - 1808 2 2337 ~ 531 - 1754 - 2285 - 212 - 984 1196 151 720 - 871 - 137 - 393 ' 530 4 2537 - 7909 4 10446 ANNEXURE "A" NO. 2,9 PERCENTAGE OF COMPANY AND DEADER OJNED RETAIL OUTLETS SUPPLIED BY EACH COMPANY YEAR 1975 N E W SOUTH WALES Conpany owned retail Dealer owned retail VICTORIA Company owned retail Dealer owned retail QUEENSLAND Company owned retail Dealer owned retail SOUTH AUSTRALIA/N.T . Company owned retail Dealer owned retail WESTERN AUSTRALIA Ccrnpany owned retail Dealer owned retail TASMANIA Company owned retail Dealer owned retail AUSTRALLA Company owned retail Dealer owned retail TOTAL RETAIL OUTLETS METROPOLITAN & COUNTRY AMOCO AMPOL B.P. CALTEX ESSO MOBIL SHELL 4.3 12.7 18.2 11.4 7.1 10.2 20.1 1.7 11.9 17.7 12.2 10.7 14.9 14.9 5.8 11.4 19.8 12.4 5.2 11.4 19.5 1.4 12.2 18.6 6.7 13.5 16.8 19.5 6.0 12.9 18.1 10.1 7.6 11.0 21.6 1.7 7. 8 18.8 15.5 7.9 15.1 25.0 5.9 11.2 22.9 9.0 6.8 10.5 25.0 ° 5 11.9 18.7 10.1 2.2 19.3 26.0 16.3 21.8 11.1 6.9 11.1 23 8 6.8 20.6 15.4 4.1 19.6 29.3 14.7 24.4 9.6 _ 13.9 23.1 14.1 23.0 13.3 14.3 23.8 4.6 12.6 19.6 11.1 6.5 10.9 21.1 1.4 10.8 18.6 11.6 8.6 16.3 21.1 2.9 11.4 19.2 11.4 7.7 14.0 21.2 SLEIGH TOTAL OTHERS ALL COMPANIES 9.2 6.5 0.3 100 12.7 3.3 100 10.5 3.4 0.6 100 10.2 1.1 100 11.3 1.4 _ 100 7.8 0.4 100 8.7 _ _ 100 9.3 100 9.0 100 4.2 100 14,3 _ 100 11.5 100 10.0 3.3 0.3 100 9.8 1.8 100 9.9 2.2 0.1 100 ANNEXURE "A" NO. 2 .1 0 PERCENTAGE OF COMPANY AND DEALER CWNED RETAIL OUTLETS SUPPLIED BY EACH COMPANY YEAR 1975 NEW SOUTH WALES Conpany owned retail Dealer owned retail VICTORIA Company owned retail Dealer owned retail QUEENSLAND Company owned retail Dealer owned retail SOUTH AUSTRALIA/N.T. Company owned retail Dealer owned retail WESTERN AUSTRALIA Conpany owned retail Dealer owned retail TASMANIA Company owned retail Dealer owned retail AUSTRALIA Company owned retail Dealer owned retail TOTAL RETAIL OUTLETS AMDOO AMPOL B.P. 6.5 3.2 11.9 20.8 16.8 10.5 7.0 1.4 10.4 9.4 19.5 18.9 8.6 9.3 14.4 16.3 18.7 11.9 7.2 10.3 11.6 5.8 21.5 14.4 - 13.8 4.4 19.4 10.1 - 16.1 2.3 21.6 17.6 6.2 3.8 12.1 13.0 18.7 13.9 5.6 12.3 17.7 METROPOLITAN CALTEX ESSO MOBIL 12.0 6.4 10.4 11.8 10.6 19.1 13.4 4.7 11.9 11.6 11.8 19.3 9.3 6.4 9.1 10.3 7.6 16.3 9.8 7.0 11.2 6.5 3.2 26.1 13.5 7.2 12.4 18.9 0.7 35.5 11.8 11.5 33.0 2 0 .e 12.0 5.9 1 1 .C 11.8 8.8 2i.; 11.9 6.6 13.: SHELL SLEIGH TOTAL 19.6 7.8 8.3 8.2 9.9 5.9 18.1 9.8 4.4 11.8 10.7 3.6 20.0 10.9 2.6 15.8 10.3 2.2 24.9 6.8 20.4 13.6 26.5 7.2 25.3 5.1 21.5 17.2 14.7 11.8 20.6 8.8 4.4 13.5 10.1 3.9 1 8 .9 9 . 1 4 .1 OTHERS ALL COMPANIES 0.3 100 100 0.8 100 100 100 100 100 100 100 100 100 100 0.3 100 100 100 COUNTRY ANNEXURE "A" NO. 2 .1 1 PERCENTAGE OF COMPANY AND DEALER CMNBD RETAIL OUTLETS SUPPLIED BY EACH COMPANY YEAR 1975 A1VPOO AMPOL B.P._______ CALTEX ESSO MOBIL SHELL SLEIGH TOTAL OTHERS ALL NEW SOOTH WALES Company owned retail Dealer owned retail VICTORIA Company owned retail Dealer owned retail QUEENSLAND Ccnpany owned retail Dealer owned retail SOUTH AUSTRALIA/N.T. Company owned retail Dealer owned retail WESTERN AUSTRALIA Company owned retail Dealer owned retail TASMANIA Company owned retail Dealer owned retail AUSTRALIA Company owned retail Dealer owned retail TOTAL RETAIL OUTLETS 1.1 13.9 20.2 1.3 10.0 19.3 2.8 13.8 20.4 1.3 12.7 18.4 3.0 11.1 17.7 0.9 6.9 19.5 2.8 10.4 26.4 1.3 12.8 19.6 23.9 29.2 7.4 22.9 13.9 26.3 15.0 23.4 1.9 13.6 21.1 1.0 10.3 19.7 1.2 11.1 20.0 10.4 8.1 9.8 12.3 10.7 14.0 10.0 6.6 10.0 5.8 13.7 16.1 11.1 8.9 13.2 16.0 7.9 15.0 6.6 6.1 9.0 10.6 2.0 18.3 3.9 6.0 7.3 14.6 4.9 16.1 8.0 15.3 11.7 13.7 9.7 7.2 10.6 11.6 8.6 15.4 11.1 8.3 14.3 20.7 11.2 4.4 16.4 13.2 2.8 22.7 12.3 1.0 21.4 10.1 0.5 23.3 11.7 - 26.0 7.5 0.3 25.5 13.2 2.8 8.6 15.2 14.5 30.1 4.0 24.1 12.4 24.7 11.5 22.0 12.0 1.9 22.5 9.7 2.3 2 2 .4 1 0 .3 1 .3 0.2 0.4 0.1 COMPANIES 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 COMPANIES 47 57 45 55 37 63 39 61 41 59 35 65 43 57 ANNEXURE "A" NO. 2.13 PERCENTAGE BREAKDOWN OF RETAIL OUTLETS SUPPLIED BY COMPANIES YEAR 1975 METROPOLITAN NEW SOUTH WALES Ccrpany owned retail Dealer cwned retail VICTORIA Company owned retail Dealer owned retail QUEENSLAND Company owned retail Dealer owned retail SOOTH AUSTRALIA/N.T. Company owned retail Dealer owned retail WESTERN AUSTRALIA Company owned retail Dealer owned retail TASMANIA Company owned retail Dealer cwned retail AUSTRALIA Company owned retail Dealer owned retail ATOCO AMPOL B.P. 86 64 83 14 36 17 92 75 75 8 25 25 75 74 84 25 26 16 69 86 83 31 14 17 90 85 10 15 94 77 16 23 83 74 80 17 26 20 CALTEX ESSO MOBIL 76 65 63 24 35 37 79 51 64 21 49 36 75 74 65 25 26 35 83 88 58 17 12 42 67 97 50 33 3 50 50 61 50 39 76 67 61 24 33 39 SHELL SLEIGH TOTAL 88 71 81 12 29 19 82 73 78 18 27 22 81 78 80 19 22 20 80 62 20 38 75 80 25 20 80 80 20 20 82 73 78 18 27 22 OTHERS ALL COMPANIES 100 76 24 100 74 26 78 22 76 24 74 26 73 27 75 25 100 COMPANIES 30 70 23 77 23 77 18 82 17 83 26 74 24 76 ANNEXURE "A" NO. 2.15 LEVELS OF MOTOR SPIRIT DISCOUNTS GIVEN BY COMPANIES TO DEALER OWNED RETAIL OUTLETS MAY 1975 AMOCO NEW SOUTH WALES High 6.5 Average 4.6 Lew 2.0 VICTORIA High 9.6 Average 4.89 Lew 1.67 QUEENSLAND High 7.8 Average 5.2 Lew 3.0 SOUTH AUSTRALIA High 10.11 Average 5.5 Lew - WESTERN AUSTRALIA High Average Lew AMPOL B.P. CALTEX ESSO 6.0 6.0 4.0 7.0 2.2 1.84 1.58 3.75 1.0 - 0.20 2.0 7.5 5.10 6.7 3.8 2.59 1.93 2.76 1.0 — 0.83 1.0 7 6.0 5.5 7.0 4.2 1.94 1.37 4.5 2.0 — 0.42 1.5 4.0 7.0 5.00 5.5 3.33 1.78 1.61 4.1 1.67 — 0.42 3.5 1.0 3.5 3.0 4.0 - 1.59 1.35 2.31 - - 1.0 0.75 MOBIL SHELL SLEIGH TOTAL 6.88 6.2 6.0 7.0 3.0 3.72 1.95 4.95 - 0.13 0.33 1.5 4.9 5.5 7.0 4.0 2.7 3.26 4.05 1.83 1.0 1.0 0.5 0.75 5.75 6.5 4.5 2.3 2.48 2.15 4.0 0.88 0.25 6.5 7.5 2.8 - 1.92 - “ “ 0.5 3.0 6.0 6.0 2.1 2.4 3.01 - 1.0 1.0 0.84 — ____________________________________AMOCO NEW SOUTH-WALES Millions of Gallons to Depots 17.4 % of Company State Total 38% VICTORIA Millions of Gallons to Depots 11.3 % of Company State Total 33% QUEENSLAND Millions of Gallons to Depots 11.1 % of Company State Total 42% SOUTH AUSTRALIA Millions of Gallons to Depots 4.0 % of Company State Total 25% WESTERN AUSTRALIA Millions of Gallons to Depots - % of Company State Total TASMANIA Millions of Gallons to Depots - % of Company State Total AUSTRALIA Millions of Gallons to Depots 43.9 % of Company State Total 39% ANNEXURE "A" NO. 2,16 MOTOR