OPEC'S REDUCTION OF CRUDE OIL

Column No : 3241

OPEC'S REDUCTION OF CRUDE OIL

17.

Mr Low Thia Khiang asked the Minister for Trade and Industry whether the recent announcement by the Organisation of Petroleum Exporting Countries (OPEC) to reduce production of crude oil will affect the Singapore economy and result in a surge of electricity charges.

BG George Yong-Boon Yeo: The Organisation of Petroleum Exporting Countries (OPEC) announced on 24th September 2003 that it would slash 900,000 barrels a day from its production ceiling. The decision to reduce its output target by 3.5% to 24.5 million barrels a day was intended to pre-empt a possible fall in crude oil prices so as to keep prices within the cartel's official price range of US$22-28/barrel.

Since the announcement, the OPEC average daily price has risen from US$25.59/barrel on 24th September to US$28.60 by 9th October.

60% of our electricity generation draws on natural gas, and natural gas price is indexed to the price for high sulphur fuel oil (HSFO). HSFO price correlates closely with OPEC's oil price. Since the OPEC announcement, the price of HSFO has increased from US$23.22/barrel on 24th September to US$24.90/barrel on 9th October.

Since fuel cost makes up about 50% of the cost of electricity, any jump in oil price will affect our electricity price. The Energy Market Authority (EMA) reviews electricity tariffs every month and will allow an adjustment, if necessary, to reflect changes in oil prices. Electricity tariffs were last revised on 1st October 2003. At that time, the tariff was reduced by 0.75¢/kWh or about 4.6%. EMA will review the rates for November, and announce any tariff adjustment in the last week of October. Unless oil prices increase significantly, the monthly tariff adjustments are not expected to be large.

As to the impact on the economy in general, based on price trends to date, MTI does not expect the OPEC action to have a significant impact on the economy. Barring any unexpected shocks, it is unlikely that oil prices will rise significantly above the official OPEC price range of US$22-28 per barrel for a sustained period. If it does, OPEC and non-OPEC producers would likely increase output, which will pressure oil prices down. MTI will continue to monitor developments.