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Explainer: What MTI's review of retail fuel prices entails and the possible outcomes

SINGAPORE — Commenting on the Government's plans to review the retail fuel market here as pump prices soar, experts said that the likely outcome of this review would be greater deterrence against anti-competitive behaviour among fuel companies here, such as collusion to raise prices. 

It was said in Parliament that the Competition and Consumer Commission of Singapore  had contacted retail fuel operators for data on fuel price movements.  
It was said in Parliament that the Competition and Consumer Commission of Singapore had contacted retail fuel operators for data on fuel price movements.  
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  • The Government will be reviewing the retail fuel market here as prices rise
  • Analysts said the likely outcome would be more deterrence against anti-competitive behaviour among fuel companies 
  • This will have a signalling effect for firms to fall in line, but may not lead to a reduction in fuel prices 
  • Other policy tools such as government fuel subsidies and price ceilings will not be considered, analysts said
  • This is because these are deemed to be too disruptive to the market

SINGAPORE — Commenting on the Government's plans to review the retail fuel market here as pump prices soar, experts said that the likely outcome of this review would be greater deterrence against anti-competitive behaviour among fuel companies here, such as collusion to raise prices. 

Other policy tools such as government fuel subsidies and price ceilings will not be considered because they are deemed to be too disruptive to the market, the analysts added. 

The Competition and Consumer Commission of Singapore (CCCS) had done at least two similar reviews before in 2011 and 2015. Both reviews found that there had been no evidence that the retail petrol market was uncompetitive. 

TODAY explains the reasons behind this approach, and why alternative policies such as subsidies for fuel will likely not be considered. 

WHY THE FOCUS ON ANTI-COMPETITIVE BEHAVIOUR

Responding to a question on whether the Government would regulate petrol and diesel pump prices, Ms Low Yen Ling, Minister of State for Trade and Industry, told Parliament on Tuesday (July 5) that any governmental move to regulate petrol and diesel pump prices would cause disruptions in the market, benefit car owners that consume more petrol and discourage the push towards energy-efficient modes of transport. 

She said that instead, the Government's approach is to ensure that there is a competitive fuel retail market. She added that CCCS had contacted retail fuel operators for data on fuel price movements.  

Mr Irvin Seah, a senior economist at DBS bank, said that while it is hard to second-guess the outcome of the review, he foresees a stronger deterrent to guard against any anti-competitive behaviour. 

However, this may not result in lower fuel prices for consumers, but it will at least give them the assurance that the prices they see are truly market prices. 

"It is to achieve a signalling effect... to ensure that the firms do not embark in any anti-competition behaviour," Mr Seah said.

"It's basically an attempt to ensure that the market dynamics is efficient and there is no other anti-competitive behaviour.”

Ultimately, the rise and fall of fuel prices will be dictated by market forces, he added. 

Another expert, Dr David Broadstock, said that although there is no evidence that fuel companies here are setting higher prices for greater profits, collusive behaviour can occur in subtle ways. 

Dr Broadstock heads the energy economics division at the National University of Singapore's Energy Studies Institute.

He said: "There may be tacit collusion... where you look at what the (competitors) do and you do the same. You're not really sitting in a backroom and agreeing (to collude)." 

For example, if one petrol company observes that its competitor has raised prices by 10 per cent, there is an opportunity to raise prices as well by any number up to 10 per cent, and it can "still be relatively more attractive", Dr Broadstock added. 

This is detrimental to consumers, but it would make sense for firms from a business point of view. 

"Companies do have to make profit and they will always have the pressure to achieve the best value for their stakeholders." 

WHAT ABOUT ALTERNATIVE POLICY MEASURES?

Mr Seah from DBS highlighted two potential policy measures that could in theory reduce prices for consumers: Implementing a price ceiling on petrol and subsidising the product. 

However, they are not the best solutions.

"Any form of control measures at this point in time could potentially cause more distortion in the market," he added. 

When there is a price ceiling, it could push prices so low that firms are no longer able to make profits, or they are simply incurring losses should costs outpace revenue. 

"If you put a price ceiling on certain essential commodities and products, the likely scenario is that some local suppliers will no longer want to supply it," Mr Seah said. "It will no longer be profitable for local suppliers."

He cited the example of Malaysia's price ceiling on poultry, which inadvertently led to the export ban on live chickens. 

"It was not profitable for some producers to supply to the domestic market, so they rather export to Singapore," he said. "If they had kept on producing and kept farming, it would result in more losses for them." 

Then, there is also the option of fuel subsidies by the Government, which is a policy measure adopted in Indonesia. 

"Subsidy of fuel means that the Government is subsidising the consumption of petrol, and this will not encourage Singaporeans to adopt cleaner and greener options in their transportation," Mr Seah said. 

There may even be an overconsumption of fuel and petrol in Singapore should a subsidy be introduced. 

"Either way, whether price ceiling or subsidy, it is not going to work as it is going to distort the market and create unwanted consumer behaviour."

ARE HIGH FUEL PRICES FAIR TO CONSUMERS? 

While the review is underway, higher retail prices may be expected anyway even during periods when global oil prices fall, the analysts said.

However, this may not be due to collusive behaviour, Dr Broadstock said. 

The war in Ukraine has created a volatile fuel market, which means that the price of oil is constantly changing, and this puts petrol firms on the edge. 

"The war creates uncertainty in supply chains as well as high price conditions, and none of that suggests that companies should be lowering prices as soon as they possibly can," he added.

"If they lower the price by 10 per cent today, and oil costs increase by 10 per cent tomorrow, then they'll be hit doubly bad." 

Dr Broadstock also said that fuel companies could be considering a "new decision-making process" behind setting prices to weather these fluctuations, and this would not be considered anti-competitive behaviour. 

"If I choose to offer a high price for fuel at the pump, it is perhaps to ensure that I create the cash flows for my company... because market conditions are uncertain.

"Consumers always want the lowest prices, but the lowest price doesn't always mean that it's the right price," he added.

"Unfortunately, the right price may be a much more uncomfortable, higher price." 

Related topics

fuel price petrol price MTI CCCS collusion profiteering

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