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Explainer: Why are Singapore's fuel pump prices at record highs and what does it mean for the economy?

SINGAPORE — Fuel prices at the pump have risen to their highest level on record in recent weeks, in the midst of an unabated hike in global crude oil prices due to a supply crunch and geopolitical turmoil in Europe.

Explainer: Why are Singapore's fuel pump prices at record highs and what does it mean for the economy?
Petrol and diesel prices in Singapore have hit record highs.
  • Pump prices of petroleum and diesel in Singapore are now higher than ever in dollar terms, not adjusted for inflation
  • On Feb 8, taxi operator ComfortDelGro announced that it is raising its fares due to inflation and rising fuel costs
  • Crude oil prices are rising, but they have not reached the same record highs in 2008 or 2014
  • The disparity between crude oil and petroleum prices is because petrol costs depend on more than just the cost of crude oil
  • Economists said higher energy costs could lead to sustained inflation that could affect economic growth

SINGAPORE — Fuel prices at the pump have risen to their highest level on record in recent weeks, in the midst of an unabated hike in global crude oil prices due to a supply crunch and geopolitical turmoil in Europe.

As of Monday (Feb 7), 92-octane petrol cost up to S$2.70 a litre, 95-octane petrol went for up to S$2.76 a litre, while 98-octane petrol surged past the S$3 barrier to reach up to S$3.25 a litre, based on figures by online price tracker Fuel Kaki, a project by the Consumers Association of Singapore.

Diesel prices, too, have reached a new high. Each litre of diesel cost between S$2.26 at SPC and S$2.33 at Shell stations as of Feb 7.

This means that fuel in Singapore now costs more than it ever did in terms of the quantum, not adjusted for inflation. The previous peak was in November last year when diesel was S$1.96 a litre, 92-octane was S$2.42, 95-octane was S$2.46 and 98-octane was S$2.97, official monthly data showed.

On Tuesday (Feb 8), ComfortDelGro announced that it will raise its taxi flagdown fares across its entire fleet of taxis by 20 cents from March, due to rising fuel costs and inflation.

The news comes as oil prices have climbed to the highest point last month since 2014, with the Brent benchmark for crude oil reaching as high as US$93 a barrel on Feb 7, before tapering down to US$92 a barrel the next day. Crude oil had hit US$110 a barrel in 2014.

The oil rally came as part of a perfect storm of factors, including a prolonged underinvestment in the oil industry and lagging production that is slow to meet current demand, as well as geopolitical factors.

There has also been a structural shift towards green energy investments at the expense of oil, gas and coal.

Newsweek magazine reported last year, for instance, that regulators in Europe have aggressively shut coal plants.

Some banned fracking (short for hydraulic fracturing, a method of getting oil or gas), while others have refused to invest in nuclear energy, putting Britain and the European Union at the mercy of renewable energy and natural gas, most of which comes from Russia.

We’ve seen food prices go up recently, because it costs more to put food and drinks on your table. And all manner of other things, too, including construction, travel, manufacturing of products — they are all affected by higher energy prices.
Mr Song Seng Wun, economist with CIMB bank

Should armed conflict break out between Ukraine and oil-producing Russia, which also supplies oil to Europe, the price of crude oil and its refined products such as petrol will undoubtedly rise, experts said.

Mr Ravi Krishnaswamy, senior vice-president of energy and environment for the Asia Pacific at market research firm Frost and Sullivan, said: “Clearly, that scenario will rattle markets and could push the prices above US$100 per barrel, and perhaps even US$120.”

WHY PETROL PUMPS DON’T MATCH OIL PRICES

In any case, oil prices have yet to reach historic highs, such as during the oil price bubble in 2008 when each barrel of crude oil cost US$147.

So what explains the record-high pump prices in Singapore?

For one thing, the price of petroleum is affected not only by the per-barrel cost of crude oil, but other factors as well.

The Covid-19 pandemic, shipping woes and supply chain issues, as well as the rising cost of non-oil raw materials has led to global inflationary pressures that affect costs across the board, including the cost to refine oil into petrol.