SPIRIT SALES BY COMPANIES TO DEPOTS AMPOL B.P. YEAR 1974 CALTEX ESSO MOBIL 21.2 27.7 37.0 19.7 28.3 21% 15% 56% 23% 25% 13.0 27.6 17.2 14.6 29.4 19% 2 1% 20% 11% 30% 11.8 16.8 16.3 8.0 22.6 25% 26% 32% 26% 39% 0.4 5.8 7.2 2.8 15.8 2% 12% 26% 23% 37% 5.1 7.9 8.1 3.7 12.4 19% 20% 25% 33% 32% 8.1 5.7 4.5 _ 4.5 47% 14% 33% 35% 59.7 91.6 90.4 48.9 113.1 21% 30% 25% 23% 31% SHELL, SLEIGH TOTAL All· COMPANIES 32.7 11.9 ’11.2 207.2 18% 14% 18% 20% *44.3 12.4 0.9 170.8 30% 16% 6% 24% 25.7 6.2 0.2 118.6 27% 25% 5% 29% 18.1 3.9 - 58.1 25% 23% 23% 19.4 4.1 - 60,8 28% 28% 26% *11.1 3.0 - 37.0 37% 32% 36% 151.2 41.5 12.4 652.6 25% 21% 15% 24% * Tasmania Sales Split out on basis of 80/20; Victoria/Tasmania. ANNEXURE " A " NO. 2.17 FORECAST AUSTRALIAN DEMAND OF PETROLEUM PRODUCTS THOUSANDS OF BARRELS ACTUAL 1974/75 1975/76 1976/77 1977/78 1978/79 1979/80 1980/81 Liquefied Petroleum Gas 4,655 HIGH LOW 5,114 4,663 5,238 ' 4,478 5,493 4,518 6,091 4,666 7,575 4,855 9,505 5,000 Aviation Gasoline 647 HIGH LOW 694 640 694 660 710 680 742 694 770 700 790 706 Motor Spirit 80,296 HIGH 84,540 83,184 88,850 86,517 93,750 89,723 98,580 92,390 103,400 94,462 108,150 96,319 .Power and Lighting Kerosene 2,035 HIGH ia-7 2,155 1,715 2,197 1,770 2,278 1,809 2,326 1,818 2,406 1,815 2,546 1,750 Aviation Turbine Kerosene 11,465 HIGH DOW 12,350 11,552 13,360 12,599 14,928 13,249 16,114 13,833 17,392 14,477 19,128 15,016 Heating Oil 5,807 HIGH La-7 6,295 5,800 6,725 6,095 7,127 6,352 7,460 6,554 7,808 6,648 8,157 6,743 Automotive Distillate 32,177 HIGH LOW 34,615 33,665 37,450 35,632 40,290 37,729 43,230 40,186 *57,187 42,492 61,305 44,767 Industrial Diesel Fuel 10,241 HIGH Lai 12,114 10,306 12,343 9,519 12,690 9,846 13,001 10,128 9,020 8,230 Fuel Oil 43,156 HIGH Lai 50,012 41,600 52,167 41,544 51,799 40,661 54,666 43,700 59,278 44,500 64,747 45,400 Refinery Fuel 16,292 HIGH Lai 19,000 17,392 20,050 17,848 20,950 18,433 21,850 19,144 22,800 19,329 23,950 21,490 Other Fuels and Non Fuels 15,620 HIGH Lai 16,550 15,324 17,284 14,148 17,209 14,686 17,333 14,916 17,784 15,332 18,279 15,837 TOTAL 222,391 HIGH LOW 243,439 225,841 256,353 230,810 267,215 237,686 281,393 243,079 296,400 254,130 316,557 261,753 * Automotive Distillate and Industrial Diesel Fuels, high estimates caubined iron 1979/80. 1981/82 10,506 5,177 815 712 112,790 99,234 2,700 1,650 21,033 15,547 8,520 6,570 65,535 46,556 7,780 50,100 44,178 25,150 21,936 18,789 16,188 315,943 265,523 1982/83 11,013 5,354 830 718 117,430 101,709 2,865 1,550 23,138 16,085 8,853 6,300 70,056 78,480 7,270 47,800 40,197 26,-400 22,105 19,314 16,552 327,699 266,320 1983/84 1984/35 11,242 11,447 5,550 5,751 850 865 724 730 122,130 126,990 104,247 106,847 3,039 3,223 1,475 1,425 25,448 27,989 16,656 17,234 9,155 9,465 5,980 5,660 74,890 30,133 50,324 53,821 6,540 5,650 46,541 46,641 38,275 45,200 27,730 29,641 22,464 24,754 19,851 20,418 16,915 17,269 340,832 356,312 269,150 284,341 ANNEXURE "A" NO. 2.18 AUSTRALIAN PETROLEUM IMPORT BILL $ Million Year Crude Feedstock etc. Refined Products Total Freight Total 1966/67 212.2 34.0 246.2 78.0 324.2 1967/68 209.0 31.6 240.6 111.0 351.6 1968/69 214.2 37.0 251.2 88.0 339.2 1969/70 202.7 45.0 247.7 86.6 334.3 1970/71 121.5 67.4 188.9 77.8 266.7 1971/72 115.1 78.3 193.4 61.8 255.2 1972/73 99.4 72.9 172.3 52.4 224.7 1973/74 244.1 132.7 376.8 73.5 450.3 1974/75* 475.1 241.4 716.5 66.9 783.4 Exports Excluding L.P.G. 30.6 33.3 26.6 28.4 41.6 60.2 46.5 104.6 161.8 Reference: Petroleum Branch - Petroleum Statistics for appropriate fiscal years * Preliminary figures Nett Total 293.6 318.3 312.6 305.9 225.1 195.0 178.2 345.7 621.6 ANNEXURE "A" NO. 2.19 COST OF IMPORTED CRUDE AVERAGE COST OF CRUDE OIL AND OTHER FEEDSTOCK IMPORTED INTO AUSTRALIA Year Million Barrels $ Million $/Barrel 1966/67 141.709 212.2 1.50 1967/68 144.748 209.0 1.44 1968/69 150.307 214.2 1.43 1969/70 145.771 202.7 1.39 1970/71 87.511 121.5 1.39 1971/72 70.283 115.1 1.64 1972/73 62.923 99.4 1.58 1973/74 65.851 244.1 3.71 1974/75 63.972 475.1 7.43 Reference: Petroleum Branch - Petroleum Statistics AVERAGE COST OF CRUDE OIL IMPORTED DURING MONTHS JULY TO DECEMBER,1975 Month Million Barrels $ Million $/Barrel July 2.22 17.23 7.75 August 3.14 25.10 7.99 September 3.58 30.38 8.49 October 4.49 38.74 8.63 November 0.99 9.16 9.24 December 3.26 31.10 9.54 Reference: Bureau of Statistics (preliminary figures) SALES PRICE OF CRUDE OIL SET BY OPEC GOVERNMENTS* 9 FEBRUARY, 1976 Country $/Barrel** Arabian Light 9.13 Arabian Heavy 8.84 Iran Light 9.22 Iran Heavy 9.12 Kuwait 8.97 Qatar Dukhan 9.40 Iraq Basrah (estimate) * 9.09 Indonesian Sumatra Light 10.16 China Taching (not OPEC) 9.76 * Organisation of Petroleum Exporting Countries. Government sales and buy-back sales. **Conversion at 9 February, 1976 $ Aust 1 = $ US 1.26 Reference: Petroleum Intelligence Weekly Special Supplement, 9 February, 1976. FORECAST AUSTRALIAN PETROLEUM IMPORT BILL {$ December, 1975) ANNEXURE "A" NO. 2.20 Demand Millions of barrels Aust.Crude Production Millions of barrels Imports Millions of barrels Import Cost $ Millions 1974/75* 222 145 77 Nett 622 Nett 1975/76 226-243 152 74- 91 761- 936 1976/77 231-256 155 76-101 782-1039 1977/78 238-267 154-156 84-111 864-1142 1978/79 248-281 153-157 95-124 978-1276 1979/80 254-296 152-156 102-140 1050-1441 1980/81 262-317 150-155 112-162 1152-1667 1981/82 ' 266-316 144-151 122-165 1255-1698 1982/83 266-328 136-145 130-183 1338-1883 1983/84 269-341 126-138 143-203 1471-2089 1984/85 284-357 114-127 170-230 1749-2367 Costs b a s e d o n crude oil imported in December, 1975 at average price $9.54/bbl pl u s freight o f $0.75/fcbl w h i c h is eq u a l to the a verage overall 1974/75 airports. *Actual data for 1974/75 ANNEXUKE "A" NO. 2.21 PERCENTAGE OF RETAIL OUTLETS AND MOTOR SPIRIT RETAIL MARKET SHARES YEAR 1975 Retail Outlets Retail Motor Spirit Market New South Wales 31% 37% Victoria 26 26 Queensland 19 14 South Australia/N.T. 11 10 Western Australia 9 9 Tasmania 4 4 Australia 100 100 AVERAGE MONTHLY MOTOR SPIRIT SALES BY COMPANIES TO RETAIL CUTLETS YEAR 1975 METROPOLITAN AND COUNTRY MARKETS ANNEXURE "A" NO. 2 ,2 2 NEW SOUTH WALES Company owned retail Dealer owned retail VICTORIA Company owned retail Dealer owned retail QUEENSLAND Coirpany owned retail Dealer owned retail SOUTH AUSTRALIA/N.T. Company owned retail Dealer owned retail