Cartels have us over a barrel | South China Morning Post
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  • Apr 1, 2015
  • Updated: 1:20pm

Cartels have us over a barrel

PUBLISHED : Monday, 04 July, 2011, 12:00am
UPDATED : Monday, 04 July, 2011, 12:00am
 

Hong Kong consumers have the dubious distinction of paying higher prices for petrol and other such products than practically anyone else in the world; therefore, they have every reason to take a close interest in a recent and unusual global initiative to lower oil prices.

On June 23, the members of the International Energy Agency (IEA) finally agreed to dip into their strategic reserves and release as much as two million barrels per day to stem oil price rises spurred by the war in Libya.

This has occurred only three times since 1974 and immediately brought the benchmark Brent crude oil price down 8 per cent in the futures market.

By any standards, oil prices are high, having crossed the psychologically important barrier of US$100 per barrel in May and stubbornly remaining around that level.

Oil prices are most visible at the petrol pump and, for those living without piped gas supplies, when deliveries of liquefied petroleum gas are made. Most consumers assume that prices move only one way - up - even when crude oil prices ease, as is happening now.

This is especially so in Hong Kong, where an oligopoly controls all forms of oil supply and helps explain why prices are more than double those in the United States.

The existence of a local oil oligopoly is hardly a secret and has been a matter of concern for bodies such as the Consumer Council. In 2006, the government published a report on allegations of price fixing in the oil industry that it commissioned from Arculli and Associates, the company run by Executive Council member Ronald Arculli.

The report confirmed that, by international standards, oil prices in Hong Kong were very high and said this was a matter of concern. However, the consultants also stated that they had encountered difficulty in obtaining information from oil companies and could therefore draw no definitive conclusions as to whether these high prices were a product of collusion.

The report was greeted with considerable discontent and there were vague government promises of further action.

After many years' delay, fair competition legislation remains stalled.

Hong Kong's experience is merely a reflection of what happens in the global oil market, which, to some degree, has been controlled by the most effective commodity producer cartel in history.

The Organisation of Petroleum Exporting Countries, or Opec, was founded in 1960.

Opec members hold almost 80 per cent of the world's oil reserves and account for about 40 per cent of daily global production. It remains the largest single block operating in the industry; its members can quite literally decide how much oil is going to cost and how much is to be produced.

By far the most influential Opec member is Saudi Arabia. It has used its influence to moderate the rise in oil prices, but there is a limit to what it can do in an organisation dominated by one-party states with very different agendas.

Opec's main allies in keeping prices high are the world's consumers with their insatiable demand for oil and more oil. However, the picture usually painted of the cartel's operations is one which suggests that greedy oil producers are simply riding roughshod over pitiable oil consumers.

The reality, vividly seen in the 1980s, is that when demand for oil dwindles, as it did then, there is little Opec can do to keep prices high. However, this reality is often overlooked.

Meanwhile, in Hong Kong there is a double whammy of an international cartel layered on top of a local oil market controlled by a handful of players, who not only keep prices at identical levels but often follow one another in giving out the same free gifts and membership discount schemes at the petrol pumps.

The government seems to be alone in not noticing this state of affairs and is reluctant to do anything about it.

The action by the IEA shows that oil-consuming countries can occasionally fight back and, wonder of wonders, petrol prices in Hong Kong actually went down 10 cents a litre last week.

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