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Oral reply to PQ on oil prices

Oral reply to PQ on oil prices

Questions

 

Mr Ang Wei Neng: To ask 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.

 

Oral Answer (to be attributed to Senior Parliamentary Secretary for Trade and Industry Dr Tan Wu Meng)

 

1. 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?

 

2. 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.

 

3. 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.

 

4. 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.

 

5.                        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.

 

6. 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.

 

7. 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.

 

8. 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.

 

9. And if 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.

 

10. 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.

 

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

 

12. 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-CCS in 2017 found that refined petrol costs accounted for less than one-third of the listed retail petrol price.

 

13.  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. CCCS is monitoring closely and will take enforcement action should evidence of anti-competitive activity surface.

 

14. 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) 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.

 

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