WESTERN AUSTRALIA Company owned retail Dealer owned retail TASMANIA Company owned retail Dealer owned retail AUSTRALIA Company owned retail Dealer owned retail AMOCO AMPOL B.P. 20300 16200 23700 9500 4100 5000 18000 11000 15500 7500 4100 5700 15400 15600 15000 8700 6600 2500 18500 15100 18400 10600 3500 2800 16800 17700 4400 2600 13900 14500 2700 3400 18300 14700 18600 9100 4300 4000 CALTEX ESSO MOBIL 25100 7300 17900 2700 21400 4500 19000 10000 11600 2500 15700 6400 16200 4300 11500 3700 14400 3100 21000 4600 17900 4200 18000 5100 18900 6100 12300 2000 18800 5900 16300 9100 - 14600 3600 20900 6400 14800 2800 17800 4900 SHELL SLEIGH TOTAL 23400 16800 13500 5100 2900 6900 17300 10800 15700 5600 8100 12300 19100 9900 17500 3100 2300 11500 18900 13400 4800 3200 21100 13300 4700 5000 24000 13700 3500 1900 20500 13100 14300 4600 4200 8300 ALL COMPANIES 20700 4800 15300 5800 15200 3600 17900 4300 17800 4600 16700 3700 17700 4600 16000 11700 14700 11400 15300 14600 19500 12100 19500 10800 18200 8100 18800 11900 ANNEXURE "A" 2 .2 4 NEW SOUTH WALES Company owned retail Dealer owned retail VICTORIA Company owned retail Dealer owned retail QUEENSLAND Company owned retail Dealer owned retail SOUTH' AUSTRALIA/N.T. Company owned retail Dealer owned retail AVERAGE MONTHLY MOTOR SPIRIT SALES BY COMPANIES TO RETAIL OUTLETS YEAR 1975 " " COUNTRY MARKETS AMDCO AMPOL B.P. CALTEX ESSO MOBIL SHELL SLEIGH 15400 6500 16100 3900 22900 4300 24200 6400 15000 1700 18900 3300 24200 4700 12700 2000 9300 5400 8400 2800 14000 3900 16500 6300 10600 1000 14700 2500 12000 3900 10000 5100 15900 6100 12300 5800 14500 2100 12900 3600 8500 2000 12600 3500 21300 2600 9800 1900 20900 2100 13100 2900 14400 2000 16800 3500 5700 1400 14500 4000 15800 3600 12100 2000 TOTAL 10700 3700 7800 4800 11700 ALL COMPANIES 19600 3900 12200 3400 14400 2700 14100 3100 WESTERN AUSTRALIA Company owned retail Dealer owned retail 11700 13600 3500 2200 15000 5300 18100 16900 5000 1700 4000 2900 8200 3500 12700 3200 TASMANIA Company owned retail Dealer owned retail 10700 13500 15500 2700 2800 6800 14600 24000 3400 3200 11200 2000 13800 3400 AUSTRALIA Company owned retail Dealer owned retail 14300 12900 17300 5400 3600 3100 18800 11400 15800 19800 5000 1500 2900 3500 11100 10400 2800 4300 15900 3300 ANNEXURE "A" NO. 3 COMPANY CMNED SITES CONTRACTUAL ARRANGEMENTS BETWEEN OIL COMPANIES AND DEALERS COMPANY TYPE OF DOCUMENT TERM RENT/LICENCE FEE HOW TERMINATED AMDCO Licence 30 months (Ex. 39 ,pp. 7-8 (Clause 5) Attachment 6 EX.224B, Attachment 3A) Fixed amount per litre of motor spirit sold, payable on delivery, or fixed amount, payable monthly. (Clause 6) By licensor at will on 30 days' written notice (Clause 5). By licensor without notice if; (a) Licensee fails to carry on business for maximum number of hours in any one week; (b) Licensee is in default in payment for supply of goods; (c) Licensee is in breach of any term of licence; (d) Bankruptcy proceedings instituted against licensee, or judgement given against him; (e) Licensee found guilty of indictable offence; (f) Licensee becomes of unsound mind or incapable of managing his Ï-m affairs in the sole opinion of the licensor (Clause 38). COMPANY OWNED SITES OTNTRACTUAL ARRANGEMENTS BETWEEN OIL COMPANIES AND DEALERS COMPANY TYPE OF DOCUMENT TERM____RENT/LICENCE FEE HCW TERMINATED Licence (Ex.38, p.24 Attachment G Ex.225 Attachment 6) AMPOL Fixed amount payable monthly, plus service fee covering a council and govern ment fees on equip ment (Clause 5) By either party on 14 days1 notice after expiration of term. By licensor at any time on 30 days1 notice (Clause 4). By licensor without notice if; (a) Licensee fails to conduct business in accordance with the agreement; (b) Licensee defaults in payment of moneys due; (c) Licensee is in breach of any term or condition of the agreement or (d) Licensee is adjudicated bankrupt (Clause 21). Annexure "A" No. 3, p.2. COMPANY OWNED SITES HOW TERMINATED By Lessor without notice if; a) Lessee breaches any condition or covenant contained in the lease; b) Lessee dies, or c) Lessee becomes bankrupt or subject to process of execution, and the lessor may without notice enter forcibly and repossess and remove lessee's effects. (Clause 5). By lessor at its option in the event of premises being rendered unfit for use by accidental fire or explosion and by lessee within the space of 6 months (Clause 3(iv)). Annexure "A" No. 3, p.3. HOW TERMINATED_ By Lessor at any time on 30 days' notice. By Lessee at end of any year on 3 months notice (Clause 2) B y L e s s o r w i t h o u t n o t i c e if; a) Lessee fails to carry on business during lawful trading hours; b) Lessee is in default in. payment of the subject of bankruptcy or found guilty of an indictable offence: and lessor has right to re-enter (Clause 21) By Licensor at will on giving notice (Clause 3(a)). B y Licensor without notice if licensee fails to pay any debt within 7 days (Clause 3c). By Licensor without notice if 1) Licensee fails to carry on business for any period during lawful trading hours on any day; 2) Licensee defaults in payment of moneys due; 3) Licensee breaches any term of the licence; 4) Licensee the subject of bankruptcy proceedings or 5) Licensee found guilty of indictable offence (Clause20) By Licensor on 30 days' notice; or by Licensee on 3 months notice at end of any 12 month period, where licensee allowed to remain in occupation after expiration of licence (Clause 3(b)). COMPANY OWNED SITES CONTRACTUAL ARRANGEMENTS BETWEEN OIL COMPANIES AND DEALERS COMPANY TYPE OF DOCUMENT TERM KENT/LICENCE FEE HOW TERMINATED Lease 1) Lease (Ex. 43) ESSO Fixed amount payable By Lessor with right to re-enter, if; monthly. a) Rent unpaid 14 days after becoming due, (Clause 5); b) Lessee fails to observe or breaches any covenant; c) Lessee becomes bankrupt or subject to process of execution (Clause 5). By either party on giving notice if premises rendered partially unfit for use by fire and not reinstated within 6 months (Clause 5(b)). Tenancy ceases absolutely if premises rendered wholly unfit for use by fire (Clause 5(c)). By either party on one week's notice if lessee remains in possession with lessor's consent after expiry of term (Clause 5(d)). Annexure "A" No. 3, p.5. COMPANY OWNED SITES CONTRACTUAL ARRANGEMENTS BETWEEN OIL COMPANIES AND DEALERS COMPANY TYPE OF