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From the old report of National Energy Policy Office:

1. Pricing of Petroleum Products by Thai Refineries Must Be Competitive with Imports from Foreign Sources

A Thai refinery has to compete not only with other domestic refineries but also with imports of petroleum products from foreign sources. Consequently, petroleum product wholesale pricing has to be competitive with the cheapest import price, i.e. the minimum export cost from a foreign source to Thailand. Therefore, the import parity basis, with Singapore market prices as references, has been applied to the determination of petroleum product prices by Thai refineries.

In determining petroleum product prices, if the prices are set higher than the import prices from Singapore, oil traders will prefer imported petroleum products to domestically produced ones. However, if the prices are set lower than the import prices, the rate of return will not be commensurate for oil refineries; hence there will not be adequate incentive to invest in the oil refining business in Thailand.

2. Why Must Thai Petroleum Product Prices Be Based on Singapore Spot Prices?

1) The Minimum Import Cost to Thailand Is Reflected. Singapore market is the largest export market in the Asian region and is the closest to Thailand. The import cost from Singapore is, therefore, the minimum cost challenging Thai oil refineries.

2) The Trade Volume Is Considerable. Similar to New York, oil trade negotiations take place in Singapore by oil trading companies operating their business there while the oil being traded may not be physically stocked in Singapore. The oil trade volume in Singapore is as considerable as those in major markets in other regions (i.e. Europe, America and the Middle East), which makes it difficult for either buyers or sellers to spiral the prices. As a result, Singapore spot prices will reflect petroleum product supply capability and demand in the region.

3) The Prices Reflect Petroleum Product Supply Capability and Demand in Asia. Although Singapore’s total refining capacity is 1.5 million barrels per day, which is lower than that of China, Japan and South Korea, its refining is mainly for export whereas the refining in those countries with greater refining capacity is mainly for domestic consumption, with an export should there be any excess. Given the export-oriented purpose, Singapore spot prices reflect the genuine export costs, which will in turn reflect the petroleum product supply capability and demand in the Asian region.

4) Export Prices of Various Countries Are Based on Singapore Spot Prices. Although Singapore’s oil export volume is declining due to increasing refining capacity in various countries, export prices of those countries are still based on prices in Singapore spot market. Moreover, the trading of oil exports from various countries mainly takes place in Singapore still.

5) Petroleum Product Price Fluctuation in Singapore Market Conforms to the World Market Prices. The National Energy Policy Office (NEPO) has followed up oil price movements in various markets -- in the Middle East, Europe, America and Singapore -- and noticed that the movements of petroleum product prices in those markets are in the same direction and at similar levels. At intervals, prices in some markets may deviate from other markets’ direction or may move at different levels due to the demand and supply imbalance in the markets during those particular periods of time. However, such price differences will cause inflow/outflow of petroleum products from/to other markets until the price level in such markets becomes in balance with other markets. This is due to the fact that petroleum products distributed in every market are universal commodities under the free trade system.

6) Fluctuation of Petroleum Product Prices in Singapore Is Moderate Compared with Other Markets. During the recent years, observations on petroleum product price movements in various markets have revealed that petroleum product prices in Singapore spot market fluctuate at a moderate degree compared with other markets. Moreover, when petroleum product prices in Singapore spot market apparently differ from others, it will take approximately 1-3 days for the prices to regain balance.

3. Appropriate Petroleum Product Pricing by Thai Refineries under the Current Situation

Given the facts that Thai refineries still have to compete with imports from Singapore and that Singapore petroleum product price movements are in line with those in other markets, but with less price fluctuation, Thailand’s petroleum product pricing based on Singapore spot prices is considered the most appropriate for the time being. Nevertheless, since Thailand exports a portion of petroleum products at lower prices than distribution prices in the country, domestic consumers should benefit from the cheaper export prices. Currently, oil refineries have, at intervals, given discounts to oil traders; the latter will then deduct such discounts from their domestic distribution prices in certain areas. If the decrease in distribution prices can be expanded nationwide through a permanent decrease of ex-refinery prices to be close to export prices, consumers will be benefited as a whole.

4. Inappropriateness of Petroleum Product Pricing Based on the Cost-Plus Basis

To determine ex-refinery prices based on the cost-plus basis, taking into account crude oil costs plus fixed refining margins, is considered inappropriate for the following reasons:

1) Crude oil prices fluctuate as petroleum product prices do. Therefore, such a pricing methodology will not be able to mitigate the impacts of retail price fluctuations in Thailand once the market conditions become deviant.

2) If the determination of ex-refinery prices is based on the refining margins of Thai refineries, domestic oil prices will increase because Thai refining margins are higher than those in Singapore. The factors contribute to Singapore’s lower refining margins are as follows:

- The refining capacity of Singapore refineries is greater and more efficient than Thai refineries; hence the cost per unit is lower than that of Thai refineries.

- There are downstream industries in Singapore, hence better rate of return of the refining compared with Thailand.

- Tax collection in Singapore is at a lower rate than that in Thailand.

- Singapore is a port of entry, hence the advantages regarding the availability of the transportation system, fine transportation locations and large-scale ports, all of which yield lower oil transportation costs, compared with Thailand.

Consequently, determination of petroleum product prices based on Singapore petroleum product prices will render benefits to consumers. That is, they can purchase petroleum products at the minimum cost as Thai refineries will have to use a lower cost base than that of Singapore refineries in determining petroleum product prices so as to be competitive with imports from Singapore.

3) Pricing based on the cost-plus basis will distort the competitive conditions of the oil market since the oil costs will not reflect the actual competition. As a result, the import and export will not correspond with the real market conditions. During particular periods, import prices may be cheaper than the prices set by domestic refineries; oil traders will then import oil instead of buying from domestic refineries. On the contrary, if the prices in Singapore are higher than those in Thailand, refineries will gain more profits from exports than domestic distribution; therefore, refineries will try to export oil as much as possible, which may cause oil shortage in the country.

4) To fix the refining margins and revenues of the refineries will create no incentive for Thai refineries to improve efficiency in order to reduce their production costs.