THAILAND'S EXPERIENCE IN
National Energy Policy Office, 1995
OIL PRICE DETERMINATION BEFORE DEREGULATION
- Ex-refinery & import prices determined by government based on Singapore posting and spot prices
- Marketing margin determined by government and rarely changed
- Excise and municipal taxes on specific basis (baht/litre)
- Retail prices determined by government and rarely changed
- Oil fund levy/subsidy acted as stabilizer of retail prices
RETAIL PRICE = EX-REFINERY/IMPORT PRICE + OIL FUND + TAXES + MARKETING MARGIN
OIL MARKET BEFORE DEREGULATION
- Retail trade controlled by 4 major oil companies (PTT, Shell, Esso, Caltex)
- Marketing margin kept constant for many years
- A few independent oil companies involved in wholesale trade
- Oil imports were controlled with quota system
- No new entrants into oil business due to government policy (no license issued for Article 6 oil trader)
- Domestic refining capacity approx. 50% of demand
- Many remote areas did not have petrol stations. Consumers bought oil from "DRUM PUMPS" whose prices were not controlled and were 1-3 baht/litre higher than service station prices.
PREPARATION OF OIL PRICE DEREGULATION
- Increase competition in domestic oil market
- Improve determination of ex-refinery & import prices to more accurately reflect world prices
- Improve tax and retail price structure of petroleum products
- Introduction of automatic fuel adjustment clause for electricity tariff
- Create public understanding about nature of oil market
- Create confidence that oil companies would not take advantage of consumers
INCREASE COMPETITION IN DOMESTIC OIL MARKET
- Revise criteria for issueing Article 6 oil trading license and issue permits to encourage new entrants
- Abolish import control
- Increase refining capacity by allowing existing refineries (Esso, Thaioil, Bangchak) to expand and giving permits for 2 new refineries (Shell, Caltex)
- Revise regulations for establishing petrol stations in order to reduce costs and time for obtaining permits and allow construction of smaller petrol stations
- Allow Bangchak Refinery to sell oil to all oil traders
- Allow PTT and Bangchak to compete in oil market and encourage Bangchak to set up small diesel outlets with agricultural cooperatives
IMPLEMENTATION OF OIL PRICE DEREGULATION
- Use the opportunity created by fall in world oil price after the end of Iraq-Kuwait war
- Deregulation was carried out for gasoline, kerosene, diesel and fuel oil
- "Semi Deregulation" implemented at the end of May 1991
- "Full Deregulation" implemented on 19 August 1991
- Service stations to post visible prices (each letter > 15 cm. high)
- Government reduced wholesale price by reducing oil fund levy
- Government encouraged oil traders to reduce retail prices
- When actual retail price was lower than maximum price, government abolished maximum retail price
- Government still established ex-refinery & import prices on weekly basis
- Oil fund levy was fixed at a constant level and wholesale prices were allowed to change every week in line with ex-refinery prices
- Oil companies changed retail prices in line with changes in wholesale prices but with a time lag
- Oil companies were responsible for setting prices at their service stations and closely monitor them
- Oil companies had to inform NEPO of each change in retail prices
- Petrol stations had to report pump prices every month
- Full deregulation occurred on 19 August 1991
- Government abolished determination of ex-refinery/import & wholesale prices
- Refineries announced their ex-refinery prices
- Prices sold to "Article 6" oil traders
- Prices sold to small customers
- An import levy was imposed to protect domestic refineries. This was later followed by changes in oil reserve regulations to further increase protection.
MEASURES TO PROTECT DOMESTIC REFINERIES
- Domestic refineries have to pay "special benefits" to the government
- 2% of gross revenue for Esso, Shell, Caltex
- 35% of gross profit for Thai-oil
- None for Bangchak but Bangchak faced other disadvantages
- Removal of "special benefits" is politically difficult so protection was provided by using import tax and oil reserve regulations
Unit : Satang/Litre Before Deregulation 1995 Gasoline, Diesel, Kerosene 1.0 6.5 Fuel Oil 0.1 1.0
Unit : % of Volume Before Deregulation 1995 1 Jan 97 Crude oil held by refineries 4% 5% 5% Locally refined finished products held by oil traders 3% 5% 5% Imported finished products held by oil traders 3% 5% 10%
PROBLEMS RESULTING FROM OIL PRICE DEREGULATION
- Consumer perception
- Marketing margin too high
- Retail price inelastic in downward direction
- Price collusion by oil companies
- Collusion by petrol stations in certain remote areas
- Retail price downward movement slow but adjust upward quickly
- Some petrol stations do not post pump prices
GOVERNMENT CONTROLS IN CURRENT SYSTEM
- In principle, should fully deregulate but in transition period certain controls are still necessary
- Existing controls
- Oil traders are still encouraged to determine prices at their service stations
- NEPO still issues "Transport Cost Account" as guidelines for oil companies to determine prices in each district
- NEPO and Internal Trade Department closely monitor prices and market condition
- Warning issued from time to time for oil traders to reduce marketing margin
CHANGES IN OIL MARKET SINCE DEREGULATION
- Marketing margin more than doubled but refining margin declined substantially.
