recent trends in domestic energy prices of asia: impacts of deregulation and changing policy...
TRANSCRIPT
Recent trends in domestic energy prices of Asia: impacts of
deregulation and changing policy directions
Fereidun Fesharaki, Heather S. Keevill and James P. Dorian
ENERGY PRICING POLICY represents a key component of national energy plan- ning. Prices can be an important tool for energy demand management, for example, particularly over a large number of years. Given the relative price inelasticity of most energy forms, a consumer’s ability to respond, in the short run, to changes in relative prices is limited. Prices can influence the pattern of consumption towards an optimal or least-cost mix of energy sources required to meet demand. Energy use may approach optimal levels, when the price for the marginal unit of energy employed reflects the incremental resource cost of supply to the national economy.
Increasingly, the pricing policies of a nation are promoting an economically efficient allocation of resources, both within the energy sector and between it and other sectors of the economy. Most analysts today agree that national pricing regu- lations should, in fact, discourage excessive government intervention. Pricing pol- icy is also used to facilitate energy conservation, preventing unnecessary waste and ~~ ~~
Fereidun Fesharaki is Director, Heather Keevill Research Assistant, and James Dorian Fel- low, of the “Programme on Resources: Energy and Minerals”. East-West Centre, Honolulu, Hawaii, United States. Fesharaki is also Past President of the International Association for Energy Economics.
The authors would like to formally thank the individuals and agencies who provided technical assistance for this study effort: from the East-West Centre in Honolulu, Wawan Prawiraatmadja, Binsheng Li, Chuanlong Tang, Duangjai Intarapravich, Nancy Paquin and Kennon Breazeale; and from the Seattle Research and Training Centre, David Isaak and Nancy Yamaguchi. John Thomas, Senior Editor at the East-West Centre, is recognised for editing an earlier version of this paper. In the Asia-PaciBc region, several government agen- cies provided input to the study results. Some notable contributions were made by John Rowe (Australia and Papua New Guinea), Osamu Fujisawa (Japan) and Katrina V. Ignacio (Philip- pines). Any errors evident in the findings are, however, the responsibility of the authors.
June 1996 I17
reducing reliance on energy from foreign sources. Relatively high prices can stem the consumption of energy fuels in short supply, such as woodfuel in a country try- ing to curb deforestation.
This paper examines current trends in energy prices within the Asia-Pacific area, in part to identify the impacts of price deregulation on the region. Price trends are also reflective of the changing patterns of energy consumption and utilisation in the area. Prices of petroleum and petroleum products, natural gas, coal and elec- tricity are included in the analysis.
To undertake the study, a comprehensive survey of energy prices was com- pleted, covering the following countries: Australia, Brunei, Canada, China, Tai- wan, Hong Kong, Indonesia, Japan, South Korea, Malaysia, New Zealand, Papua New Guinea, the Philippines, Singapore, Thailand and the United States. The sur- vey covered 1993 and 1994 prices, where available, as well as national energy policies through early 1995. Each participant was asked to provide price infor- mation for 1 January 1993 and 1 January 1994, and monthly information for the 1993 calendar year. In addition, information on 1990 prices was requested, to ensure the necessary historical perspective. Data were obtained directly from gov- ernments and industry in the region, and many organisations assisted in the study by filling out detailed questionnaires.
To our knowledge, very few comprehensive surveys of domestic, end-user consumer energy prices have ever been completed for the Asia-Pacific region, despite the varying magnitude of prices between the countries and the effects of such prices on local and regional economies. The survey, made possible through funding by the US Department of Energy,l was therefore considered timely and important. The study was aimed at expanding the information base of energy prices in Asia and promoting cooperation among governments in the region, in their attempts to establish pricing based on market forces. Since many Asia-Pacific countries are beginning to deregulate their energy prices, the analysis reveals changes in national pricing policies and structures.
The study involved four principal components:
(1) a literature review of available information on domestic consumer energy prices in selected Asian countries;
(2) a survey of current energy prices for petroleum and petroleum products, natural gas, coal and electricity, by sector/industry (where available) and by country;
(3) identification of the price build-up or component structure of indi- vidual prices, including tax and subsidy components; and
(4) analysis of the survey results and identification of areas for further research.
Pricing data generated in the study are suitable for subsequent, more detailed econ- omic analyses by government or company officials.
118 OPEC Review
I. Regional overview and analysis a) Summary analysis
Tables 1-6 list end-user prices for petroleum and petroleum products, natural gas, coal and electricity, for January 1994 and January 1990, by country. Prices are broken down into consumer end-user prices and tax elements in total prices. Pet- roleum product prices are in US dollars per barrel, while natural gas prices are in dollars per million cubic feet, coal in dollars per tonne, and electricity in dollars per kWh (throughout this paper, United States dollars are used, unless otherwise stated).
In 1994 (tables 1-3), Japan and South Korea reported the highest gasoline prices, with Taiwan and Singapore also having relatively high prices. Unleaded pre- mium gasoline prices averaged $196.76/b in Japan, compared with only $52.08/b in the US. In addition to China, Brunei and the US showed the lowest relative gasoline prices, while the rest of the countries fell into the lower-middle range.