DOCUMENT TERM RENT/LICENCE FEE HOW TERMINATED Lease (Ex.45 Attachment 20) Revised lease and reseller contract (Ex. 441) MOBIL Monthly rental By Lessor, with right to re-enter if; (Clause 3) a) Rent unpaid for 14 days after becoming due; b) lessee fails to observe or perform any covenant, including covenant to comply with Reseller Contract; c) Reseller Contract terminates for any reason; d) Lessee permits process of execution against his goods or, e) Lessee goes into liquidation (Clause 7). By either party on written notice where premises rendered partially unfit for use by fire and not reinstated within 6 months (Clause 8). Tenancy shall absolutely determine if premises rendered wholly unfit for use by fire (Clause 8). By either party on one month's notice if lessee remains in occupation with lessor's consent after expiry of term (Clause 9). Annexure "A" No. 3, p.6. COMPANY OWNED SITES COMPANY SHELL CONTRACTUAL ARRANGEMENTS BETWEEN OIL COMPANIES AND DEALERS TYPE OF DOCUMENT TERM RENT/LICENCE FEE Lease 1-3 years Set amount per month being Main Service (Ex. 2 30, fixed sum per gallon Station + p. 33) of motor spirit Provisional purchased plus amount Service for additional facilities. Station or, fixed monthly rental (Ex. 230) for specified facilities. Provisional lease for new tenant, main lease where parties wish to renew. (Ex.230,p.9) Provisional Lease: By either party on 30 days' notice at any time during first 12 months. (Fourth Schedule, Clause 1). By either party on giving notice if it becomes unlawful to use premises. (Fourth Schedule, Clause 2) (Main lease Clause 1). By either party on 30 days* 1 2 3 notice if premises unfit for conduct of business as a result of fire, flood, storm, tempest or inevitable accident (Fourth Schedule Clause 3) (Main Lease Clause 2). By landlord with right to re-enter, if; 1) Rent unpaid for 30 days; 2) Tenant commits any breach of obligations under the lease and fails to remedy same within 14 days of receipt of notice to do so. 3) Tenant commits act of bankruptcy or if any execution issued against him. (Fourth Schedule Clause 11) (Main Lease Clause 10). By either party with one month's notice if tenant remains in occupation with landlord's consent after term expires. (Fourth Schedule, Clause 12)(Main Lease Clause 11). By either party if tenant dies or is in capable of carrying on business (Fourth Schedule,Clausel3) (Main Lease Clause 12). HOW TERMINATED_________________ Annexure "A" No. 3, p.7. COMPANY OWNED SITES Lease (Ex.40, Appendix 4) Revised Lease (Ex.231A, Schedule 5) 3 years Fixed amount payable (Clause 1) monthly SLEIGH By Lessor at its option on 10 days' written notice if average monthly gallonage of motor spirit sold does not react the amount specified. a) in months 6-l2 inclusive, b) in months 12-18 inclusive or c) in months 18-24 inclusive (Clause 3(i)) By lessor at its option and without notice if, a) Rent unpaid for 7 days; b) Lessee becomes bankrupt, or, c) Lessee breaches or fails to perform any covenant or condition and fails to remedy such breach within 7 days after notice to do so (Clause 3(ii)). By lessor on 10 days' notice if lessee dies or, being a company, is dissolved during the term or any period of holding over (Clause 3 (viii)). Substitute Clause 3(i). Terminable by lessor if premises required for redevelopment or reconstruction, or by lessee for any reason, on 6 months notice if given within the first 6 months of the tenancy, or 3 months' notice at any time thereafter. Annexure "A" No. 3, p.8. COMPANY OWNED SITES CONTRACTUAL ARRANGEMENTS BETWEEN OIL COMPANIES AND DEALERS COMPANY TYPE OF DOCUMENT TERM____ RENT/LICENCE FEE HOW TERMINATED TOTAL Lease and Licence Irrevocable (Ex.232,p.10-11) for 1) Licence specified period (Clause 3) 2) Lease (Ex.232, p.10-11) a) Nil-during period from date of commencement to end of month in which licence canmences. b) Thereafter, 1.5Φ per gallon of motor spirit and distillate pur chased payable on delivery; amount payable not to fall belew specified monthly figure. c) In addition, specified fee payable monthly - (Clause 8) Fixed monthly rental (Clause 1) By Licensor on giving notice at any time after non-revocation period (Clause 3). By Licensor without notice if a) Licensee in breach of any covenant or condition in the lease; b) Licensee becomes bankrupt suffers execution against his goods or any cheque in favour of Lessor is dishonoured, or, c) Licensee becomes of unsound mind or incapable of managing his own affairs (Clause 44). By Licensee at any time on 2 months notice. Provision for damages if notice not given (Clause 45). By Licensor on 7 days' notice if lessee is a partnership and one or more partners dies or retires (Clause 37). By lessor, who has right to re-enter without notice if, a) Rent unpaid within 7 days of becoming due; b) Lessee fails to perform or observe any covenant or condition in the lease, or, c) Lessee becomes bankrupt or has cheque in favour of lessor dishonoured. Lessor may re-let premises at lessee's risk (Clause 3(e)). By Lessor on 7 days' notice if Lessee is a partnership and one or more partners dies or retires (Clause 3(b)). Annexure "A" No. 3, p.9 ANNEXURE "A" NO. 4 DEALER OWNED SITES CONTRACTUAL ARRANGEMENTS BETWEEN OIL COMPANIES AND DEALERS DESCRIPTION Supply Agreement Supply agreement with grant of rebate on usual list prices in consideration of the owner's investment. As per (2) with loan advanced to proprietor, usually secured by mortgage on the premises. A lease iron the owner to the company and a sub-lease back to the owner as well as one of the above trading agreements. Where owner not operator, operator required to enter one of agreements (1) to (3) and in seme cases, a similar agreement with the owner. Used in all cases where equipment supplied on loan. COMPANY SOURCE DOCUMENTS USED DESCRIPTION AMPOL Ex. 38, p.23-4 Ex.225, Att.7 "Reseller Trading Agree- Supply Agreement requiring dealer to sell ment" exclusively Ampol petroleum products in return for which Ampol guarantees supply. Other arrangements: (1) Lump sum cash pay ment. (2) Interest Bearing Loan. (3) Providing free workshop and servicing equip ment. (4) Rebates. (5) Financial assist ance for building or modifying sites. (6) Loans repayable by offsetting rebates (7) Painting and mainten ance of the premises. Annexure "A" No. 4, p.2 DESCRIPTION