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LCQ14: Oil price

     Following is a question by the Hon Fredrick Fung and a written reply by the Secretary for the Environment, Mr Wong Kam-sing, in the Legislative Council today (January 28):


     International oil prices have plummeted in recent months, with the average prices of NYMEX Light Sweet Crude Oil Futures and ICE London Brent Crude Futures tumbling from the peak of over US$100 per barrel to below US$50 per barrel, the lowest closing price in six years, and the downward trend is comparable to that after the outbreak of the financial crisis in 2008.  Some analysts have anticipated that oil prices will remain at low levels for a prolonged period of time in the future.  In this connection, will the Government inform this Council:

(1) whether it has assessed the impacts of tumbling oil prices on the various aspects of the Hong Kong economy, including the economic environment, the inflation rate and the foreign exchange market, etc.; if it has, of the outcome; of the impacts of low oil prices on government tax revenue as well as its expenditures on fuels;

(2) whether it has assessed the impacts of low oil prices on the energy market as well as the import prices of fuels for electricity generation and vehicles, etc.; if it has, of the outcome; whether, as estimated by the authorities, a substantial portion of the rate of reduction in the import prices of fuels will be reflected at the retail level, including whether the electricity tariff and retail prices of auto-fuels will drop to a similar extent; if they will not, of the reasons for that; and

(3) whether it has assessed how the persistently low oil prices have impacted on the operating costs of public utilities that are sensitive to oil prices, and whether there is any room for public transport operators, including franchised bus companies that have sought fare increases on grounds of high oil prices, to make downward adjustments of their fares; if there is not, of the reasons for that?


     President, the consolidated replies of Government Economist, the Financial Services and Treasury Bureau, the Environment Bureau and the Transport and Housing Bureau to the three parts of the question are as follows:

(1) In overall terms, as Hong Kong is highly services-oriented with low energy dependency, the direct positive impact of a drop in oil and other related energy prices on the Hong Kong economy should be relatively mild.  Yet, the positive impacts on individual sectors will hinge on the intensity of their oil usage.  Specifically, the more fuel-intensive industries, such as airline, local transport, restaurants, and construction, would in general benefit more from lower operating costs.

     As for inflation, since Hong Kong's energy consumption relies totally on imports, volatility in oil prices would have a direct impact on inflation via changes in fuel prices.  Yet, the items directly-related to fuels in the Composite Consumer Price Index have a weighting of less than 1 per cent, and given the low dependency on oil of Hong Kong economy, the direct benefit from the drop in oil prices on inflation should be limited.  However, the sustained decline in oil prices may also drag down other import prices and could still help to lower inflation in Hong Kong.

     The oil price plunge would also have indirect impacts on Hong Kong economy by affecting the external environment.  The drop in oil prices would be beneficial to net oil-importing economies.  Should the decline in oil prices improve the economic outlook of Hong Kong's major trading partners, it would render some indirect support to Hong Kong's exports and economy.  Nevertheless, the recent drop in oil prices was drastic, further complicating the already-uncertain external environment.  These include adding uncertainties over the pace of the US monetary normalisation, heightening deflation risks in the eurozone and Japan, and exerting pressures on the public finances and exchange rates of some net oil-exporting economies, which might in turn cause further gyrations in the world economy and financial markets.  The Government will monitor the situation closely.

     For Government tax revenue, according to the Dutiable Commodities Ordinance, certain types of hydrocarbon oil (i.e. aircraft spirit, light diesel oil, motor spirit) are commodities subject to excise duties.  Duty on hydrocarbon oil is charged at specific rates per unit quantity.  Hence, the duty revenue on imported hydrocarbon oil is affected by the quantity of oil imported, not the oil price.

(2) The two power companies mainly use coal and natural gas for electricity generation. The proportion of oil consumption is very small. The prices of coal purchased by the two power companies do not link with international oil prices. For natural gas, the price of some contracts is to a certain extent related to oil price. The actual price changes will vary according to the terms of individual gas supply contracts.  The continual fall of oil price will help alleviate the pressure of fuel costs for electricity generation. If the downward trend of fuel prices continues, the actual reduction will be reflected in the future electricity tariff.

     Regarding auto-fuels, since the beginning of July 2014, international crude oil prices have accumulated a reduction of about 50 per cent.  The trend movements of import prices for unleaded petrol and diesel are roughly the same during the period. In this period, oil companies, in response to falling import prices, have adjusted downwards the retail prices of unleaded petrol and diesel, each nineteen times, with maximum accumulated reduction of over $3.2 per litre. According to our observation, this is generally in line with the trend movements of international oil prices over the same period, and represents around 50 per cent of the import price of its refined oil products.  In addition to the import prices of refined oil, retail price also includes tax ($6.06 per litre for unleaded petrol and tax free for diesel), and other operating costs, such as land costs, government rent, staff costs, transportation, promotion, operation of oil terminal, etc.  When oil companies adjust their prices, apart from the import prices of oil products, they also take into account changes in these operating costs.

(3) The Government is aware of the concerns of the public over the fares of public transport services.  We are of the view that fares should be set at a reasonable level, having regard to the acceptability and affordability of the public on one hand, and the long-term financial sustainability of public transport operators on the other.  This is to ensure that the public can continue to enjoy quality and cost-effective services as well as modal choices.

     Public transport services fuelled by oil products with regulated fares include franchised buses, green minibuses, taxis and ferries.

     There is no fuel surcharge for the above public transport services.  Fare adjustments have all along been made with reference to changes in costs and revenue in overall terms (instead of changes in fuel price alone) and do not have retrospective effect.  For franchised bus which is a road-based mass carrier, there is a passenger reward arrangement under its fare adjustment arrangement.  Under this arrangement, when the rate of return for an operator reaches or exceeds the threshold of 9.7 per cent as a result of changes in the overall costs and revenue, the operator has to share the profit above the threshold as fare concessions with the passengers on an equal basis.

     As for green minibuses, taxis and ferries, the Government will continue to closely monitor the impact of a fluctuating oil price on them.  However, we must point out that their fare adjustments would also be made with reference to changes in the overall costs and revenue.  Although changes in fuel price would inevitably affect the operating costs of these public transport services, we have to carefully assess whether such changes would give room for a fare reduction.  This is because major operating costs of these public transport services are made up of various components.  They include wage expense or rental, maintenance and insurance, apart from fuel cost.  Since the cost components and their weightings vary for these public transport services, the impact of changes in fuel price on them will not be the same.  Moreover, as the expenditure on various cost components (particularly the labour cost) have basically been increasing in recent years, we have to carefully assess whether the decrease in fuel cost is sufficient to offset the increase in other costs.  

     Any fare adjustment should take into account changes in the overall costs and revenue. Therefore, whether the fares of these public transports can be reduced as a result of a decrease in oil prices would depend on the overall cost and revenue position. The Government will continue to keep the situation in view.

Ends/Wednesday, January 28, 2015
Issued at HKT 14:49


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