2econdsight

"to rescue truth from beauty and meaning from belief"

Pump prices – missing the bigger trees for the forest

8 Comments

A comment I made regarding petrol (gas, to our US friens) pump price was republished for a wider audience at tremeritus.com. It’s a real concern and adds to the bigger picture of a government out of control with its guiding philosophy of ‘what’s wrong with collecting more money’ from citizens.

“Crude oil price dropped by nearly 50% and our pump price dropped just under 8% because petrol stations are leased out to pump operators on a 30 years lease by HDB at a staggering over $80 million for a small plot.”

May I give a perspective that is even worse for Singaporeans to fathom than what the writer implies.

Firstly, on the face of it, the inference of a disproportionately lower decrease in pump price (8%) vs the crude oil price (50%) appears to be due to the high lease rate that pump operators paid to the govt.

What’s inferred appears to be supported by the comparative decrease in price in M’sia (grade 97 came down fr about M$2.95 or so to M$2.46 or 16%).

But is the high lease to blame – and solely to blame?

The answer is an emphatic NO!!!

Very simply, when a pump operator signed the contract for the lease, the rent becomes a sunken or fixed cost. This cost would then already be priced into the initial retail price after taking into consideration the total fixed, variable and ops costs PLUS the minimum profit margin that the HQ has set to meet overall corporate profitability.

That is to say, ALL the lease cost payable has already been PRICED IN at the initial retail price level.

Since the cost of the crude oil is a ‘Variable Cost’ (VC) as part of the Total Cost (TC), any VC movement (up or down) does not affect the Total Cost in direct percentage or proportion but only relatively. That is to say that a 10% VC movement does not mean a 10% change in TC but lower.

Hence, there is and cannot be a 50% lower price in M’sia.

That leads us to the second point. And the question is, ‘Why does a 50% drop at the crude level result in only a miserly 8% at the pump?’

Is it possible that the VC, in the case with petrol, makes up only a very, very small proportion of the total cost?

– Let’s say the VC is only a small part of the TC.
If so, then the pump operator can then reasonably plead that most of the cost are fixed ones, mainly lease cost. Now, if that is so, then not only are we not able to enjoy the ups and downs of market price forces fairly, we have been always paying thru our nose day-in, day-out. No thanks to the govt’s land policy.

– Next, what if the VC is NOT a small part of the TC?
Here’s the killer part, it then means that the operator are pocketing some extra-ordinary profit margins!!! That means that if a 10% decrease in crude price allows for, say, 4% decrease at the pump WHILE MAINTAINING the ordinary “x” profit margin, the operator only gives a 2% discount and pockets the difference.

If that is the case, then the situation is far, far worse than what we complain about.

IT MEANS THAT, IN EFFECT AND PRACTICE, BUSINESSES IN SG ARE OPERATING WITH GREED AS CREED. THEY CAN SCREW S’POREANS FOR ALL THEY WANT – no problem there since the govt has set the e.g…likewise, Temasek via all the GLCs. Now u know why no minister says anything abt it?

Houston, we have MORE than a problem.
It’s sanctioned robbery by the govt.

2cents

* Comment appeared in TRE article: “Is this the dog’s life we aspire to in 1st world S’pore?

Advertisements

8 thoughts on “Pump prices – missing the bigger trees for the forest

  1. Somewhere between 45 % to 50% of a barrel of oil goes into gasoline, the rest goes into other products like jet fuel, heating oil …
    Gasoline prices have government taxes which vary from country to country. I live in Canada and our prices are always higher than the U.S. even though we export are oil to the U.S.

    Like

    • According to GasBuddy.com, US average price has dropped by over 1/3 in the past 12 months while Canada by about 1/4. Note that retail gas price movement trails cruel oil prices. So expect further drops in gas prices in coming months.

      Liked by 1 person

    • Hi,

      Thx for dropping in.
      Your point is understood and taken.

      The price for gas in Malaysia is now M$2.11/litre for grade RON97 while Singapore’s unchanged. a 28.5% drop vs a comparative 8% or so in SGP.

      Since we are discussing variable cost with all fixed costs (biggest being rent for station) already priced in as sunken cost from the very start, the most logical explanation appears to be that the retail arms of the oil giants are making a killing by keeping a lot of the crude oil price decrease to themselves.

      This can only be done because they have seen that the SGP government screw its own citizens – who are mostly conditioned to accept the situation without protest…yet.

      Liked by 1 person

      • I don’t think you can simply write off the “fixed” costs, especially the monthly rent. Let’s assume that the fixed cost was 80% and raw petrol accounted for 20% a year ago. A drop of 50% in oil prices will result in 10% drop in petrol prices at best.

        The point is cost of living in Singapore is *very* expensive, for both living and dead (columbarium). Rent dictates prices and there is no way around it.

        Liked by 1 person

      • That’s a very good one, Xmen!

        For readers not residing here in SGP, I refer to the ‘columbarium’ saga still playing out to full ‘eye’ house in social media, if not the slanted version in mainstream media.

        Perhaps, one fervently hopes, this event will be seen as the Tipping Point in our fortunes (or the PAP’s) in the years to come. Now, we may have the ‘other world’ enlisted in our fight for change! Hurrah rah!

        Like

      • Hey mate…. I don’t think it is clear that the oil giants are making a killing. If that has been the case, their stocks would not have been pummelled since crude prices began this precipituous drop. Some of the stickiness of prices in SG compared to Canada and US is due to the weakness of S$ and proximity to production but that cannot explain all of it. Another point to note, that due to high petrol taxes, it is in the government interest that prices do not fall.

        Like

      • – Stock price is usually based on predictive or predicated future earnings.
        – The oil giants’ revenue fr SG is miniscule, not even peanut size and has little if any impact at all on the stock price, I think.
        – My remarks are strictly relating to the SG compared over time period. If the S$ has weakened vs US$, then the logical effect would be a BIGGER fall in S$. Hence, even more discounts available or profit to keep.
        – For HS code 27101212, Motor spirit of RON 97 & above unleaded, the excise duty is fixed at $4.40 per dal
        . So, no change as volume not value based. Even if value base, there should be neutral effect on the cost to kiosk owners since it is proportionate – except where and when there is a MINIMUM duty rate specified. This appears not to be the case.

        That’s as far as I understand. Maybe, I’m mistaken.

        Like

  2. I have never been to Singapore, so I have no idea about rent. However, in Canada, some gas stations are owned by oil companies and they hire managers. Plus the gas stations sell other products to help cover the rent. Some are rented to business people who also offer car repair services so gas sales are not a big profit generator

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s