Supply agreement, for period of up to 5 years. Supply agreement as above with provision for rebate of fixed sum per gallon of motor spirit purchased. As per (2) with provision for interest-free loan for purpose of inproving and developing business, offset by rebate. but repayable on demand. Where substantial sum advanced, repayable over 10 years. Supply agreement, owner to procure execution by operator of similar agreenent and to ensure operator observes covenants and conditions. Company to let on hire tanks, pumps and other dispensing equipment at nominal rent. COMPANY SOURCE DOCUMENTS USED DESCRIPTION CALTEX Ex. Ex. 227A (1) 227A (2) "Solo Agreement" Lease and Sub Lease Supply agreement whereby owner/dealer agrees to purchase Caltex petroleum products exclusively. Lease frcm owner/dealer to Caltex, lease-back to dealer fran Caltex - Sub-lease contains normal "service station" terms and conditions. ESSO Ex. 272 "Retailers Agreement" Supply agreement - Dealer to purchase petroleum products exclusively frcm Esso. Agreement also provides for installation of pumps and tanks. Annexure "A" No. 4, p.4. COMPANY SOURCE DOCUMENTS USED DESCRIPTION MOBIL Ex. 441: Revised documents (1) "Reseller Contract" (2) "Equipment loan Contract" (3) "Meter Wholesale Contract" Supply contract. Dealer to purchase minimum requirements of petroleum products frcm Mobil. Company loans actual pumps tanks and other dispensing equipment to dealer. Used in conjunction with (1) and (2) where petroleum products supplied to dealer on consignment. SHELL Ex. 230, pp 11 - 12 (1) and Ex. attachments 230 (2) "Sales and Purchase Agreement" Agreement for Sale and Purchase of Petroleum Products Ex. 230 (3) Lease and Sub Lease Other arrangements Rebates based on dealer's capital invest ment Real Property Mortgage - Loan moneys for specific purposes._____ Supply contract covering exclusive purchase of Shell products for 1 to 5 years. Agreement whereby Shell agrees to sell and deliver motor spirit and petroleum products and the buyer agrees to purchase exclusively frcm Shell. Lease from owner-dealer to Shell, with Sub lease back frcm Shell to owner-dealer for the same period minus a day. Sub-lease contains normal "service station" terms and conditions. Annexure "A" No. 4, p.5. COMPANY SOURCE DOCUMENTS USED DESCRIPTION SLEIGH Ex. 231A Sched. 5 Att. GFP, D-E Att. GFP. F Att· GFP. G Ex. 231A Att. GFP. H Att. GFP. J (1) "Trading Agreement" (with "Collateral Agreement" providing for rebate) (2) "Loan Agreement X" (3) "Loan Agreement Y" (4) "Loan Agreement Z" (5) "Equipment Hiring Agreement" Supply Agreement whereby dealer agrees to purchase all requirements of petroleum products frcm H.C. Sleigh. "Collateral Agreement" provides for a monthly rebate to the dealer based on volume of products purchased each month, which may be paid to dealer directly or applied in satisfaction of moneys owing. Loan moneys advanced to dealer for the purpose of effecting improvements to the site; rebates applied in reduction. Loan is interest free unless minimum purchase target not reached. Interest-bearing loan advanced to dealer for purpose of effecting improvements. Repayment secured by post-dated cheques, mortgage, bill of sale or other security. Provides for interest-bearing loan and interest free loan for purpose of effecting improvements. Interest free loan may attract interest if minimum purchase target not reached. Security required. Dealer hires pumps, tanks and other equipment on payment of rent; agreement expires when trading agreement terminates. Annexure "A" No. 4, p.6. COMPANY SOURCE DOCUMENTS USED DESCRIPTION TOTAL Ex. 232 p. 11 & Annexure "Reseller Trading Agree ment" Supply agreement - Dealer agrees to purchase all petroleum product requirenents exclusively frcm Total. Annexure "A" No. 4, p.7. ANNEXURE "B" LIST OF CLAUSES APPROPRIATE FOR A FORM OF LEASE BETWEEN COMPANIES AND DEALERS A. Duration; A fixed minimum period of three years. During the first 12 months of the initial lease either party can terminate on 30 days' notice to the other. If the oil company lessor terminates during this period, it must compensate by paying him a fair value for his plant, equipment and stock as it stands on the site. B. Rent: A fixed rent being the economic rent for the premises concerned. In particular this amount should contain all the rent paid for the premises. No part of the rent should remain buried in the wholesale price paid for product or in any other outgoing by the lessee. C. Termination: If the lessor does not give notice of termination more than six and less than nine calendar months before the date of expiration of the lease and if the lessee continues in occupa tion of the subject premises after the expiration of the term, the tenancy shall continue under all covenants and conditions of the lease for a further period of three years from the date of expiration at a rent to be agreed by and between the parties or in the absence of agreement to be determined by arbitration as provided in the lease as being the fair rent for the subject premises having regard to comparable rents of similar premises as of the date of expiration of the said term. B.l The lessee may terminate at the expiration of the lease or of any period of continuation on a minimum of thirty days' notice. D. General Covenants By Lessee: (While these are not intended to be exhaustive or inflexible, variations, particularly in the case of housekeeping, should not be more stringent). (i) to pay the rent; (ii) provided that in the event of damage by fire, lightning, flood or tempest, rent shall abate until the subject premises are restored; (iii) and to pay excess water rates and rent on water meter; also to pay telephone rent and for all calls until possession is restored to the lessor; (iv) and to maintain and leave the premises clean and in good repair (having regard to the condition thereof at the commencement of the lease) reasonable wear and tear, war damage and damage by fire, lightning, flood and tempest only excepted; (v) and not to paint ths subject premises except for purposes of maintenance and then only in the colour previously used on the part of the premises or in such other colour as is first approved by the lessor; (vi) and to comply in all respects with all statutes, regulations and other provisions having the force of