Fuel Watch

Compared to Europe, Australia has relatively low taxes on petrol. Hence, prices at the pump are much more responsive to changes in global demand (or for that matter supply). So the last week has been an interesting case in what results when a reactive government meets with vocal concern from a nation of drivers. The result, it turns out, is to ‘price watch’.

Based on the experience of Western Australia, Rudd has decided to nationally rollout out a scheme called Fuel Watch. While not the only international example of such a scheme, its main feature is an obligation placed on fuel retailers to notify their ‘tomorrow prices’ by 2pm each day, which are then posted onto a consumer forum. The idea – conceptually a good one – is that when empowered with information consumers will be more likely to shop around for petrol and put downward pressure on providers.

But of course there are also some problems. First, the whole process of daily posting prices is a fairly bureaucratic affair and it’s unclear what the size of these ‘transaction costs’ might be and the extent to which they offset any gains. Second, the Australian pump market is highly dominated by a small number of major retailers so it’s unlikely marginal changes in consumer power will exert significant pressure on prices. Third, any observed price change is almost certain to be inconsequential relative to the (larger) price effect from the global economy. And fourth, to an outsider at least, it feels like a slightly inappropriate role for government to be mandating retailers to tell them the prices they’ll sell at – how is one supposed to draw the line at what consumer prices the government should or shouldn’t be regulating? (indeed it was announced yesterday that the government will also be ‘watching’ the prices of child care providers following reforms to how they are funded). Surely a rigorous compeition policy apporach is preferable to government market-monitoring?

Anyhow this has kicked off a slightly odd national debate not about the principle so much, but more the econometric evidence of whether it actually works. Unfortunately for the government in turns out not to be so effective. Although pump prices have fallen in Western Australia since the introduction of the scheme in January 2001, this also coincided with the move of a major Australian supermarket retailer, Coles, into the region. It turns out it was this move, rather than the price watch scheme, that explains the majority of the (small) relative fall in prices compared to the rest of the country.

Even more unfortunately for the government, leaked memos suggest their own officials advised them of the neutral, or even negative, effect the scheme would have. Disappointingly, the agency which undertook the econometric research for them has refused to release details of the model they actually used, or indeed even the confidence intervals for the results they produce. The political fallout has been a loss of five percentage points in approval ratings for Rudd. But with two out of three Australian’s still in favour of the Labor leader, I’m sure it’s a position Gordon Brown wouldn’t mind being in now.