Oligopolistic Behaviour of Major Oil Companies and Realistic Petrol Pump Prices in Singapore

7 Mr Ang Wei Neng asked the Minister for Trade and Industry (a) whether there are indications that the major oil companies in Singapore behave like an oligopoly; (b) what is the realistic selling price of the popular Octane 95 petrol when the crude oil price is zero or less; and (c) whether the Ministry will mandate oil companies to publish their lowest petrol and diesel prices after their best discounts.

The Senior Parliamentary Secretary to the Minister for Trade and Industry (Dr Tan Wu Meng) (for the Minister for Trade and Industry): Mr Speaker, the Member’s query speaks of important, deep questions, which can be described as follows: why did some crude oil prices go to zero or less, and what does it mean for retail petrol prices? When is an oligopoly market structure harmful to consumers? And how do we help consumers find the best fuel prices, regardless of crude oil price or market structure?

Sir, firstly, on crude oil prices. Brent Crude is the most commonly used benchmark in the world. Brent Crude fell from US$28 per barrel at the start of 20 April to a low of US$16 a barrel on 22 April, the lowest price in over two decades. The United States generally relies on a different benchmark, the West Texas Intermediate (WTI) Crude, which fell from US$18 to minus US$38 per barrel on 20 April.

Observers have cited the much reduced demand for oil because of the COVID-19 situation as a key factor in explaining the trends for both cases. At the same time, supply has far exceeded demand. So, inventory was filling up, and in a number of markets there was lack of storage space. Some analysts have noted that WTI Crude oil faced an acute shortage of storage space and thus traders were paying money in order to offload expiring contracts that carry a commitment to receive WTI Crude this month; hence, the negative trading prices for WTI Crude.

What does this mean for Singapore and Singaporeans? While a drop in oil prices generally results in a drop in retail petrol price, this may not always happen, because of many other factors which affect retail petrol price. I seek your indulgence as I explain why.

Sir, crude oil is made of many different types of hydrocarbon molecules. The refining process separates the hydrocarbons in crude oil into different products such as retail petrol, jet fuels, bunker fuels, asphalt and naphtha. The proportions are more or less fixed. So, if there is a change in demand for one of the refined products, it can affect the supply and demand situation for the others.

The COVID-19 situation is a real-world example. The demand for jet fuel has dramatically fallen because of travel restrictions around the world. Hence, refineries will need to store the excess jet fuel supply, reduce the price of jet fuel to move the supply, or reduce the production of jet fuel altogether.

Storing excess supply is only viable and sustainable if the refinery has enough storage space, with the assumption that this excess supply could eventually be sold. Reducing the price of jet fuel may not move the supply much, if jet planes are not flying – as we have seen with the fall in demand due to travel restrictions from COVID-19. And if the demand for jet fuel continues to be low, the refinery may decide to reduce the production of jet fuel by refining less crude oil. This will reduce the production of other refined products, including retail petrol. And this would exert upward pressure on their prices despite no change to the underlying demand. 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.

Another potential outcome of low demand and full inventory is that refineries will likely need more time to sell their products before they can bring in a new supply of crude. If the refineries are still processing crude oil purchased before the plunge in prices, there may be a longer lag time before lower crude oil input prices can pass through to end products.

Hence, it is not certain that every plunge in crude oil prices would necessarily lead to a decrease in refined petrol cost.

Furthermore, in addition to the refined petrol cost, the price that consumers pay for petrol also depends on the petrol companies' operating costs, land costs, duties and taxes, and discounts and rebates. The detailed study published by then-Competition Commission of Singapore (CCS) in 2017 found that refined petrol costs accounted for less than one-third of the listed retail petrol price.

Sir, secondly, when does an oligopoly market structure become harmful for consumers? Oligopoly is a market structure where there are only a few providers in the market. Partly due to Singapore's relatively small market, an oligopolistic-type structure can be found in several sectors, including supermarkets and cinemas. Harm can arise if there is anti-competitive behaviour among the firms, for example, collusion to mark-up prices. The 2017 study found that the major petrol retailers do regularly monitor and respond to each other's prices and promotions, but also found that prices do not always move in tandem among the petrol retailers. Furthermore, there was no observable pricing pattern, such as a clear price leader, either for price increases or price decreases. The Competition and Consumer Commission of Singapore (CCCS) is monitoring closely and will take enforcement action should evidence of anti-competitive activity surface.

