Possums Pollytics

Politics, elections and piffle plinking

FuelWatch – ACCC Econometrics

Posted by Possum Comitatus on May 29, 2008

When the ACCC releases their econometric modelling of FW, we’ll update and whack it in here.

But as a bit of a warm up we’ll run a basic test to to show that there was price change when FuelWatch was introduced.

The series we’ll be using is Price Difference which equals the difference between the Perth price and the 3 State average (Melbourne, Adelaide and Sydney – again, Brissy is excluded because of the rebate we get up here) price for unleaded petrol. We’ll use the quarterly data from the Australian Automobile Association.

We’ll run a very simple regression. We’ll regress the Price Difference on a constant and a dummy variable that has the value of zero for the period before FuelWatch in WA and a value of 1 after FW was introduced.

Yes, serial correlation I know , see comments.

The constant tells us that before FW in WA, the Perth price was, on average, 1.38 cents per litre more expensive than the 3 State average. It also tells us that after FW, the price difference reduced by an average of 1.57 cents per litre – leading Perth petrol being, on average, 0.2 cents per litre cheaper than the 3 State average price (1.38-1.57). That’s around what our non regression results told us earlier which it should be.

That’s a statistically significant structural break. potentially statistically significant structural break – see comments regarding serial correlation.

This is part of the weekly series the ACCC uses rather than our quarterly data:

It comes from Appendix S of the ACCC inquiry into the price of unleaded petrol

What we’ll be looking for in ACCC work is talk of the volatility changes that resulted from FuelWatch in WA since we already know that there was clearly a structural change in the price.

UPDATE

The ACCC has now released a paltry little document over here:

http://www.accc.gov.au/content/index.phtml/itemId/829429

The first thing to note is they did the same simple test that we did earlier, apparently in the previous report, but on weekly and monthly measurements. Their results showed the existence of a structural break in the price at the implementation of FW.

They found reductions in the price of petrol in Perth compared to the eastern capital city average of:

1.92 cents per litre as a weekly average

1.86 cents per litre as a monthly average

0.9 cents per litre as a weekly average based on the lowest price point from week to week.

The important thing was always going to be about the volatility, in terms of whether the price on the cheapest day of the week in Perth increased or decreased relative to what they were pre-FuelWatch

Importantly here, the ACCC measured the week to week price changes from the lowest price point of the week, the highest price point of the week and the remaining five days. They found:

prices decreased an average of 3.5cpl for the highest price day of the week prices decreased an average of 0.7 cpl for the lowest price day of the week prices decreased an average of 1.8 cpl for the remaining middle five days of the week.

So the volatility post FW still enables motorists which buy fuel on the cheapest days to benefit from those cheapest days, but it’s had the effect of slightly compressing the bottom end of the variance of Perth petrol prices.

While Perth petrol consumers that buy on the cheapest day still save money compared to pre-FuelWatch – around 0.7cents per litre, the real area of pricing change is at the top end of the weekly price cycle, with that top reducing by an average of 3.5cpl with the other 5 days being in the middle at 1.8cpl.

The ACCC also performed some more advanced tests on whether FuelWatch induced a structural break in the price of Perth fuel and found that it had.

We can conclude that there is an extremely high probability that FW reduced overall prices in Perth that the biggest price reduction occurred at the top of the weekly cycle (making the most expensive days of the week cheaper), that the smallest price reduction occurred at the bottom of the weekly cycle (making the cheapest day of the week slightly cheaper) and the other 5 days fell in the middle.

And we can also conclude that FuelWatch, based on the WA experience, had zero evidence of increasing prices anywhere, at anytime in the weekly price cycle.

It would have been nice to see the modelling itself – and the data.

UPDATE 2

Sinclair Davidson crunches numbers on the original ACCC modelling HERE:

It confirms the importance of the ACCC releasing the data and all of their modelling.

At the moment, the more you look at the ACCC work, the more uncertainty it seems to contain. Without all of their work and data, it’s almost impossible to make a definitive independent conclusion.

UPDATE 3

Competition or Fuelwatch? – that’s the big question when it comes to determining what reduced the difference in petrol prices between Perth and the eastern capitals.

Sinclair reckons it was competition – and it’s hard to argue with, the evidence is compelling.

To show how compelling we’ll do three regressions; the first one again (but this time adjusting for serial correlation in the errors since we have Buckleys and none of getting the actual ACCC data ), then we’ll replace the Fuelwatch dummy variable with a Coles dummy variable (which has a value of 1 in 2004 onwards after Caltex and Coles Express moved into the Perth market, and zero at all other times), and we’ll finally run a regression with both of them.

FuelWatch

Competition

Combined

This final regression is compelling – it would suggest that, using quarterly data, the extra competition that the introduction of Caltex and Coles Express had on lowering the difference in prices between Perth and the eastern capitals was more powerful than Fuelwatch.

So much so that Fuelwatch became statistically insignificant when the increase in competition was controlled for.

Even if we limit the time period to 1992 onwards, nothing much changes.

If FuelWatch really did decrease prices – we’ll need a lot more evidence than the ACCC has thus far provided. At best we could say that FuelWatch combined with higher levels of competition reduced the price difference between Perth and the eastern States, but looking at Sinclair’s data (which uses a higher resolution of data, monthly rather than quarterly) – even that might be a bit of a stretch.

18 Responses to “FuelWatch – ACCC Econometrics”

  1. Are you serious? The errors are highly correlated making any inference on ordinary regression completely invalid. The Durbin-Watson statistic that you report shows that this is a problem. Once you allow for the serial correlation in the errors, I reckon the statistical significance would evaporate.

