Plunge in crude oil prices will not necessarily lead to drop in petrol prices: MTI

SINGAPORE — The plunge in crude oil prices globally does not necessarily mean that consumers would enjoy lower petrol prices, said Senior Parliamentary Secretary for Trade and Industry Tan Wu Meng on Tuesday (May 26).

Responding to a question by Member of Parliament (MP) Ang Wei Neng, Dr Tan told Parliament that petrol pump prices are affected by other factors such as the petrol companies’ operating costs and lag time.

Mr Ang, an MP for Jurong Group Representation Constituency and chief executive officer of transport company ComfortDelGro Taxi, asked whether there were indications that major oil companies in Singapore are behaving like an oligopoly, and whether the Ministry of Trade and Industry will require them to publish their lowest petrol and diesel prices.

On April 20, oil prices in the United States dropped below zero — the first time in history — as demand has fallen sharply amid the global economic fallout from the Covid-19 pandemic.

The Brent Crude, another commonly used benchmark for oil prices, also fell to US$16 a barrel on April 22, the lowest in two decades.

WHY DID OIL PRICES PLUNGE?

As global economies come to a standstill with governments imposing lockdowns to curb the spread of the coronavirus, the demand for oil fell and there is now a lack of storage space as inventories pile up, said Dr Tan.

In the case of US oil, the negative prices meant that oil traders were paying buyers money to offload their oil barrels.

WHY PETROL PRICES DO NOT FALL IN TANDEM

Dr Tan explained that crude oil is further refined into various other products, such as retail petrol, jet and bunker fuels, which are produced in similar proportions.

As oil producers respond to a drop in demand for jet and bunker fuels, they may decide to reduce production, which would affect the supply of retail petrol as well.

If there is no change to the underlying demand for retail petrol, the reduction in supply would increase its prices instead, said Dr Tan.

“This effect could be more pronounced and persist in the medium to longer term if more refineries across the world shut down temporarily or for good, due to a mixture of the impact of Covid-19 and persistent, low demand,” he added.

With a full inventory now, oil refiners will probably need more time to sell their existing products before they can bring in new supply.

And if they are still processing the crude oil bought before the slump, Dr Tan said that there may be a longer lag time before lower crude oil prices can be passed on to consumers.

He also explained that the price consumers pay for petrol also depends on the petrol companies' operating and land costs, taxes and rebates.

A study done by the then-Competition Commission of Singapore in 2017 found that refined petrol costs made up less than a third of the petrol price for which consumers paid.

This prompted MP for Mountbatten Lim Biow Chuan, who is also president of the Consumers Association of Singapore, to ask whether oil companies could publish the breakdown of such costs then, in the interest of price transparency. 

Dr Tan replied to say that the 2017 study found that retail petrol prices increase and decrease by an average of 7 cents whenever there is a 10-cent change in the benchmark pricing for refined oil products in Asia, which is known as the Mean of Platts Singapore (Mops).

Increases in retail petrol prices took place over eight days when Mops pricing went up, while the reverse happened over six days.

Hence, Dr Tan also said that there is no evidence to show that retail petrol prices decrease slowly when crude oil prices drop, but go up faster when crude oil prices increase, contrary to popular perception.

He added that consumers can visit the Fuel Kaki website to compare petrol prices after taking into account the various discounts and rebates that they can use.

“This customised information is more meaningful to consumers than providing fuel prices based on the best discounts, which the retailers may not apply to every individual,” he said.

IS THERE PRICE FIXING AMONG OIL COMPANIES?

Dr Tan said the 2017 study found that major petrol retailers regularly monitor and respond to one another’s prices and promotions, but that prices do not always move in tandem among themselves.

There was also no observable pricing pattern, such as a clear price leader.

But Mr Ang responded to say that the many parliamentary questions filed on fuel prices showed that many MPs and members of the public were not convinced that oil companies are behaving fairly.

He asked whether MTI would consider injecting more competition into the local petroleum market by removing the rule that requires Singapore vehicles to fill at least three-quarters of their tank with fuel before leaving Singapore through its land checkpoints.

This would encourage more motorists to head to Malaysia to fill their tank, he said.

He also suggested that white pump operators — which usually refer to transport companies that have their own stock of fuel for their vehicle fleet — be allowed to sell their diesel to consumers.

Right now, it is illegal for these operators to do so.

In response, Dr Tan said the three-quarter-tank rule is part of a suite of rules to encourage lower car usage and reduce carbon emissions.

As for allowing white pump operators to sell their fuel to consumers, he said that the Government is prepared to consider Mr Ang’s suggestion. But this has to take into account factors such as land use, land allocation and safety, Dr Tan added.