Thirdly, how do we help consumers find the best fuel prices, regardless of crude oil price or market structure? I had previously mentioned that well-informed consumers are a key deterrent against unreasonable pricing decisions. I highlighted the Consumers Association of Singapore (CASE)'s work on Fuel Kaki. The Fuel Kaki Price Estimator empowers individual consumers to compare not just the retail pump prices, but also the effective price of petrol across retailers, based on the various discounts and rebates specifically applicable to them. Fuel Kaki also allows individual consumers to explore what effective price would be paid, if they used different combinations of discounts and rebates across different retailers. 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.

Mr Speaker: Mr Lim Biow Chuan.

Mr Lim Biow Chuan (Mountbatten): Sir, if I may ask the Senior Parliamentary Secretary a question. I think the consumers are frustrated, because everytime there is a drop in crude prices, there seems to be a lack in the fall in pump prices. Whereas, the minute there is increase in crude oil prices, pump prices rise quite quickly. While the CASE is happy to work with CCCS to provide fuel prices in Fuel Kaki, I am just wondering whether MTI would be able to ask the fuel companies, in the interest of price transparency, to consider asking the fuel companies to provide or publish a breakdown of their costs components. That means the base costs of crude oil, the taxes, the land costs, their labour costs and so on.

This will be similar to what One Motoring or LTA publishes insofar as the price of cars are concerned. One Motoring publishes the Open Market Value (OMV), the Additional Registration Fee (ARF), the taxes as well as the base costs of cars. For consumers, I think it will help if they are able to understand what are the crude oil prices, what is the fuel component of it, so that when a fuel companies increase their prices, then they would know how much more the fuel companies are charging for the the fuel component of the costs.

Dr Tan Wu Meng: I thank the Member for his supplementary questions. If I can address his first point, which is whether petrol companies pass through more of the price change and at a faster rate when the crude oil prices go up, as compared to a decrease. And the answer is that, if you look at the empirical evidence, it does not suggest listed retail petrol prices adjust downwards more slowly or by a smaller amounts compared to upward price adjustments.

The 2017 report by then-CCS found that between January 2010 and December 2016, for every 10 cents change in Mean of Platts (MOPS) price, the listed retail petrol price changed by an average of seven cents.

This finding applied to both increases and decreases in price. On average, adjustments in listed retail petrol price, took place over eight days for MOPS' price increases and six days for MOPS' price decreases.

The Member also asked about the components of listed petrol prices. In 2015, MOPS made up less than one-third of total listed petrol price and the non fuel components such as operating costs, taxes, duties, land costs, discounts and rebates made up the remaining amount. Some of the information that the Member is interested in may well be commercially sensitive, but we are prepared to work with CASE, with our agencies and with the companies to see whether there are ways to put more of this information out there.

Mr Speaker: Mr Ang Wei Neng.

Mr Ang Wei Neng (Jurong): First, I want to thank Speaker for the opportunity to ask the questions and I also thank the Senior Parliamentary Secretary for the comprehensive reply. I would like to first declare my interest as CEO of the ComfortDelGro taxi business.

The fact that we have many questions over the last few months about fuel price, means that a lot of Members of the Parliament and also members of the public are not convinced that oil companies are behaving fairly. The fact that the five oil companies are making a lot of money, also adds to the suspicions.

I like what Senior Minister of State Chee Hong Tat said about the food delivery companies at the last sitting. Senior Minister of State Chee said that it may not be wise to cap the commission fees of the food delivery companies and the better way is to inject competition. Thus, MTI is encouraging the restaurants and food outlets to engage the delivery companies under the Food Delivery Booster Package. In that way, the end customers can get food from the food outlets directly without going through the food delivery companies.