law, from time to time in force relating to the use of the subject premises provided however that the lessee shall not be responsible for repairs of a structural nature unless these are rendered necessary by the lessee's use of the premises; B.2 (vii) and not to do anything upon the subject premises which may be a public or private nuisance or annoyance or which may in any way interfere with the quiet enjoyment of adjoining owners or occupiers; (viii) and not to do anything which may render any increased premium payable for the insurance of the subject premises or which may make void or voidable any policy for such insurance; (ix) and not to keep on the subject premises any materials of a dangerous or explosive nature provided that this paragraph shall not apply to petroleum products so long as they are kept in accordance with any laws applicable thereto; (x) and both to apply for and maintain such licences, permits, approvals and consents as may be necessary from time to time to enable the lessee to keep the subject premises open for business as a service station, and, on the request of the lessor following the termination of this lease, to transfer any such licences, permits, approvals and consents as are transferable to the lessor or the lessor's nominee and at no cost to the lessor or its nominee other than the payment of any statutory fees necessary in order to effect the transfer; (xi) and that the lessor and/or its agent may so often as the lessor shall deem necessary at any reasonable time during the term without the necessity of giving the lessor any previous notice, enter and view the state of repair and the lessee will repair accord ing to notice in writing and that in default B.3 the lessor may repair at the lessee's expense; (xii) and the lessor may enter and carry out requirements of public authorities, and repair under the lease; (xiii) and the lessee will not use nor permit to be used the subject premises or any part thereof for any purpose other than that of the business of service station or as the case may be; (xiv) and not to assign the lease or to sub-let, let a licence or part with possession of the subject premises or any part thereof, provided that the lessee may, with the consent in writing of the lessor, which consent should not unreasonably be with held, assign this lease; (xv) and to keep the subject premises open no less than during the hours from 7 a.m. to 6 p.m. on Mondays to Fridays both inclusive other than public holidays provided that if the subject premises are included in a roster under any law or regulations, Federal or State, the premises shall be kept open during the periods stipulated in respect of them under such roster system; (xvi) and that the lessee will indemnify and save harmless the lessor, its officers, servants and agents from and against all or any actions, suits, claims and demands by or on behalf of any person or persons whatsoever in respect of any accidental death or accidental bodily injury or accidental damage to property which may arise directly or indirectly out of the lessee's business at the subject premises B .4 (xvii) (xviii) (xix) E. General (i) (ii) or out of the occupation or use by the lessee, his servants, or agents of the subject premises; and the lessee will indemnify and save harmless the lessor from and against all loss and damage to the subject premises and to the said building of which the subject premises form part caused by the negligent use, misuse or abuse of the water, sewerage, gas or electricity services to the subject premises or any of the mains or fittings or fixtures used in connection with the same by the lessee or by any person or persons employed by or acting or claiming under the lease and the lessee will at his own cost and charge, pay for all damage or injury arising to the lessor or to any person or persons in consequence of such negligent use or abuse; and not to make any alteration or addition to or deletion from the subject premises whether structural or otherwise; and to conduct on the subject premises the business of a service station in a proper and businesslike manner. Covenants By the Lessor: for quiet enjoyment; and not to discriminate against the lessee in favour of any other purchaser of petroleum products from the lessor or any company affiliated with it in relation to:-(a) the prices charged for petroleum products; (b) any discounts, allowances, rebates or credits given in relation to the supply of petroleum products; B.5 (c) the provision of services or facilities in respect of petroleum products; (d) the making of payments for services or facilities provided in respect of petroleum products; provided that the lessor shall not be in breach of this covenant if:- (a) the discrimination makes only reasonable allowance for differences in the cost or likely cost of manufacture, distribution, sale or delivery result ing from the differing places to which, methods by which or quantities in which petroleum products are supplied to the purchasers; or (b) the discrimination is constituted by the doing of an act in good faith to meet a price or benefit offered by a competitor of the supplier. (iii) and to pay all Federal, State and local rates and taxes in respect of the subject premises. F. Lessor's Right to Re-enter This lease shall be subject to the proviso that the lessor may re-enter:-(i) on non-payment of rent or for products supplied for 14 days after payment due; or (ii) non-performance of any covenant herein if, and only if, the lessor has served upon the lessee a notice -(a) specifying the breach complained of; and (b) if the breach is capable of remedy, requiring the lessee to remedy the breach; B. 6 and (c) in case the lessor claims compensation in money for the breach, requiring the lessee to pay the same; and the lessee fails within a reasonable time thereafter to remedy the breach, if it is capable of remedy, and where compensation in money is required, to pay reasonable compensa tion to the satisfaction of the lessor for the breach; and the breach is, in the opinion of an arbitrator appointed as hereunder provided, of a substantial and serious nature; or (iii) on the lessor making any assignment for the benefit of creditors or taking the benefit of any Act now or hereafter to be in force for the relief of Bankrupts or Insolvents