  2. Possum Comitatus said

    I’m after a weekly series which knocks a fair whack of that gross serial correlation out.I’ve seen it charted but cant find the data. I know the ACCC performed the same basic test on the weekly data and it was fine. The quarterly average of prices – the best and only data I could find – oversimplifies the data to the point that it becomes almost impossible to work with.

  3. Possum Comitatus said

    Looking at it a bit further – the ACCC use as the baseline prices from Perth and eastern capital from which they take the difference of as: the retail price minus the lagged Mogas95 price minus net taxes minus fuel quality premium. I wonder if those things are significantly different between Perth and the eastern capitals? Anyone know?

    Averaging over a quarterly period seriously reduces the information contained within the quarterly price series – but now that Robs raised serial correlation, I’m a bit worried if that averaging would really knock most of it out? Especially if those net taxes and fuel quality premium dont significantly differ between Perth and the eastern capitals.

  4. Ronin8317 said

    That will explain all the leaks. Some companies (well, 2 companies) are going to lose SERIOUS money over the proposal.

    The negative publicity over the scheme does smell of something. SMH is usually one of the most pro-Rudd newspaper, but even they seems to be anti FuelWatch. Normally I would expect Ross Gittin to be on page 1 explaining the economics of it. From an ecnomic perspective, I do not believe there has EVER been an example where pricing clarity has increased the cost to consumers. It’s a ‘no brainer’.

    We’re seeing a fight between the ‘business lobbyist’ vs good policy. Rudd has so far shown he has good political instinct (e.g. the controversy over Henson’s photo). Swan saying on ABC radio that he’ll ‘hunt down the leaker’ is unfortunate, but illustrates the importance of the issue. If leaks like this continues, then no government departments will be allowed to submit any advice that runs contrary to the political stance. They’ll just be salaried ‘yes man’.

  5. onimod said

    I’m guessing the significance really lies in the volume statistics.
    In that respect the transparency that’s being touted by fuelwatch only goes so far, and maybe it should. But if we were really going to analyse it’s effects we’d have to see some volume stats and see how that lines up with the price stats wouldn’t we?
    Who lives such a disciplined life that they only fill up on (the formerly) cheap Tuesday anyway?

  6. Rod said

    Poss

    What do they use for the average, an average price across all suburbs, is it a simple or weighted average, are the discount dockets taken into account, what about areas where there is little competition, eg Vaucluse.

    Best indication is that the big 2 oppose it, smells like price control.

  7. Andos said

    Onimod: precisely. Volume weighted analysis would be very interesting. I have no idea how one might obtain such data, though.

  8. David Richards said

    One thing – is the result in WA a function of WA being the only one running a scheme? In other words, if the scheme was national, would the benefits disappear? Also, how would you know what effect a national scheme was having because you’d then have no point of comparison. Then there’s the point that anything that encourages use of petrol is not a good thing environmentally speaking. They’d be better off subsidising fuel efficient cars and jacking up taxes on the fuel wastrels. Triple the Tarago Tax!!!

  9. Sinclair Davidson said

    My number crunch effort is here

    http://www.ipa.org.au/publications/publisting_detail.asp?pubid=825

    [Sorry Sinclair – you were in the spam bin…. Poss]

  10. Possum Comitatus said

    Sinclair – did you get the same serial correlation problem with the monthly data that I got with the quarterly?

    The ACCC needs to release the weekly data.

  11. Sinclair Davidson said

    i corrected with newey-west, the same as the accc did.

  12. […] Possum Comitatus has run some analyses that the change in the margin between WA and the eastern states is better […]

  13. Sinclair Davidson said

    Hi possum, thanks for that.

    sorry about the terseness, i’ve been in canberra and could only snatch moments at borrowed pcs (or in the qantas club).

  14. Possum Comitatus said

    No probs – you call that terse?

    Ha! – you need to run a politics blog!:mrgreen:

  15. Kerneels said

    Possum,
    Surely the point is what is the average price actually paid for fuel, rather than the average price day by day? If I was in Perth, I would be making a point of buying when the price was at its lowest. In Melbourne, I use a hit and miss method banking on the fact that Tuesday and Wednesdays seem cheaper.

  16. Possum Comitatus said

    Defintely Kerneels – to really get to the bottom of it, we’d need data that matches prices to volumes sold.

    But that will never be released by the major fuel operators in a pink fit.

    So what we are left with is really really imperfect analysis using data that only tells us half the story. It’s better than nothing, but not by much:mrgreen:

  17. Xercius said

    Dunno if it’s much help, Poss. But, in regards to MOGAS 95 visavis Perth and the eastern states . . .

    As I understand it, Perth has but one ‘refinery’ (which might also be read as ‘recieving depot’). This means that all retail fuel supplies for WA have that point as the source of origin of supply (which with respect to the other ‘brands’ is facilitated by the oil companies ‘buy / sell’ arrangments: a sort of sophisticated contra deal — albeit with dollar signs attached — if you will).

    Meanwhile, in the eastern states, there about four or five refineries / recieving depots, each owned by the individual oil companies. They still ‘buy / sell’ (with fuel) between each other, but, obviously, they remain competitors in the market.

    Add into this that freight to Perth from Singapore (I am led to opine) is cheaper than it is to the eastern states. The big question is, though, freight on what exactly? It won’t be on MOGAS 95, as that brew doesn’t meet Australian fuel standards (and, a bit like unscrambling an omlette, it can’t be made compliant). More likely it’s (in the main) on TAPIS: a sweet light crude ameniable to cracking (distillation) into fuel products.

  18. Pete said

    just would like to contribute by sharing this website http://www.fuelwatcher.com.au/ – it shows fuel prices and maps.

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