INCREASE IN PETROL PUMP PRICES (Rationale)

[Mr Speaker in the Chair]

Mr Tan Soo Khoon asked the Minister for Trade and Industry what is the rationale for the recent increase in petrol pump prices.

The Minister for Trade and Industry (BG George Yong-Boon Yeo): Mr Speaker, Sir, first let me say how honoured I am to have been asked the first question by the former Speaker.

With growing tension in the Middle East, oil prices have been going up and we are seeing this reflected in the prices of petrol.

Generally speaking, petrol pump prices are determined by market demand and supply. Consumer demand for the various grades of petrol determines the overall demand. On the supply side, costs depend on several factors, including the costs of storage and distribution, the prices of crude oil and wholesale petrol, and the foreign exchange rates. Crude oil prices account for about 20% of the pump price. In the short run, as consumer demand does not adjust rapidly, changes in pump prices generally reflect changes in these cost factors. However, because of the oligopolistic structure of the industry, prices tend to be sticky both ways.

The Consumers Association of Singapore (CASE) has asked the oil companies to justify the recent increases in petrol pump prices. One of the oil companies, ExxonMobil, has explained in detail in the Straits Times on 28th March that the rise in wholesale petrol prices since January this year was the main factor that contributed to its decision to raise petrol pump prices.

The key question is whether there is price fixing by the oil companies. Looking at the fluctuations, the Ministry of Trade and Industry finds no evidence of collusion by the oil companies either to restrict supply or to raise prices. Either would be frowned upon by the Government and would be illegal once we put in place a Competition Law.

The recent price increases follow decreases in petrol prices last year. For the period between July 2001 and December 2001, crude oil prices fell by approximately 26%. Around the same period, and after taking into account a time lag, petrol pump prices fell by 14%. Part of this reflected the reduction in petrol taxes announced in October 2001 as part of the off-Budget measures. I have circulated a chart showing changes in the prices of crude oil and petrol from 1993 to February this year. Last year, I circulated a similar chart. Import Price Index for Crude Oil (1998 = 100) and Consumer Price Index for Petrol (1998 = 100) - January 1993 - February 2002

To keep the retail market for petrol as competitive as possible, our policy is to facilitate the entry of independent petrol retailers. Last year, I announced to the House that we were planning to introduce "white pumpers". These are petrol-pumping facilities annexed to supermarkets and commercial buildings. MND has identified several sites but detailed studies need to be made to ensure that safety, traffic flow and environmental requirements can be met. After September 11, the security considerations have become more severe and this has caused a delay in the sites that we intend to let out for white pumps. Some parties have expressed interest to operate these white pumps.

Mr Tan Soo Khoon (East Coast): Sir, if there is no price fixing among the major petroleum companies, why is it that price increases are always more or less by the same quantum amongst the oil companies, and why is it that the price increase takes place almost on the same day?

BG George Yong-Boon Yeo: Mr Speaker, Sir, this is a well known phenomenon in economics. When an industry structure reflects high fixed cost and, where there are few players involved, normally, the lowest cost producer will be the price leader and the rest will follow suit. In such an industry, there is a tendency for price instability and for price wars to happen. So the smaller players have to be very careful not to trigger off a chain of events which may lead to price wars and they will normally take the lead from the price leader. This is called monopolistic competition by some economists. It reflects the nature of competition in oligopolistic structures. The airline industry faces the same problem. Many chemical industries face the same problem.

Mr Tan Soo Khoon: Sir, if that is the case, why is it that the smallest petroleum company in Singapore, which is the Singapore Petroleum Company, with only five or six outlets in Singapore has managed to keep its price low and has not increased price and, in fact, is offering a discount?