- Marketing + refining margin adjusted for changes in product specification hardly rose.
- Numbers of oil traders and service stations have substantially increased.
- Districts with no services stations have substantially declined. Remote areas are served by a new breed of small scale service stations.
- Reduction in collusion in remote areas.
- Refining capacity rises substantially and surplus capacity is expected in 1996.
- Competition in oil market intensifies particularly as oil companies are carving up market share before surplus develops in 1996.
- Improvement in quality of service.
- Greatly facilitate improvement in oil quality for environmental protection.
MAJOR PLAYERS INVOLVED IN DEREGULATION
- National Energy Policy Office (NEPO)
- Internal Trade Department
- Provincial Authorities
- STATE OWNED OIL COMPANIES
- PTT, Bangchak (BCP)
- PRIVATE OIL COMPANIES
- Shell, Esso, Caltex, Thaioil
IMPROVE DETERMINATION OF EX-REFINERY & IMPORT PRICES TO MORE ACCURATELY REFLECT WORLD PRICES
- Previously ex-refinery and import prices were set based on Singapore posting with unclear time lag and formulae were changed from time to time upon request by oil companies.
- A clear set of formulae was devised - essentially linking import prices to CIF price of Singapore spot market with a time lag of one week.
- Ex-refinery prices still based on Singapore posting but with clearer guidelines.
- This allowed a more regular flow of imports into Thailand.
IMPROVE TAX AND RETAIL PRICE STRUCTURE OF PETROLEUM PRODUCTS
- Tax and retail price structure were previously very distorted leading to adulteration of products, engine modification and shift to diesel vehicles.
- During 1985-91 taxes and retail prices were gradually adjusted to reduce the distortion.
Unit : Baht/litre 1984 1995 Tax & Oil Fund Retail Price Tax & Oil Fund Retail Price Premium Gasoline 2.7898 11.70 3.248* 8.60* Regular Gasoline 2.4410 10.80 3.206* 7.96* High Speed Diesel 0.7431 6.70 2.829 7.48 LPG (Baht/Kg) -0.2684 10.74 1.774 9.72 * Prices and taxes of unleaded gasoline
PRICE STRUCTURE OF PETROLEUM PRODUCTS
Unit : Baht/Litre
Unleaded Premium Unleaded Regular High Speed Diesel Ex-Refinery 3.9100 3.4008 3.6889 Excise Tax 2.3500 2.3500 2.0000 Municipal Tax 0.2350 0.2350 0.2000 Oil Fund 0.0300 0.0300 0.0700 Energy Conservation Promotion Fund 0.0700 0.0700 0.0700 VAT 0.4616 0.4260 0.4220 Wholesale Price 7.0566 6.5118 6.4509 Marketing Margin 1.4424 1.3535 0.9618 VAT 0.1010 0.0947 0.0673 Retail Price (BKK) 8.60 7.96 7.48
REDUCTION IN RETAIL PRICES BETWEEN BANGKOK AND PROVINCIAL AREAS
- Oil prices in Bangkok had always been lowest in Thailand as Bangkok is the main distribution centre
- Price in a district outside Bangkok had been determined as Bangkok Price + Transport Cost even after deregulation
- Competitive forces had already begun to reduce gap between price in Bangkok and provincial area but this was not fast enough
- Policy to reduce price gap was announced as policy of present government
IMPLEMENTATION OF PRICE GAP REDUCTION
- Government asked oil companies to increase marketing margin in Bangkok and reduce margin for sale in provincial areas.
- This does not really distort market forces as cost of selling oil in Bangkok is much higher any way.
- At present retail prices in nearly all provinces in the central region are the same and price differential for outer provinces has declined by 50%.
27 November 1995