So, in the same way, I would ask a supplementary question. Will MTI consider injecting competition to the local petroleum market? And there are two options, one is to remove the three-quarter tank rule, so that Singapore motorists can go to Johor Bahru to pump petrol when COVID-19 is over. However, Singapore Government will lose the petrol tax if the Singapore cars go over to Johor Bahru to buy petrol. The second option is to allow white pump operators to sell fuel to the general public instead of selling the fuel to their own the fleet of vehicles only. This is similar to the practice amongst the telcos where some of the players are buying bulk from the existing telcos, repackage these and sell broadband connection at a lower price to the end customers.

So, I hope MTI can consider injecting competition into the local petrol market to silence the criticism that major oil companies are profiteering.

Dr Tan Wu Meng: I thank the Member for his many extensive supplementary questions. If I take a bit of time, please cheer me on with "加油".

On the question about the three-quarter tank rule, the three-quarter tank rule is part of a suite of policy measures to encourage less car usage and reduce carbon emissions. These considerations remain relevant today. The Government will continue to ensure a well-functioning competitive petrol market against this backdrop.

There was also a question that the Member raised, about what some have called "white pump fuel dispensing". The idea, essentially, is, if you have a company that maintains a stock of fuel on site – some of these companies may do so because of a vehicle fleet – whether this stock can be sold onwards to consumers. At the moment, companies maintaining such fuel stocks for their own vehicles are not allowed to retail to the public. We are prepared to look at his suggestion and to consider it. But any consideration has to be done very carefully because there would have to be factors such as implications for land use and land allocation as well as ensuring safety for this.

The other issue that the Member alludes to is: how do we improve transparency in a way that the consumer, on a day-to-day basis, has that information easily. With your permission, Mr Speaker, may I ask the Clerks to distribute the handouts to Members?

Mr Speaker: Yes. [Handouts were distributed to hon Members. Please refer to Annex 1.]

Dr Tan Wu Meng: Sir, I will continue as the handouts are being distributed.

We can very much understand the interest in the listed pump prices. That, to date, has formed a lot of the discussion and discourse among members of the public. When you talk to uncles and aunties, it is often the listed pump prices that are at the top of the mind. But the listed prices can be different from the effective prices, which are what individual consumers pay after discounts and rebates.

The 2017 study by the then-CCS had found that there was a lack of ready access to, and awareness of, retail petrol prices by consumers. This prevented consumers from having the necessary information readily available to make the best petrol purchase decision. Following that study, MTI and CCCS worked with CASE to develop the Fuel Kaki website to help improve transparency for petrol prices.

The Fuel Kaki website does not just collate the listed pump prices. That is what you see at the top of the handout. But it also has a Price Estimator within. And as individual consumers, you can find out which petrol retailer offers the lowest effective price based on your individual eligibility for discounts and rebates. So, if you look at the handouts, what you can see is that the retailer with the lowest listed price may not be the one with the lowest effective price. You would also see that although listed prices are the same for most retailers, effective prices do differ even without any promotions or discounts other than the loyalty programme. So, although the handout has quite a small font size, I thought I would bring your attention to Figure 2, which is the effective price that one can get based on the loyalty programme only. You can see the bars are not quite exactly the same length and not exactly the same value, and that is reflected in the handouts which we have distributed to Members.

Consumers can also tick multiple boxes on the Fuel Kaki website to search across multiple petrol retailers and across multiple discounts and rebate programmes to find the lowest effective price. So, if you are curious, you want to see what the other promotions, options, discounts and rebates are, you can search. I know of users who will tick all the boxes and then they click search and the website gives a whole list, much like what you see in Figures 3 and 4 of the handouts that you have. And this helps individual consumers also find out if a different retailer with different discounts and rebates can give a better lower effective price.

Mr Speaker, actually, there is so much more to look at beyond the listed pump price; so much more to see when you look into the rebates and discounts when you look at the effective price. And Fuel Kaki puts that into the palm of your hand, on your smartphone, and you can search within a minute. That information can help you in so many ways. If you are a consumer, you can search for the lowest effective price; if you are an academic, it helps to have a single portal which you can look up, and I am sure there are many learned economists in this House and outside who would be interested. If you are a journalist or an analyst, it helps you, too.

So, by making it easier for consumers to compare effective prices, Fuel Kaki helps empower consumers and, as mentioned earlier, well-informed consumers are a key deterrent against unreasonable pricing and we will continue to work with CASE to improve Fuel Kaki and to continue empowering all our consumers.