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Getting into a twist over pump prices

[SINGAPORE] Why do we get so angsty about petrol prices whenever crude oil prices fall?

According to Bloomberg, the benchmark Brent is hovering between US$19 and US$26 this week, down from US$68 in January and US$84 six months ago. This is one of the grades which is relevant to fuel prices in the Asia-Pacific.

Almost like clockwork, a clarion call for pump prices to be adjusted downwards rang out earlier this week. No other product elicits a similar consumer response. Why?

Common notions include petrol pricing not being transparent, oil companies operating in an oligopolistic market, and some form of collusion existing between players.

The first two are true, but there is no evidence of the third.

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Because Singapore is such a small market, petrol station operators share similar costs - for instance, land and labour costs.

That is one reason petrol prices do not differ much across brands, which may give rise to perceptions of collusion.But lack of transparency probably irks us the most - especially when big, powerful entities such as oil giants are concerned. We have little idea of the various cost components which go into a litre of fuel, let alone the share of each cost component.

For instance, wholesale prices of refined products in this region - a big determinant of pump prices here - are available only to subscribers of Platts, a unit of financial information firm S&P Global.

Hence, we latch on to the only information freely available to us - crude oil prices, which are closely tracked and reported by agencies such as Bloomberg.

But is chicken rice pricing transparent? Or the price of a cuppa at our favourite coffee joint?

No, although we instinctively know that for these goods, there is a higher level of competition. There are thousands of chicken rice stalls across the island, and as many, if not more, coffee shops and cafes.

And economics dictate that competition is the best check against profiteering.

Another thing which gets us into a twist is that, in the case of fuel, the party which sells the raw material is the same party selling the refined product.

The oil companies say upstream and downstream businesses are segregated, but it is hard for us to appreciate that. After all, it is like a chicken rice seller who also owns a chicken farm.

Nevertheless, expecting pump prices to fall in tandem with oil prices is akin to expecting chicken rice prices to drop with the price of chicken.

While chicken is the main ingredient, it is not the only cost component in a plate of chicken rice. Again here, we do not know much since the price of chicken is not tracked or reported as closely as the price of crude oil. Nor do we really care.

Still, we expect pump prices to follow crude oil prices, which is not unreasonable. Pump prices will eventually follow crude prices, which first influence wholesale fuel prices. But there is a time lag - usually the time taken for pump operators to deplete their current stock and replenish with stock bought at new prices.

A host of other factors influences the price of petrol, too.

The two which impact operations in Singapore more than in most other cities are petrol duty and land cost.

Together with GST, they account for as much as S$1 per litre of fuel, which depending on loyalty and credit card programmes, retails from around S$1.70 (for 95-octane petrol). Wholesale petrol prices are estimated at around 25 cents a litre today. Beyond that, it is unclear how other costs add up.

Ultimately, can consumers do anything about pump prices, or do we just gripe and carry on? Actually, there have been some suggestions on how we can force firms to reduce prices further.

One is for everyone to fill up only what he uses for the day, say 5 litres. This will cause a storage problem for oil companies, who will then lower prices to move stock.

Another method is for everyone to boycott one or two brands for a month, forcing them to cut prices to drive sales.

As people have different needs and interests, these actions are impossible to orchestrate. For if such a level of cooperation were possible, we could technically bring down the certificate of entitlement (COE) prices to, say, S$100, and keep them there.

Of course, this has not happened in the 30-year history of the COE system. Nor will it ever. It's the same story for pump prices.


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