and Section 85 (d) of the Conveyancing Act 1919, as amended is hereby varied accordingly; (iv) the lessee becoming bankrupt or, being a company, going into liquidation (other than for the purposes of reconstruction or amalgama tion) . Upon re-entry as aforesaid, the lease shall absolutely terminate. G. Conciliation and Arbitration: All questions and differences whatsoever which shall at any time hereafter arise between the parties hereto or their respective representatives or assigns or any of them, touching or concerning this lease, or the construction, meaning, operation or effect thereof of any clause herein contained or as to the rights, duties or liabilities of the parties hereto respectively or their respective representatives or assigns or any of them under or by virtue of this lease or otherwise or touching the subject matter hereof or arising out of in relation thereto, shall be referred:- B.7 in the first instance to conciliation by a person appointed for that purpose by the Australian Government. in the event of the said conciliator stating in writing that the question or difference or any question or difference referred to him as aforesaid has not been settled by discussion or agreement as aforesaid, then to the arbitration of an arbitrator appointed for that purpose by the Australian Government who shall upon hearing the parties or their legal or other representatives decide the issue between the parties according to equity and good conscience with a minimum of legal form and precedent. It is agreed that in the event of any claim by either party to enforce the terms of this lease or otherwise in respect of a breach of any covenant herein, otherwise than pursuant to clauses F(i), (iii) and (iv) hereof, the sole obligation of the other party in respect of such claim shall be such as is determin ed by the said arbitration. H. Supply of Product: It may be desirable to have a separate supply agreement. If there is such it should not be used in any way to limit the tenancy rights of the lessee as set out in the lease. I. Clauses Not to be Included: (1) Any clause with respect to tyres, batteries or accessories. (2) Any clause providing for exclusive dealing. (3) Any clause stipulating hours of opening other than as above. (4) Any clause dealing with advertising or promotions. (5) Any clause prohibiting the sale of goodwill (a) (b) B. 8 or absolutely prohibiting assignment. B.9 ANNEXURE "C MOTOR SPIRIT MARKETING ECONOMICS ASSUMPTIONS 1. The economic analysis is based on a station assumed to be typical of mainline company-owned stations in the metropolitan areas. 2. Company outlet-related expenses are assumed to be about 4.5 cents per gallon. This figure is based on the following assumptions: cents per gallon Total Marketing Margin (terminal to pump) 25.0 Dealer Margin (12.5) Company Margin 12.5 Rental "Subsidy" in Wholesale Price to Dealer* (6.0) Country Marketing Cost "Subsidy"** (1.0) Metropolitan Delivery Cost (1.0) Outlet-Related Marketing Expenses 4.5 *Esso reduction in dealer wholesale price in South Australia and Esso Exhibit 228A, p .25. **Shell Exhibit 244B Unless large numbers of outlets are closed, it is assumed that these expenses are fixed per outlet. On 1974 retail motor spirit sales volumes of 1^)90 million gallons, the outlet related costs would equal about $91.1 million. Company-owned stations represent about 42% of all Australian stations, but it is assumed that 60% of C.l these expenses would be allocated by the companies to their "owned" stations. This would result in an allocation of about $7,570 per company-owned station. 3. Delivery expenses in the metropolitan areas are assumed to be about 1 cent a gallon based on the Ampol delivery charge to ACTU/Solo stations. (This may be a little high. Shell in Exhibit 482 estimates metropolitan delivery costs at .69 cents a gallon for full drops of 6,000 gallons and 1.04 cents a gallon for half drops of 3,000 gallons.) 4. Real estate costs are based on a return on investment target of a 15% DCF after tax on the company investment in the site. This is typical of current return on investment targets (see, for example, B.P. Exhibit 226A, p .117), but may be high for a station assumed opened in the late 1960's. However, land taxes and rates will also be covered by this return on investment. For simplicity, the cash necessary to yield the target return is calculated by application of a 27.5% capital charge, assuming a 15-year project life, 50% of the investment depreciable and a 43% tax rate. The station is assumed to have been opened in 1968 at a capital cost of $122-500. This is based on figures for new high gallonage outlets in 1973 provided by some companies, deflated back to 1568 on the basis of the Australian Bureau of Statistics index of buildings other than houses. 5. Station labour expenses are based on the B.P. submission for a "good lessee" operation at 36,000 gallons a month (Exhibit 226A, p.114). This incidently is near the gallonage proposed for the Commission's "benchmark" service station. For a service station operation of this type it has been assumed that the equivalent of one employee is required for roughly each 8,000 gallons a month of motor spirit sales. The use of C. 2 casual and part-time labour is common in order to service demand peaks. The detailed assumptions on which the labour costs are based are shown in Table 1 to this Annexure. 6. Other retail expenses for service stations include utilities, supplies and services, depreciation, bad debts and miscellaneous expenses. These are detailed in Table 2 and are based on BP data (Exhibit 226A, p .110) and data from service station accounting services provided on a confidential basis to the Commission. 7. Dealer income includes a return on his capital invested and remuneration for his labour and management contributions. Excluding the return on his capital, the Commission considers $300 per week to be a reasonable dealer income target for a substantial service station in view of his very long hours, management responsibilities and self-employed status (no annual holiday, paid holidays, sick pay, long service leave, superannuation, etc.). 