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LCQ8: Fuel prices
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     Following is a question by the Hon Frankie Yick and a written reply by the Secretary for the Environment, Mr Wong Kam-sing, in the Legislative Council today (May 4):

Question:

     It has been reported that the cumulative rates of decrease in international crude oil prices and import prices of refined oil products since 2011 are as high as 75 per cent and 56 per cent respectively, but the retail prices of petrol in Hong Kong have dropped by merely 28.5 per cent over the same period. As such, members of the public are unable to benefit from the significant drop in international oil prices. Moreover, a survey has found that the retail prices of auto-fuels sold by three oil companies in Hong Kong have moved almost in tandem, thus arousing suspicion of collusive price-fixing. In this connection, will the Government inform this Council:

(1) given that the oil products of various oil companies vary in inventory levels as well as import time and they do not come from exactly the same places of origin, and that oil companies have different operating costs (e.g. transportation costs), whether the authorities have investigated why the retail prices of auto-fuels sold by the aforesaid oil companies have moved almost in tandem; if they have, of the details; if not, whether they will conduct such an investigation;

(2) as the rate of decrease in the local retail prices of petrol differs from the rate of decrease in the prices of international crude oil and those of refined oil products by 46.5 and 27.5 percentage points respectively, whether the authorities have studied if such differences are reasonable; if they have studied and the conclusion is in the affirmative, of the criteria and justifications for arriving at such a conclusion; if the conclusion is in the negative, of the authorities' measures to narrow such price differences;

(3) as some members of the public have pointed out that the oil companies' practice of offering greater discounts to major customers (e.g. government departments) has resulted in members of the public subsidising those major customers and showed that there is room for downward adjustment of the retail prices of petrol, whether the authorities will take the initiative to request oil companies to reduce oil prices so as to alleviate the burden on the public; if they will, of the details; if not, the reasons for that;

(4) given that petrol prices have direct impacts on people's livelihood as well as on the logistics and transportation industry (e.g. affecting the fares of public transport services), whether the authorities will consider requesting oil companies to make public the inventory levels and sales figures of their oil products so that the public can monitor whether it is the case that the prices set by the oil companies have been "quick to rise and slow to drop"; if they will, of the details; if not, the reasons for that;

(5) as oil companies have to recover such operating costs as land costs, government rents and tax (e.g. $6.06 per litre for unleaded petrol) from the retail prices of petrol, whether the Government will consider, by making reference to the pricing formula for the auto-liquefied petroleum gas (LPG) ceiling prices adjustment mechanism for dedicated LPG filling stations, requiring the oil companies to set their retail prices of petrol based on international oil prices and operating prices;

(6) whether it will consider adopting, apart from bidding prices, other criteria such as fuel quality and retail prices for vetting and approving tenders for the sale of petrol filling station sites, so that (i) the retail prices of auto-fuels can better reflect the trend movements of international oil prices, and (ii) the threshold for running a petrol filling station can be lowered, thereby attracting more new operators and increasing market competition; if it will, of the details; if not, the reasons for that; and

(7) given that the Competition Commission will conduct an investigation into whether the oil companies have engaged in anti-competitive behaviour in setting auto-fuel prices, whether the Government knows the completion date of the investigation and the date for publication of the results; how the authorities will follow up on such investigation results?

Reply:

     President, the consolidated replies of the Environment Bureau and Commerce and Economic Development Bureau to the above seven questions are as follows:

(1) and (4) In a free market economy, retail prices of auto-fuels in Hong Kong are determined by oil companies having regard to commercial practices and their operating costs.  When oil companies determine their prices, apart from the import prices of oil products, tax and the changes in operating costs (such as staff costs, transportation costs, costs of operating oil terminal, land premium, etc.) will also be taken into account.  Since the relevant data are commercially sensitive information of oil companies, in a free market economy, the Government does not have the power to request the oil companies to provide such detailed information.

     The role of the Government is to endeavour to ensure a stable fuel supply, maintain market openness, and remove barriers to enter into the market to enhance competition.  We also endeavour to improve the transparency of the prices of auto-fuels products to facilitate consumers to make choices.  We appreciate the impact of the auto-fuels prices on the public and have been monitoring the changes in local retail prices of auto-fuels and comparing them with the trend movements of international oil prices (benchmarked against the Singapore free-on-board (FOB) prices (i.e. Means of Platts Singapore (MOPS)) for unleaded petrol and motor vehicle diesel).  We will urge the oil companies to promptly reduce their retail prices whenever there is room to do so in order to lessen the burden of the general public.  Although the trend movements of the oil companies' retail prices of auto-fuels are similar, the various kinds of discounts and promotions offered by the oil companies to customers are different.  The prices paid by customers are actually different.

