MARK COLVIN: The Government and the competition watchdog face another challenge in the politically-sensitive petrol market.

The big refiner Mobil has agreed to sell more than 300 service stations to its rival Caltex.

If you include Woolworths-Caltex outlets, the deal would give Caltex almost half of the total retail market.

Caltex sees it differently; it says the purchase will merely allow it to compete with what it calls the dominant retailers Woolworths, Coles and BP.

But the plan, announced today, has drawn severe fire.

Economics correspondent Stephen Long.

STEPHEN LONG: If you believe Caltex, it's all about competition.

DES KING: Australia has a very competitive retail fuel market and this acquisition will allow us to compete with major retailers.

STEPHEN LONG: According to the Caltex boss Des King, those major petrol retailers don't include his company.

DES KING: The major retailers are Coles, Woolworths and to some extent BP.

STEPHEN LONG: That might puzzle more than a few motorists. Roughly one in four petrol stations in Australia already carry the Caltex logo although in more than half of those, it's in league with Woolworths.

That's the product of a deal six years ago, when the regulators allowed big retail to form alliances with big oil.

Coles and Woolies now control more than 44 per cent of the nation's petrol stations. And Caltex reckons it needs to take over more than 300 Mobil petrol stations, in part so it can "compete" with the Woolies-Caltex outlets that it already supplies.

It doesn't wash with some high-profile pollies.

NICK XENOPHON: To say that they are not a big player is a little cute.

STEPHEN LONG: Senator Nick Xenophon, the South Australian Independent.

NICK ZENOPHON: This will mean less diversity in the market place. It is not good news for consumers.

STEPHEN LONG: The Queensland Coalition Senator Barnaby Joyce's reaction was very Barnaby Joyce

BARNABY JOYCE: Well it's going to reduce competition. This is ridiculous. We keep on centralising back our market place; we keep losing an opportunity for the Australian family to go into the business. We keep losing competition in the market place.

The consumers will get exploited. Now we're going to have a couple of retailers, a couple of fuel stations, a huge debt and an ETS. What a wonderful economy we're getting.

STEPHEN LONG: And, as to the idea this will increase competition with Coles and Woolies petrol outlets.

BARNABY JOYCE: No one centralising a market place so that they can give the consumer a better deal. They get control of the market place so they can exploit the consumer and force prices up.

STEPHEN LONG: The ACCC is examining the deal. The former ACCC boss, Allan Fels, says it should take a good, hard look.

ALLAN FELS: We used to have nine oil companies once plus many independents and imports plus a bit later Coles and Woolworths operating independently. Now this will take us down to three big oil companies, two of whom are closely linked with Coles and Woolworths; plus some independents plus very shrinking independent imports.

STEPHEN LONG: The ACCC has however given the go ahead to all of the previous mergers.

ALLAN FELS: Well, is this one too many? One of the big calls (phonetic) is letting Coles and Shell get together and Woolworths and Caltex because for awhile it looked like we might have a few oil companies competing with a couple of big retailers.

Now Caltex will be supplying Woolworths which has 22 per cent and then it supplies itself which will go to 22 per cent; so that's 44 per cent of the market really hugely boosts the power of Caltex in the, in the market.

STEPHEN LONG: The Australian Automobile Association, the peak body for state and territory motoring groups, is concerned.

Its executive director, Mike Harris.

MIKE HARRIS: If you've got a market place that has four major players, which is what we had, or have at the present time. If you take one of those players out and you leave only three, some if not all of those remaining players will have a larger market share and therefore greater capacity to influence price.

STEPHEN LONG: Mike Harris says he'll put his faith in the ACCC's inquiry, but adds this rider:

MIKE HARRIS: Like every motorist in the country who queues up at a service station to buy petrol, I remain sceptical about the price that I'm paying. Nobody, including the ACCC, has yet been able to convince either me or the vast majority of the motoring public that they are paying, at any given point in time, a far price for a litre of petrol.

MARK COLVIN: Mike Harris from the Australian Automobile Association ending Stephen Long's report.