8. Assumptions on dealer investment in the service station are: (i) A basic investment of $10,000 for a 10,000 gallon per month station. (Mobil Exhibit 229A, p .36 notes that the average dealer investment is $ 10,0 00-$12,000 . The average sales of dealer leased stations are 17,000 gallons per month). (ii) It is assumed that 60% of the dealer investment is fixed and 40% volume related. The volume related portion should show some economies of scale as throughputs increase due to increased inventory turnover, but these savings C. 3 have not been estimated. (iii) The assumed dealer investment is based on the following schedule: Monthly Motor Spirit Sales COOP gal) 10 20 30 40 50 60 Investment (b00$) Fixed 6 6 6 6 6 6 Volume Related 4 8 12 16 20 24 Total 10 14 18 22 26 30 Shell (Exhibit 230, p.24) shows a dealer investment of $16.9 thousand for a 22,500 gal. per month station and $22 thousand for a 33,900 gal. per month station, although the lower volume stations described by Shell have lower dealer investments than we have assumed. As with the company real estate investment, the target rate of return on the dealer investment is 15% on a DCF basis calculated as described in Assumption 4. 9. The sum of the cost items described in Assumptions 2-8 is the total marketing expense, both wholesale and retail, from the terminal through to the pump. 10. The total marketing expenses do not need to be recovered through the motor spirits marketing margin alone. Service stations have a significant non-motor spirit income from the sales of oil, tyres, batteries, accessories, lubrication, repairs and other services. The non-motor spirit income estimates are based on service station operating data provided by BP (Exhibit 226A, pp.111-112), Shell (Exhibit 230, p.24), Amoco (Exhibit 224B), and Mobil (Exhibit 45, Attachments 24-26). It has been C. 4 conservatively assumed that non-motor spirit sales increase only slightly at motor spirit sales volume levels above 30,000 gallons per month. This is consistent with the assumptions (Assumption 5) on station labour costs. To significantly expand non-motor spirit sales at gallonages above 30,000 per month, it would probably be necessary to add a second mechanic. Depending upon the location and potential of the station it might be profitable to do so. The higher volume stations described in the Mobil and BP submissions each had two mechanics and achieved significantly higher non-motor spirit incomes. However, for purposes of consistency in this analysis, the lower figures based on one mechanic have been assumed. C. 5 TABLE 1 SERVICE STATION ECONOMICS LABOUR SCHEDULE - DEALER EXCLUDED Function Wages Weekly Monthly Salary Salary Motor Spirits Sales ('000 gals/month) 8 12 18 21 30 40 Number of Employees 60 Forecourt Attendant $110 $480 Lube operator $ 84 $364 Mechanic $116 $504 Casuals $110 $480 Total Number of Employees Subtotal: Direct Wages Holiday pay, sick pay, workers' compensation, etc. @ 25% Total Labour Costs $/gal. 1 1 1 1 1 1 1 1 1 1 .5 1 1 1 1 - - .5 1 m 1 —1 2.5 3.0 3.5 4.0 4.5 1096 1348 1588 1828 2068 274 337 397 457 517 1370 1685 1985 2285 2585 . 171 . 140 .110 .095 .086 1 2 1 1 1 1 2.0 3.5 5.0 7.5 2308 3360 577 840 2885 4200 .072 .070 Source: B.P. estimates - Victoria SERVICE STATION ECONOMICS OTHER RETAIL EXPENSES PER MONTH (Gallons/month) 8,000 12,000 18 $ Φ/gal $ Φ/gal $ Utilities Telephone ) Light & Fewer ) 70 .009 80 .007 100 Supplies and Services Laundry ) Supplies ) Stationery ) Accounting ) Advertising )100 .013 150 .013 200 Maintenance & Repairs ) Insurance ) Motor Vehicle Expenses) Depreciation 25 .003 50 .004 65 Bad Debts 25 .003 25 .002 25 Miscellaneous 70 .009 75 .006 75 TOTAL* 290 .036 380 .032 465 000 24,000 30,000 40,000 60,000 Φ/gal $ Φ/gal $ Φ/gal $ Φ/gal $ Φ/gal .006 125 .005 135 .005 150 .004 180 .003 .012 250 .010 300 .010 350 .009 450 .008 .004 75 .003 100 .003 120 .003 150 .003 .001 25 .001 25 - 25 - 50 .001 ,003 100 .004 100 .003 100 .003 150 .003 .026 575 .024 660 .002 745 .019 980 .016 *cents per gallon column may not add due to rounding TOTOR SPIRIT MARKETING ECONOMICS Monthly Motor Spirit Sales Voluntas (' 000 Gals) 5 10 15 20 25 30 35 40 45 Cost Elements (i per Gallon) Company Marketing Expenses $631/month 12.6 6.3 4.2 3.2 2.5 2.1 1.8 1.6 1.4 Delivery li/Gal. 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 Real Estate Costs $2807/month 56.1 28.1 18.7 14.0 11.2 9.4 8.0 7.0 6.2 Station Labour see notes 24.6 15.8 12.2 10.9 9.5 8.6 7.8 7.2 7.1 Other Station Expenses see notes 5.0 3.2 2.8 2.5 2.3 2.2 2.0 1.9 1.8 Dealer Income $1300/month 26.0 13.0 8.7 6.5 5.2 4.3 3.7 3.3 2.9 Return on Dealer Invest- see 4.6 2.3 1.8 1.6 1.5 1.4 1.3 1.3 1.2 ments below 129.9 69.7 49.4 39.7 33.2 29.0 25.6 23.3 21.6 Non-Motor Spirits see Income below 28.0 14.0 12.0 10.0 9.0 8.0 7.5 7.0 6.5 Required Motor Spirits 101.9 55.7 37.4 29.7 24.2 21.0 18.1 16.3 15.1 Income Notes: Station Labour Costs ($/month) 1230 1528 1835 2186 2386 2585 2720 2885 3214 Other Station Expenses ($/month) 250 320 420 500 580 660 705 745 805 Dealer Capital Investment ('000$) 10 10 12 14 16 18 20 22 24 Non-Motor Spirits Income ($/nonth) 1400 1400 1800 2000 2250 2400 2625 2800 2925 50 55 1.3 1.1 1.0 1.0 5.6 5.1 7.1 7.0 1.7 1.7 2.6 2.4 1.2 1.2 20.5 19.5 6.0 5.5 14.5 14.0 3542 3871 865 925 26 28 3000 3050 60 1.1 1.0 4.7 7.0 1.6 2.2 1.1 18.7 5.2 13.5 4200 980 30 3100 SERVICE STATION ECONOMICS OF NEW COMPANY O W E D OUTLETS COMPARED TO COMMISSION'S fCDEL VOLUME Cost Elements (Φ/gal.) Company Marketing Expenses Delivery Real Estate Costs Station Labour Other Station Expenses Dealer Drawings Return on Dealer Investment1 Total Marketing Costs Non Motor Spirits Incane Required Motor Spirits Margin NOTES Dealers Drawings ($/month) Station Labour Costs ($/month) Other Station Expenses ($/month) Non Motor Spirits Income 22,300 gals/month Site Commissions Î' Site 3.2 2.9 1.0 1.0 (1 ) 31,700 gals/month (1) 32,900 gals/month 45,500 gals/month 15.1 9.1 3.4 2.6) 2.4) 36.8 9.9 26.9 584 2033 760 2216 12.6 10.2 2.4 5.9) 1.6) 36.6 9.5 27.1 Site 'B' 2.2 1.0 10.2 8.0 2.9 2.1) 3.5) 29.9 9.0 20.9 650 2538 923 2867 Commissions site 2.0 1.0 8.9 8.3 2.1 4.1) 1.4) 27.8 7.8 20.0 Site 'C 2.1 1.0 11.7 5.3 2.5 1.8) 2.8) 27.2 5.8 21.4 607 1765 842 1911 Commissions site 1.9 1.0 8.6 8.1 2.1 3.9) 1.3) 26.9 7.7 19.2 Site 'D' 1.6 1.0 8.0 7.6 2.3 1.5) 2.3) 24.3 7.3 17.0 700 3478 1042 3310 Commissions site 1.4 1.0 6.2 7.1 1.8 2.9) 1.2) 21.6 6.5 15.1 (1) Leased Outlets (2) Figure based on accounting return, i.e. Gross Profit - Drawings