THREE-QUARTER TANK RULE FOR CARS GOING INTO MALAYSIA (Suspension)

Mr Simon S. C. Tay asked the Minister for Finance, in view of the prevailing high petrol pump prices, if the Government will suspend the three-quarter tank rule for cars going into Malaysia in order to increase competition.

Dr Richard Hu Tsu Tau: Mr Speaker, Sir, the three-quarter tank rule was introduced to ensure that cheaper petrol in Johor would not undermine our use of petrol duties to curb vehicle usage and limit traffic congestion in Singapore. It is therefore not appropriate to suspend the three-quarter tank rule on account of higher petrol prices in Singapore.

The Minister for Trade and Industry had informed the House in January this year that his Ministry is studying how more competition can be introduced into the petrol retail business and is working with the Ministry of National Development to study the feasibility of allowing 'white pump' sites to dispense petrol without compromising on fire safety and environmental requirements.

Mr Simon Tay: Sir, does the Minister appreciate that the rule used to be a half-tank rule and, secondly, in that sense, we have increased the margin of protection that the local oil companies have in refusing to lower their prices?

Dr Richard Hu Tsu Tau: Sir, the reason why the half-tank rule was changed to the three-quarter tank rule was because the half-tank rule was manifestly inadequate to achieve the purpose which we have set out to do. There was still considerable leakage due to motorists leaving their tanks half full and filling up in Johor. Bearing in mind the very large differential in price between Johor and Singapore, the half-tank rule would not have been effective.

I do not see the direct correlation between high duty price and the oil companies' prices, which are set independently of the level of Government duties.

Mr Simon Tay: Sir, would the Minister appreciate that we are actually setting up a market in the sense that every rule we create structures the ability of the oil companies to fix their prices? I would suggest to the Minister that if the half-tank rule was reinvoked, actually the margin of their price being higher would be narrowed and, therefore, there would be more competition in the market that Government has created.

Dr Richard Hu Tsu Tau: I am afraid I do not follow this logic at all. I think Mr Tay might want to explain to us in detail how this particular mechanism will work.

Mr Simon Tay: Mr Speaker, may I ask the Minister: would he not accept that if there was no rule at all regarding filling up your car in Malaysia, there would be more competition, especially for the petrol stations in the northern part of the country? Assuming that is the case, the Government actually helps structure the market for competition for Singapore petrol pumps vis-a-vis Malaysian petrol pumps by this rule.

Dr Richard Hu Tsu Tau: I am afraid that is not possible. If you look at the difference in price, there is no way, even if we remove all duties in Singapore, for the Singapore oil companies to compete with the price in Johor largely because Johor petrol prices are fixed by the government at a level which they believe they want to sustain in a country which not only produces petroleum on its own but has a large car population which they want to promote. So I do not think it is feasible.

Mr Simon Tay: Sir, I do not mean to belabour the point. But I am asking the Government not to fix the price as Malaysia does, but rather to fix the market. The market that Government has created, first, by setting the three-quarter tank rule (raising it from the half-tank rule), from limiting the number of sites which petrol pumps can be situated and by licensing of petrol pumps, has led to a situation where there is a near cartel which has proven that prices have been sticky upwards.

Dr Richard Hu Tsu Tau: I think this is a very sensitive subject. We understand his concern. But petrol stations are sited by the Ministry of National Development in places where they do not disrupt the environment, and are tendered out. So that, in some way, fixes the cost of retailing petrol. The proposal to set up "white sites" would allow more non-major oil companies, presumably, to set up petrol retailing sites, although where they would buy the raw petrol from, I am not clear, because we are not a country which is near major sources of refined products. The only suppliers of petroleum here are the major oil companies. So unless you are proposing to import finished fuel directly from the Middle-East, then you are really going to find it very difficult to compete.

On the issue of price-fixing and cartel procedure, the Minister for Trade and Industry had, in fact, addressed this particular problem, in response to a series of questions in January this year when Dr Teo Ho Pin asked him what measures could be taken to address the apparent oligopolistic behaviour of oil companies in Singapore. And he had given a very comprehensive answer. I would refer Mr Tay to read the details in the Hansard. But I would just quote briefly from his first paragraph:

`MTI's study shows that petrol pump prices have moved in tandem with crude oil prices in the past, but with a time lag.' In fact, petrol pump prices generally move with crude prices after a lag, both upwards and downwards. In other words, if crude oil prices move up, petrol pump prices will not move up simultaneously but with a pronounced lag, and the reason for this is quite clear if you look into how petroleum products are produced. Crude oil is bought in the Middle-East from OPEC producers. It has got to be shipped 10,000 miles, through a long supply chain, to a refinery. It may be three months before crude purchased at higher prices would actually reach the pump. So a lag is inevitable. The reverse works the same way. If prices of crude fall, the lower crude price will not be reflected in the pump price until after a lag. So these lags must occur because of the nature of the supply chain.

In the second paragraph, MTI has said that it "has found no evidence of price fixing by the oil companies. Because the industry structure is oligopolistic, . price movement tends to be sticky and the companies prefer to compete on free gifts and loyalty benefits." Generally, in the market of this sort where you have a few major producers or retailers of petrol, prices tend to equate largely because the cost of producing a litre of petrol nowadays is not very different between one company and another. The difference is quite small. Companies are all equally large, they buy crude from the same people, their refinery costs are not significantly different, shipping costs are not significantly different, they tender for their sites in Singapore, so their retail costs are not that different. So in the end, differences in pump prices will not be very large. That being the case, the market leader who has the largest network of retail sites would probably have the lowest unit cost. Therefore, he sets the price and he becomes the market leader.

The other companies who have comparable retail prices would then just follow the leader. If they try to compete by slashing price directly, I think, in the end, they would not succeed. I think this is the nature of retail oil in a country like Singapore, where the oil business is dominated by major companies who have very long supply lines. If you are operating a retail outlet in the United States, the situation is quite different because the US has many independent oil producers with widely varying oil production costs, and that allows them to have different pricing structures. I hope I have explained the matter.

Mr J. B. Jeyaretnam (Non-Constituency Member): Mr Speaker, Sir, this is not the first time he has told us that the reason for the imposition of this tank rule was because revenue was dropping. May I ask him: is the loss in revenue that heavy that the Government cannot forgo that and help Singapore citizens to get cheaper petrol?

Dr Richard Hu Tsu Tau: Indeed, there are two parts to this petrol tank rule. One is to set the price high enough to discourage excessive use of cars. In the process, of course, Government gains revenue. And I can assure Members that the revenue gained is not insignificant. In fiscal year 2000, petrol duties collected were $500 million. So if we lifted the three-quarter tank rule, based on the average of 3.4 million cars which crossed into Johor Baru last year, the estimated loss in tax for 95 octane petrol - based on the assumption that an average 1.6 litre car would be able to buy, say, 50 litres of petrol - would be in the region of $80 million, and this is not peanuts.