Thai government oil price intervention
drives out retail market participants?
By Jon Fernquest |
Today's Bangkok Post business section features an article on claims made by Shell Oil that Thai government oil price interventions may be inflicting long-term harm on Thailand's energy sector.
Majority state-owned oil companies, such as PTT and Bangchak Petroleum Plc, may be making interventions into retail oil prices that save consumers some money in the short-term but in the long-term:
1. Encourage excessive fuel consumption
2. Undermine government energy-saving efforts
Shell claims that both PTT and Bangchak lose money on their retail operations and that they make up for these loses by profits from their oil refinery operations.
The end result seems to be that companies that only have retail operations like Shell run big losses and have no reason to remain in the retail business in Thailand which might harm the retail energy sector in the long-run.
Here is the article in full:
Shell warns against pump-price tinkering
Foreign oil firms may pull back in ThailandYUTHANA PRAIWAN
Tuesday April 01, 2008
The Shell Company of Thailand has warned the Energy Ministry to avoid intervening in retail oil prices through the majority state-owned oil companies, PTT and Bangchak Petroleum Plc, saying that it could lead foreign oil companies to divest in Thailand.
Tiraphot Vajarabhaya, Shell Thailand's chairman, said the company had lost money for three years due mainly to price intervention by PTT and Bangchak.
"In the first three months of the year, we recorded a loss of 400 million baht or 0.60 baht a litre for every litre sold. This has not been caused by inefficiency of our staff or a slow market. We were hurt by the national oil campaign," he said yesterday.
Due to market interference, foreign oil companies have done little expansion in the past five years since oil prices began rising, he said.
He warned that if the government carried on using measures to distort the market, the retail oil market in Thailand would see no improvement, no new investment, and no new service stations.
Major oil traders would only invest in upgrading existing facilities and renovating existing service stations, he said.
Shell will spend 100 million baht this year, equal to last year's budget, to renovate gas stations nationwide.
Mr Tiraphot said price intervention would not only encourage small players to leave the market, but would also undermine government energy-saving efforts by encouraging excessive fuel consumption. "If the government continues to use this kind of measure, you'll see the major oil companies give up their businesses in Thailand," he said.
If foreigners pulled out, he said, PTT and Bangchak would gain more market share, which would cause them to be harmed by price intervention.
He suggested that the government should support reduced energy costs only for some sectors such as farming, fisheries and public transport, which would help ease the cost of living.
The subsidies from 2004-05 had harmed the government's conservation efforts, the company said, adding that average oil consumption fell by 7% shortly after the government floated retail prices.
However, Shell said it would maintain its retail operations in Thailand even though it decided to sell its oil refineries to PTT several years ago.
Both PTT and Bangchak, the company said, were using their high refining margins to offset retail losses. But the companies reportedly showed strong profits from their refineries in those years.
Mr Tiraphot said Shell was seeking investment opportunities to acquire other oil companies' assets after it had been beaten by PTT in its bid to acquire the Jet service stations from US-based Conoco Phillips two years ago.
Simon Hirst, the general manager of retail sales and operations for Shell, said the retail prices of premium petrol were currently lower than the overall cost by 0.67 baht. Prices of regular petrol are 0.84 baht below what they should be and diesel 1.61 baht.
However, the company earns a profit of 0.24 baht from gasohol 95, and 0.14 baht from gasohol 91. The average gross profit should be at least 1.50 baht a litre to maintain a healthy business, he said.
(Source: Bangkok Post, business section, page B10, 01-04-08, YUTHANA PRAIWAN, temp-link)
Vocabulary:
Shell Oil - one of the largest oil companies in the world, headquarted in Houston, Texas (See Wikipedia)
an oil refinery - "a very large industrial plant where crude oil is processed and refined into more useful petroleum products, such as gasoline, diesel fuel, asphalt base, heating oil, kerosine, and liquefied petroleum gas, oil refineries are typically large sprawling industrial complexes with extensive piping running throughout, carrying streams of fluids between large chemical processing units" (See Wikipedia on oil refinery)
undermine - weaken, make less strong than before (See glossary)
undermine government energy-saving efforts - weaken government energy-saving efforts
make up for X - take the place of X which was lost, damaged, or substandard (for example, the student made up for their deficiencies by studying harder)
pump-price - the price of gasoline when purchased at a gas station from a gas pump
tinkering with - trying out small changes to see if they solve a problem (they may actually make the problem worse)
pull back from Y - stop current activity and leave Y, retreat from Y, withdraw from Y
divest Y - sell business Y, get rid of Y (See glossary)
intervening in retail oil prices, price intervention - government action to make prices lower than market prices at gas stations to help consumers
a campaign - organised public activities for political or social change (can range from public meetings or protests, speeches, publications, tv and radio broadcasts)
the national oil campaign - efforts to control the price of oil across the whole country, including incentives to use biofuels and natural gas
distort - to change something so that it is no longer true or accurate
measures to distort the market - actions that change prices from normal market prices where supply equals demand
service stations - gas stations on the side of the road
upgrading - improve and make up-to-date (See glossary)
renovating - to repair and improve an old building or facilities and make them new again
market share - the percentage of total sales in a market that a company has, some industries like the automobile industry only have a few companies each with a very large market share (See Wikipedia on market share)
gain more market share - increase the percentage of sales in a market that a company has
the cost of living - the cost of buying things you use everyday such as food, gas, clothes, and medicine, measured by a cost-of-living index that measures changes in the cost of living over time (See Wikipedia on cost of living)
ease the cost of living - control inflation (so that people can still buy the things they need to buy with their limited income)
conservation - the careful use of scarce resources such as energy and water so that they are not wasted
government's conservation efforts - actions taken by the government to force or encourage people to conserve scarce resources (in South Korea people pay a tax on garbage bags and everyone is required to sort their garbage into plastic, metal, and paper before disposing of it)
floated retail prices - retail prices were allowed to move freely up and down in response to market supply and demand
margin, profit margin - the profitability of a company, measured by relating profits to revenues, the three most common profit margin calculations are: operating profit margin, pretax profit margin and net profit margin (Source: RBC Dain Rauscher)
offset - make up for (the extra money she earned this month offet the extra expenditures she had to make so she didn't have to borrow money to cover them, See glossary)
using their high refining margins to offset retail losses - using profits from one business, oil refineries, to make up for losses in another business, retail sales
