askST: Why are petrol pump prices high when crude oil prices have dipped below US$30 a barrel?

CRUDE oil prices have been falling for over 18 months now, and dipped below US$30 a barrel early this month (January), its lowest level in more than 10 years. Because of that, many readers have written in to askST why petrol pump prices have not fallen in tandem. It is a good question, which senior transport correspondent Christopher Tan will attempt to answer below.

THERE is one main reason why pump prices in Singapore do not seem to fall as much or as fast as crude oil prices - taxes.

We have a relatively high duty on petrol, and that masks any reduction in the price. In countries such as the US, where there is little or no petrol tax, any reduction is more immediately and more fully realised.

Petrol duty was raised a year ago. This further masks the magnitude of any price adjustment.

For instance, when crude was around US$100 a barrel a few years ago, 98-octane petrol was retailing at $2.32 a litre (before discount). If you remove the duty of 44 cents per litre, the price would be $1.88.

Today, the same grade fuel is $2.17 a litre. Minus duty of 66 cents a litre and you get $1.51

Now, $1.88 - $1.51 = 19.7 per cent price drop.

If we do not take out the duty portion, the drop would work out to 6.5 per cent.

While a 19.7 per cent drop is significant, it still lags behind the 70 per cent drop in crude oil prices. The thing is, petrol (a refined product) does not always move in tandem with the crude product. Much depends on demand for petrol, which can be seasonal. Obviously, geo-economic factors are a big influence, too. For instance, in the last 10 years, China's demand for petrol has soared on the back of rapid motorisation.

Then, there are fixed costs such as land, building and distribution. In fact, the cost of fuel is estimated to make up only one-third of a fuel retailer's total cost. So, that is another major reason why a drop in oil prices does not translate to an equivalent drop in pump prices.

Also, there is usually a lag between price movements of crude and refined products. Retailers have to sell off the "high cost" petrols in their inventory before they can start repricing their fuels.

 

But having said all that, oil companies are profit-motivated businesses; and it would not be a surprise if they delayed downward adjustments for as long as possible. If prices moved the other way (up), the adjustment tend to be faster.

This tendency is not only apparent in the fuels sector. Prices of foodstuffs, utilities, air travel, medicines and other items also tend to be "sticky downwards". It is only in an extremely competitive market - such as electronic goods - that price adjustments are swift.

What can consumers do about this perceived tyranny of the pumps? Well, the most effective way would be to minimise consumption. If every user cuts back usage by 10 per cent - by driving more efficiently and driving more judiciously and wisely - demand will drop by 10 per cent.

Going by economic theory, price should then fall. And even if they do not, an efficient driver would already have saved on his own fuel bills. Not only that, he would have reduced his carbon footprint.

Other ways to save include driving a well-maintained car with well-inflated tyres. And use 92-octane petrol, which is the cheapest. Most cars will do fine with 92-octane.

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