(2) and (3) Hong Kong has no oil refinery.  All auto-fuels sold locally are imported refined oil products instead of crude oil.  Refined oil products (such as unleaded petrol and motor vehicle diesel) are products produced from crude oil after refinery processes and are different from crude oil.  Therefore, changes in international crude oil price and prices of unleaded petrol and motor vehicle diesel are not necessarily the same in terms of timing and magnitude.  When comparing international oil prices and the local retail prices of auto-fuels, it is more appropriate to make reference to Singapore FOB prices (i.e. MOPS) and the prices of importing oil products by oil companies as explained above.

     In assessing whether the prices of local auto-fuels are adjusted in tandem with the changes in import prices of auto-fuels, we should consider the portion of import price of auto-fuels in the pump price, and should not take into account other components (that is, tax and other operating costs) in the pump price.  When the import prices drop, if tax and other operating costs are unchanged, the percentage change of pump price must be lower than that of import price.  On the contrary, when the import prices rise, the percentage increase in pump price will be lower than that of import prices.  Therefore, it is not appropriate to simply compare the percentage change of auto-fuels pump prices with that of import prices.  Besides, as oil companies generally provide various kinds of discounts and promotions to consumers, the actual prices paid by consumers are effectively lower than the pump prices listed at petrol filling stations (PFS).

     Oil price has fluctuated notably since mid-2014.  According to our analysis, the import prices of auto-fuels in February 2016 have dropped by around $3.7 per litre (around 60 per cent) from their peak levels in June 2014.  During this period, oil companies, in response to falling import prices, have adjusted the pump prices of auto-fuels downwards, with accumulated reduction of around $3.7 per litre, which represents around 60 per cent of the peak level import prices of auto-fuels (the peak level import prices of unleaded petrol was $6.47 per litre in June 2014).  Therefore, the magnitude of the pump prices adjustments is generally in line with the trend movements of import prices.  Similarly, according to our observation, the adjustments in retail price of auto-fuels are generally in line with the trend movements of MOPS over the same period.

     In addition, oil companies point out that discounts and promotional offers are part of their market competition strategies.  In order to maintain the competitive edges of their products, they provide various discounts and rebates to cater for the needs of individual and fleet customers.  The discounts obtained by different customers depend on various factors, including long-term fuel consumption, service need, credit history, prevailing market competition condition, other business considerations, etc.  The Government will continue to monitor the prices of local auto-fuels and urge the oil companies to promptly reduce their retail prices whenever there is room to do so in order to lessen the burden of the general public.

(5) and (6) As mentioned in the reply above, the magnitude of the pump prices adjustments of oil companies is generally in line with the trend movements of import prices and MOPS.  According to free market mechanism, we consider that Government's existing arrangement to grant land for use as PFS to the "highest bidder" by public tender is appropriate.  This arrangement is same as other land sales arrangements.  Any suggestion to change the existing arrangement should be considered carefully as it may reduce Government's revenue and affect the fair business competition environment under free market economy.  

     To enhance market competition, since 2003, the Government has re-tendered all existing PFS sites upon expiry of their leases, instead of renewing the leases to the existing operators.  At the same time, the requirement for bidders of PFS sites to hold import licence and supply contract have been removed.  Since the introduction of the new tendering arrangements, two new operators have successfully entered the market.  The share of the three incumbent major operators in terms of the number of PFS has dropped from over 90 per cent to about 70 per cent.  At present, there are six oil companies operating over 180 PFS in Hong Kong.  In view of the size of Hong Kong market, the tendering arrangement has effectively enhanced the competition in the auto-fuel market and increase economic efficiency.

(7) According to our understanding, the study on the auto-fuel market conducted by the Competition Commission (the Commission) is expected to be completed within this year.  We will maintain close liaison with the Commission and welcome views of the Commission on competition matters, with a view to jointly enhancing market competition.

Ends/Wednesday, May 4, 2016
Issued at HKT 12:51

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