BG George Yong-Boon Yeo: Mr Speaker, Sir, I do not know, but I can guess that its position in the market is too small for it to cause sufficient reaction from the other players. Oil companies compete in different ways, some offer free tissue paper, some offer loyalty programmes. So there are different ways to compete and to hold on to your customers. The question is: should MTI intervene in the market? We should intervene if it is clear that there is abuse of dominant position, or if there is price fixing. As I said, if you look at the chart which I have distributed and if I may draw Members' attention to it, we have two indices, one is crude oil prices which fluctuate quite a lot and are going up again because of tension in the Middle East. Then we have fluctuating with a time lag, in a much more sticky way, variations in the price of premium petrol. I can understand why as consumers we get very upset when we see pump prices going up. When pump prices go down, it attracts less attention. This is natural as consumers. These indices reflect nominal prices. If you look at the price in January this year and compare it to, say, January 1993, nominal prices have not changed very much. But I do not think that on the basis of prices we can draw an automatic conclusion that oil companies are deliberately fixing oil prices at high levels.

Mr Tan Soo Khoon: One last question, Sir. Would it not be more logical to suggest that the larger oil companies, and quite naturally, will enjoy larger economies of scale than the smallest oil company and they are in a better position to follow the price set by the smallest company which is, I presume, still making good profits?

BG George Yong-Boon Yeo: Mr Speaker, Sir, I am not familiar with the prices offered by these five SPC outlets. I do not know whether they have the same loyalty programme, whether they offer the same free gifts and points ---

Mr Tan Soo Khoon: $1.234 less 10%.

BG George Yong-Boon Yeo: Do they offer the same points?

Mr Tan Soo Khoon: No.

BG George Yong-Boon Yeo: Consumers will make their own decision whether they want to collect points, or whether they want to take lower upfront prices. But let us say that Mr Tan is right that these five outlets offer prices which are much lower than the other retail outlets, then consumers will vote with their wheels, which means that when new sites are available for tendering, SPC will be able to offer higher prices for these sites because they are much more competitive. In other words, the market should be able to resolve this problem, if there is a problem.

Assoc. Prof. Low Seow Chay (Chua Chu Kang): The Minister tries to justify that there is no price fixing among the oil companies. So he tries to use the crude oil price in relation to the premium petrol price. If you really look at the drastic increase and fluctuations of the crude oil price as compared with the relatively moderate fluctuation of the premium petrol price from the chart, I would like to ask the Minister does he arrive at the conclusion that, at the moment, in fact, the oil companies are making lesser profit as a result of the adjustment of the pump price. That is the first question.

The second question is that the chart does not reflect the profit level of the oil companies. I think what people are actually unhappy about is the high petrol price and that has resulted in high profits by the petroleum companies. So if you look at the international petroleum spot price, I would like the Minister to comment whether I am right or not on this particular matter. The international petroleum spot price for 98 RON petrol ---

Mr Speaker: Mr Low, could you ask your question?

Assoc. Prof. Low Seow Chay: I am asking my question.

Mr Speaker: Please do so.

Assoc. Prof. Low Seow Chay: I am asking the Minister whether I am right or not. The 98 RON petrol price based on the international petroleum spot price on 12th March this year was 32.9 cents per litre and the pump price, after deduction of the Government tax, the margin gained was 42.4 cents. Assuming that I am not familiar with the cost of operation - the cost is not much because we are very competitive in terms of our so-called business costs - they are making 130% margin from the international petroleum spot price. I would like to ask the Minister whether this kind of margin is acceptable.

BG George Yong-Boon Yeo: Mr Speaker, Sir, I am not really in a position to answer that question. The data is not available to me. We do not require them to be presented or audited by any regulatory agency. It may be that there is a higher margin, but then the cost of distributing petrol is not cheap either. They have got to tender for the sites. They have got to ensure that safety is maintained. They have got to hire people, many operate 24 hours. The cost structure varies from industry to industry, from product to product, and the fact that there is a high margin over the wholesale price, by itself, does not indicate anything.

