Impact of Falling Oil Prices on Singapore Economy and Petrol Pump Prices

Ms Foo Mee Har asked the Minister for Trade and Industry what is the impact of the decline in oil prices to Singapore's economy, businesses and consumers.

Mr Alvin Yeo asked the Minister for Trade and Industry what implications will a depressed oil price over a prolonged period have on our petrochemical sector and on Singapore's economy in general.

Mr David Ong asked the Minister for Trade and Industry (a) what impact will falling oil prices have on our economy; and (b) whether current adjusted prices on public utilities and at petrol pumps fairly reflect the fall in oil prices.

The Minister for Trade and Industry (Mr Lim Hng Kiang): Mdm Speaker, can I have your permission to take Question Nos 1 to 3 together?

Mdm Speaker: Yes, please.

Mr Lim Hng Kiang: Thank you. Global oil prices have fallen sharply in recent months on the back of sluggish global demand and strong supply conditions. Since June 2014, the benchmark Brent oil price has declined from a peak of US$115 per barrel to around US$50 per barrel recently.

Ms Foo asked about the impact of the decline in oil prices on Singapore's economy, businesses and consumers. As a net importer of oil, the Singapore economy will benefit from lower oil prices. In particular, a drop in oil prices will translate to lower electricity tariffs and fuel costs, which will directly benefit businesses and consumers.

For businesses, lower electricity tariffs and fuel costs will help to lower their input costs. This will help improve their margins, and could also dampen the pass-through of business costs to consumer prices. Consumers, on their part, will benefit from lower spending on electricity and other oil-related items such as petrol. Lower inflation in the economy could also increase their purchasing power, thereby stimulating consumption and further boosting the economy.

Mr Yeo asked about the impact of lower oil prices on the petrochemical sector. Overall, the sector will benefit from lower oil prices due to reduced input costs for oil-based feedstock and utilities. However, the upside of lower input costs may be limited, as prices of key petrochemical products have also fallen in tandem with oil prices.

Mr Ong asked about the current adjusted prices of public utilities and pump prices, and whether they fairly reflect the fall in oil prices. EMA regulates the electricity tariff to ensure that the quarterly tariff revisions fairly reflect the underlying costs of production, including fuel costs. As the price of natural gas, which is the main fuel used for electricity generation in Singapore, has fallen in tandem with oil prices, the electricity tariff has likewise been adjusted downwards. For example, between July 2014 and January 2015, average gas prices fell by 19%. As fuel costs make up around half the tariff, the electricity tariff between July 2014 and March 2015 accordingly fell by 9.3%.

Pump prices fell by 15% between July and December 2014, compared to a 41% fall in crude oil prices over the same period. The fuel component of pump prices is not determined by the price of crude oil, but the price of refined products like petrol and diesel. In addition, petrol companies also have to take into account non-fuel costs such as land and labour costs when setting their prices. These are some reasons why pump prices fell by a smaller percentage compared to the drop in crude oil prices.

Mdm Speaker: Ms Foo Mee Har.

Ms Foo Mee Har (West Coast): Madam, I thank the Minister for his response. I would like to ask the Minister a few supplementary questions. The Minister has highlighted the flow-through benefits of low oil prices. I would also like to highlight that the Malaysian ringgit is also at its historic lows; and Malaysia is a country where we import a significant amount of produce. I would like to ask the Minister if he has any prediction on the downward revision of the 2015 core inflation rate, or even a possibility of deflation.

Also, so far, despite the fall in oil prices – and the Minister has shared some numbers – but I think consumers on the ground have really not seen the pass-through reduction in prices. Could the Minister explain what Government measures are in place to ensure that there is no profiteering and ensure that some cost savings are passed to the consumers, especially in terms of transport and food prices?

The last question is about people working in the oil and gas sector. Given the intense pressure on companies' bottomline, I am concerned that the job security of Singaporeans working in this sector may be bleak, if companies decide to cut staff costs to manage their bottomline. Any policy measures in place to mitigate this impact should this situation occur? Thank you.

Mr Lim Hng Kiang: Mdm Speaker, as I had mentioned in my earlier reply, overall, there will be a slight positive impact on the economy because of the lower oil prices – because of the cost of the businesses as well as to the consumers. In terms of inflation, it will have a small benign effect; it will lower inflation. As we have indicated in our economic forecast, we expect the headline inflation to come down this year, lower compared to last year. But the core inflation will remain rather sticky because we still have a lot of economic restructuring. The high wage cost is likely to pass through to the core inflation. The Monetary Authority of Singapore (MAS) is watching the situation very carefully. We expect the core inflation to remain still quite stiff, but the headline inflation will be adjusted downwards.

On the oil and gas sector, as I had mentioned just now, there is a slight positive effect because of feedstock prices. But the petro-chemical and chemical prices have also come down. So, the margins remain very small and tight. The main reason is because there is over capacity in the Asian region, and therefore, competition remains very stiff. In that sense, I do not think the impact on the oil sector will be too significant. The feedback we get from the oil and gas sector – if we look at the petro-chemical cluster – they benefit from the feedstock, but they are also affected by the revenue. So, I think they will be quite neutral. For the oil and marine sector -- those involved in the oil rigs -- the impact will be more in the longer term. For the immediate future, their order books are still very strong and I think that will keep them in good stead for the next few years. But if the oil prices remain low for a prolonged period, then, this will affect their long-term prospects. So, for those in the oil and gas sector -- which I presume the Member means the oil and marine sector, and those in the oil rig construction – the prospects are okay for the immediate future, and will only be adversely affected if the oil prices remain low for a long time.

Mr Ang Wei Neng (Jurong): While the low oil prices spell good news for the Singapore economy in general. Could I ask the Minister will the low oil prices slow down our drive towards cleaner and renewable energy?

Mr Lim Hng Kiang: I think our attitude towards energy conservation and alternative energy is a long-term one. This is because we are an energy-disadvantaged country, and we have to diversify our energy sources. We are anticipating a global agreement on climate change and we would have to meet these obligations. These are the long-term trends. Our strategy is to meet these long-term requirements, rather than be influenced by short-term volatility in the oil prices.

Mdm Speaker: Ms Foo, keep it short, please.

Ms Foo Mee Har: Madam, I would like to ask the Minister to give his thoughts regarding the question I raised in the supplementary question earlier about prevention of profiteering, because many consumers on the streets are not seeing the significant oil price reduction translating into food prices and transport prices. These are the concerns on the ground. I hope the Minister could enlighten us on whether there are measures to stop companies from profiteering.

Mr Lim Hng Kiang: Our main approach is to ensure that competition forces are at play. This is regulated and supervised by the Competition Commission of Singapore. In sectors where they are regulated, then, of course, we have to make sure that the regulation is transparent and the factors are clearly seen by everybody. For example, in the utilities sector, this is a regulated sector, and EMA regulates this on a very transparent formula, taking into account fuel prices as well as other costs. As I had explained in my reply, this has translated into a significant drop in the utilities prices.

For the other sectors, for example, pump prices, we have to depend on competition and market forces to make sure there is no profiteering.