Last October, the surging price of natural gas threatened to swallow the profits of oil refiners and force them to reduce fuel production, news agency Bloomberg reported.

Oil refineries rely on the hydrogen from natural gas — methane, in particular — to eliminate sulphur during the diesel production process.

Among other things, crude oil is also refined into jet fuel, which suffered from a drastic loss in demand when aviation was decimated during the Covid-19 pandemic. Producers then cut back on pumping oil, which also has an impact on raising the costs of petrol production.

Distribution and marketing costs, which were affected by a diminishing workforce of fuel truck drivers in many parts of the world during Covid-19 shutdowns, also contributed to keeping pump prices high, experts said.

And then, there are petrol taxes.

In February, Singapore hiked petrol duties by 15 cents a litre for premium petrol and 10 cents a litre for intermediate petrol, as part of the Budget 2021 measures. This followed a petrol tax hike in 2015, when rates were raised by 20 cents for for premium petrol and 15 cents a litre for intermediate petrol.

Deputy Prime Minister Heng Swee Keat said last year that the increase in petrol taxes based on usage is meant to shape consumer behaviour towards a more efficient use of fuel or environmentally friendly alternatives.

Altogether, crude oil costs make up around half of the retail cost of petrol, the American Fuel and Petrochemical Manufacturers estimated last year.

Another reason why pump prices may not track closely with crude oil benchmarks is because petrol retailers base their prices decisions on the Mean of Platts Singapore (Mops) price, which is the price at which petrol retailers buy refined wholesale petrol from the refineries.

In 2015, the Competition Commission of Singapore sought to find out the decision-making of petrol retailers following public feedback that listed petrol prices did not rise and fall with crude oil prices.

Its report in 2017 concluded that “listed petrol prices do not reflect wholesale price movements completely and immediately”, often adjusting their prices in tandem with the Mops price for an average of eight days for price increases, and six days for price decreases.

Mr Krishnaswamy said that some petrol retailers also have long-term contracts with refiners, and likewise between refiners and oil importers, which has an effect on this lag time as well. Integrated companies such as Shell, however, control the entire chain and thus have a different calculus.

“There will be a lag effect, because the pump prices are not directly linked to crude prices, and they are determined independently by the companies, some of which are refiners and some are retailers,” he added.

WHAT TO WATCH OUT FOR

The rise in petrol cost will impact vehicle users directly. Private transport prices, which are affected by petrol costs and vehicle prices, grew by 15.5 per cent last December, continuing a double-digit percentage point inflation that began in April 2021.

But oil prices are also closely linked to business input costs, since much of the world’s commerce and trade depends on transportation and travel. This could also be passed on to consumers, experts said.

Mr Song Seng Wun, an economist with CIMB bank, said that rising energy prices is one key reason why the prices of most things, across all categories of goods and services, are going up.

“We’ve seen food prices go up recently, because it costs more to put food and drinks on your table. And all manner of other things, too, including construction, travel, manufacturing of products — they are all affected by higher energy prices,” Mr Song added

Mr Krishnaswamy said that this is why Monetary Authority of Singapore is looking to counter rising inflation. Last month, the central bank unexpectedly calibrated its monetary policy to cater for inflation in an off-cycle move.

The worry will be that a sustained rise in input costs, and thus prices, could ultimately dampen demand and affect economic growth, Mr Song said. This could set back the already fragile nature of post-pandemic economic recovery.

If this is combined with rising unemployment, it could lead to an undesirable outcome known as stagflation, which is a dangerous combination of high inflation and unemployment, and a weak economy.

Thankfully, given the tight labour market here and around the world, this does not appear to be the case today, Mr Krishnaswamy said.

“I don’t see stagflation panning out in Singapore or globally, perhaps only in some markets where that can happen. That said, it is worth watching out for that in the medium term.” 

Related topics

petrol fuel price crude oil price inflation cost of living transport

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