A matter of principle is this. Should Government be concerned with whether oil companies are making money or losing money? If we decide that we are going to regulate prices and regulate profits, then there is no end to it. Some years ago, one major oil company protested strenuously to MTI that MND was releasing more sites for petrol pumps. It had earlier tendered for sites thinking that we are going to restrict the number of these sites and so it paid a lot of money at the tender. So he came to me and said, "Look. Yes, it was not legal but surely there was an understanding." I said, "I am sorry. MND has its own policy on the release of sites for petrol pumps and these are the risks that you take." So we are not responsible for the losses they make, neither are we responsible for the profits they make. But for Dr Low's exact question as to whether the margins are justifiable or not, I am in no position to answer his question.

Mr Yeo Guat Kwang (Aljunied): Mr Speaker, Sir, I would like to ask the Minister what measure will MTI consider to ensure that consumers' interest will be safeguarded in sectors like this where there is little or no competition. Besides white pumps, how can we introduce more competition into the petrol retail sector?

BG George Yong-Boon Yeo: Mr Speaker, Sir, we are open to suggestions. White pump was an idea suggested to us slightly over a year ago and we thought it was a good idea. White pumps are available in some countries, like Britain, where they have attained a certain market share and so we decided to introduce them. If CASE or anyone here has got ideas on how to introduce more competition to the business, MTI keeps an open mind. There is no reason for us to want to restrict competition.

Our general policy towards the economy is that competition is good and competition should be encouraged. Should we regulate to ensure competition, like through a Competition Law, which is the question which has been raised a few times in this House? There is a draft being circulated among the Ministries and various economic agencies. There are a lot of problems because, sometimes, when you regulate to force competition, you may in fact end up creating anti-competitive practices and imposing a higher cost on the economy. The key is to regulate, but regulate lightly. Right now, the various regulatory agencies are responsible for competitive behaviour within the sectors they regulate, eg, in telecoms, power, health care or whatever. But whether there should be an overarching competition law, it is something that we are now considering seriously. We have not decided definitely to proceed. It is likely that we will, but the details are very important and we are making sure that before we present a Bill to this House, we have consulted widely with the industries.

Dr Teo Ho Pin (Holland-Bukit Panjang): Mr Speaker, Sir, may I ask the Minister whether the increase in oil prices will lead to an increase in electricity tariffs, and whether the Government will soften the impact on consumers and businesses, if there is any such increase.

BG George Yong-Boon Yeo: The increases in energy prices must be reflected in electricity tariffs. I think that is necessary. We must ensure that the signals get passed through to the economy so that every consumer and every industry makes its own adjustments to these price signals. Should the Government ameliorate it? I would be against the Government ameliorating it directly, because then we would be making electricity artificially cheaper and, if we do so, there will be an over consumption of electricity. But the Government can always ameliorate its effects through income support, which this Government does from time to time.

Assoc. Prof. Low Seow Chay: The Minister does not seem to answer my question whether the profits are acceptable. I would like to ask the Minister, because he touched on the issue of tender prices for petrol kiosks.

Based on the tender prices that have been accepted in the past, I would like the Minister to comment whether I am right that they are still very profitable based on the following scenario. When a petrol station is available for tender and the land is about 30,000 square feet, the common tender price will be around $10 million. If we work that out in simple mathematical terms, it will be around $300 per square foot for a 30-year lease. If, let us say the price works out to be equivalent to a 99-year lease, the tender price for a petrol station in a noisy, dirty and very unattractive roadside would be even more than that for an Oxley Road residential land. If they tender for a piece of land at that kind of price and the profit is not good, why should they do so? Could the Minister prove that I am wrong.

BG George Yong-Boon Yeo: Mr Speaker, Sir, I am not quite sure I understand the point of Prof. Low's question. If it is so self-evident that running a petrol kiosk is so profitable, then I am quite sure that the next time sites are available, Prof. Low will be one of those who will tender for those sites.

Assoc. Prof. Low Seow Chay: Sir, I accept the challenge if I can run a petrol company.