Comprehensive competition law would set record straight

PUBLISHED : Tuesday, 17 January, 2006, 12:00am
UPDATED : Tuesday, 17 January, 2006, 12:00am

A study into the local petrol supply sector commissioned by the government has concluded no cartel is fixing pump prices.

The news will undoubtedly have raised eyebrows among the city's drivers who pay some of the highest prices in the world to fill their tanks.

It seems even more surprising when you consider that just three companies - Caltex, Exxon Mobil and Shell - supply about 80 per cent of the city's petrol, especially as changes to their pump prices are remarkably well synchronised (see chart).

The latest increase came just on Wednesday last week, when the price of a litre of unleaded petrol was raised to $12.88 from $12.68. That is expensive even compared with other pricey markets such as Singapore where a litre of the same grade of petrol costs the equivalent of $8.56.

To be fair, Hong Kong's high prices are largely the result of high taxes. For every litre of unleaded petrol we buy, the government imposes a $6.06 excise duty.

Even without the tax, Hong Kong's petrol still looks expensive. One litre of unleaded petrol here costs $6.82 before tax. That compares with the equivalent of $5.58 a litre in Singapore when the 5 per cent local goods and services tax and 37 Singapore cent ($1.75) duty are stripped out of the price.

Even factoring in the discounts loyal customers in Hong Kong can hope to earn, petrol is still 13 per cent more expensive here.

According to the study, the price differential is largely due to the high cost of shipping the refined petroleum here from Singapore and the high rents on storage facilities and petrol stations. The study says the oil companies pocket just 29 cents in profit for each litre of unleaded they sell.

The study may well be right in concluding there is no conspiracy to inflate petrol prices at the expense of consumers.

(It is questionable whether shipping and extra rental costs really add 13 per cent to the pre-tax price of petrol compared with Singapore. It would be worth investigating further to determine if any transfer pricing - in which overseas suppliers charge their local subsidiaries premium prices - is taking place so oil companies can book their profits offshore. But that was beyond the scope of the study.)

Unfortunately, the motives behind the study are open to question. In choosing to investigate the fuel market for anti-competitive practices, the government's competition advisory group was deliberately unambitious in its selection of a target.

In the unlikely event that the study concluded a price-fixing cartel was at work, the guilty companies would be big international and mainland oil companies, rather than local concerns.

A study into the supermarket or property sectors, on the other hand, might well have found a great deal more evidence of collusion and there the culprits would be influential local conglomerates, not foreign multinationals.

Moreover, the choice of Arculli and Associates to conduct the petrol market study looks strange. The firm is owned by Ronald Arculli who is chairman of the Jockey Club, possibly the most powerful monopoly in Hong Kong.

Given the result of the petrol market investigation, it looks likely that the study will be seized upon by big local businesses and big local business-loving officials as evidence that Hong Kong is a free and fair market, and that there is little need for a comprehensive competition law.

That would be a shame. The overriding perception is that Hong Kong is riddled with cartels, all colluding to inflate their members' profits to the detriment of the general public.

One study into a sector controlled by foreign companies and heavily distorted by high tax rates is not going to dispel that impression. Only a clear economy-wide competition law, diligently enforced, will succeed in persuading Hong Kong's consumers they are getting a fair deal.