The ideal FuelWatch system

The other day, I speculated that we could do better than the WA model in making petrol pricing information more available. But that led me to wonder: if the communications technology was ideal (as it pretty well is or at least will be within a year or two), what would be the ideal system for consumers?

Well here it is: a driver is setting out or driving around and wants to find the best petrol price. They send a request (from a computer or mobile phone) to the FuelWatch website that gives their location, their destination, the degree to which they will deviate from an optimal route and the time frame upon which they would like price offers (this last bit, I’ll explain in a moment). Then, the site would give them a series of prices and locations that will be fixed (capped) for the time frame they have nominated. The driver, then chooses a petrol station and can make a purchase at that price.

So what does this require of the petrol stations? First, they have to upload their prices. They have to be contingent prices based on the time frame a driver might want them fixed for. So a station could offer a 149 cent per litre offer if the driver wants it fixed for 30 minutes but possibly a different price if they want it fixed for some other length of time. There is no reason why the price offers should not be for arbitrary lengths of time up to 24 hours. Beyond this and we have an issue associated with consumers gaming the system (you know, asking for a week long commitment, but never exercising it).

Second, they could change these price offers at any time. However, this means that if they raise their prices they still have to honor offers made to consumers for fixed periods that cover this.

The end result of this would be to dramatically reduce the cost of searching for the best deal but if you chose not to search, it could well be that you end up paying more. So be it. Nonetheless, I suspect that this would be enough to end and not just move out to two weeks, the petrol price cycle.

And here is the really good news: absent the current FuelWatch, there is nothing stopping the petrol industry just setting up this mechanism. It is just a market for short-term futures on petrol prices. Of course, if we rush headlong into the current proposed FuelWatch design, it will rule out design innovations. Do we really want to do that?

11 thoughts on “The ideal FuelWatch system”

  1. Hi Joshua,

    One potential complication is that petrol bowsers will need to be able to handle charging different prices to consumers who may come in at the same time, depending on the price they commit to, as not all consumers will make use of this system. Some stations certainly will not be able to handle this – this may not be a trivial cost. If consumers are willing to commit to a certain quantity, that makes it more feasible (but I wouldn’t like to assume it is costless)

    Would the costs of doing this exceed the search/queueing costs of the current system? I don’t know.

    cheers

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  2. David. That isn’t a problem in what I have in mind. You would just take your offer inside and get the price you were offered if it is different than the one on the bowser. Stations that can’t handle this would, I guess, have to fix their prices for 24 hours.

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  3. There are many ways to implement this and it could be done with today’s technology and with little change to any existing system. The following is an outline of one way to do it.

    Assume there is an electronic market place (which knows about me as well as about petrol stations) which can estimate the best price for my normal travel pattern. I need petrol and send an SMS or go online and the system gives me back a quote and how long it will last. The online price may or may not be the same as the station price.

    When I go to pay at the petrol station the credit card or debit card processing operates as normal but the company passes all payments through the system and looks to see if I had a quote because the system knows my credit card number. If I had a quote then if I paid too much I get money put into my bank account.

    Once the basic system is in place it could be attached to GPS phones to give the best price for my current location or it could be set up to inform me of low prices and low queues. Other useful innovations could be added.

    Such a system would cost relatively little to implement ($1M to get to cash flow positive) and could be financed by the telcos and/or the service stations and/or the credit card companies and/or the government or by private investors. To join the system would be free but you would agree to pay a percentage of the refunds you receive. This would pay back the investors for financing the system.

    Let us assume that the average refund is $2 each week and that 100,000 people joined and paid 25% of their refund for the service then this would be an income of $50K a week which would rapidly pay for the sunk costs and the promotion of the system. If it extended to 1M people then we are talking a lot of money. It does not take much imagination to see how it could be extended to groceries – it could make shopper dockets obsolete by tying store discounts into petrol discounts.

    The system would take as its feed the government’s price watch system and those petrol stations that wanted to offer electronic deals.

    Perhaps this could be an investment for the government infrastructure fund to consider or perhaps readers of this blog might like to contribute the start up funds:) Contact me if you are interested in pursuing the idea.

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  4. It is just a market for short-term futures on petrol prices.

    No, you’re not Joshua. You’re for all intents and purposes setting up an options market without driver paying for the option.

    i wish all derivatives markets came with a free option.

    In fact if your sysmtem was adopted you would find that the price of the option would be paid for by those not going through this method.

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  5. Josh,

    I understand the principle of what your saying, but I don’t see why this is any better than fuelwatch.

    What’s so bad abiut Fuelwatch? The WA government have shown that the 24 hour rule increases competition which makes fuel cheaper than the rest of Australia.

    At the end of the day, the fact is fuelwatch has been proven to work by the accc, so why is yours any better?

    Stu

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  6. If the system you sketch out above does increase the costs of not searching, but substantially decreases the costs of/benefits from searching, I think the result would be a good one. Those not willing to sustain higher prices for not searching can do so, and those willing to put in a modicum of effort to search get rewards. It looks like a good way to discriminate between petrol consumers to me.

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  7. Hmmm. Compared to the 24 hour scheme, doesn’t this impose a lot of extra complexity on petrol customers, for not much extra benefit?

    You and I might find options trading on our petrol a fun game, I think we might be a minority on that one.

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