The diesel price situation is slightly different, as Japan still shows the highest 1994 price (over $2 per gallon). However, South Korea’s prices, relative to gaso- line prices, are much lower, falling into the same range as prices in New Zealand, the Philippines, Singapore and the US (between $l/gal and $1.40/gal). Taiwan, Canada and Australia reported prices in the upper-middle range, between $1.40/gal and $2/gal. Brunei and Indonesia reported the lowest diesel prices, between $0.70/gal and $0.80/gal. Tremendous growth in diesel demand is expected to drive diesel prices above gasoline prices in the near future, at least until the supply imbalance is corrected. A situation, in which diesel prices rise above gasoline prices, would be especially costly for countries where diesel prices are maintained at artificially low levels.
For natural gas, residential prices in 1994 were high for Japan ($25.60/mcf), New Zealand ($ll.OO/mcf), and South Korea ($11.34/mcf), but low, due to abun- dance, in both Indonesia ($l.O2/mcf) and Brunei ($1.12/mcf). Coal prices varied widely among the countries in the region, ranging between $45.54/tonne and $22.58/t for residential use and $63.40/t and $29.03/t for power generation.
With respect to electricity, Japan once again reported the highest prices as of January 1994, between $0.52/kWh for industrial use and $0.62/kWh for residen- tial use. South Korean and Philippine prices are much lower, at $0.07/kWh and $O.lO/kWh, respectively, for industrial use, and $0.1 l/kWh and $O.lO/kWh, respectively, for residential use. Papua New Guinea, Indonesia and Malaysia reported the highest commercial electricity rates listed in table 1, at $0.19/kWh, $0.15/kWh and $0.13/kWh, respectively. As a result of abundant hydropower resources, New Zealand is able to provide the lowest reported industrial electricity rates in the region, at $0.03/kWh.
Nominal prices in 1990 were changed from their 1994 levels and, in some cases, the recent prices were lower than the 1990 figures, resulting from deregu- lation, changing tax structures or different market conditions (tables 4-6). The following sets of prices dropped between 1990 and 1994 for the countries listed:
June 1996 119
Tab
le 1
C
onsu
mer
(end
-use
r) to
tal p
rice
s, as
of J
anua
ry 1
994
US
dolla
rs
Aus
tral
ia
LPG
$/b
24
.94
Gas
olin
e $/b
U
nlea
ded
regu
lar
69.4
5 U
nlea
ded
prem
ium
74
.94
Lead
ed re
eula
r
Hon
g B
rune
i C
anad
a C
hina
Tai
wan
Kon
g In
done
sia
Japa
n
30.9
6
183.
92
196.
76
Sout
h K
orea
M
alay
sia
New
Pa
pua
New
Z
eala
nd
Gui
nea
Phili
ppin
es
23.3
7 30
.05
79.0
0
Sing
apor
e T
haila
nd
US
33.1
7 41
.73
8.64
7.
29
1994
da
ta
10.2
3 68
.71
121.
47
59.4
8 90
.73
not
52.6
6 70
.10
45.2
4 96
.74
avai
l. 55
.65
34.9
8 44
.34
104.
07
43.8
1 11
0.59
62
.58
52.0
8
122.
55
47.9
1 64
.05
121.
47
61.7
2 15
6.34
65
.80
54.3
2 83
.47
80.2
6 57
.18
72.4
1 40
.02
Lead
ed p
rem
ium
69
.35
Nap
htha
$/b
K
eros
ene
$/b
70.2
8
52.6
6 96
.74
19.6
7 47
.16
73.9
1 22
.26
30.6
0 61
.89
39.4
6 68
.50
30.2
1 22
.56
28.6
2 22
.56
30.2
1 30
.21
16.4
6 69
.86
119.
76
85.9
7 36
.07
37.5
0
30.1
8
16.4
6 49
.76
37.9
6 33
.31
47.8
3 45
.42
40.4
5 D
iese
l $/b
. A
utom
otiv
e 65
.59
Indu
stria
l 42
.85
Pow
er se
ctor
M
arin
e 5 1
.80
LS s
m in
dust
rial
LS lg
indu
stria
l 24
.13
LS p
ower
sec
tor
HS
sm in
dust
rial
HS
lg in
dust
rial
21.5
1 H
S po
wer
sec
tor
Nat
ural
gas
$/m
cf
Res
iden
tial
Com
mer
cial
In
dust
rial
Pow
er s
ecto
r
Fuel
oil
$/b
Coa
l $it
R
esid
entia
l La
rge
indu
stria
l Po
wer
sec
tor
Ele
ctri
city
$/kW
h R
esid
entia
l C
omm
erci
al
Indu
stria
l
41.9
3 37
.38
41.5
3 30
.02
38.4
9 26
.78
17.1
7
20.0
3 15
.26
40.6
2 62
.44
40.0
2 52
.96
36.9
2 36
.92
52.9
6 36
.92
22.7
2 35
.67
26.3
2 19
.61
15.1
6 27
.85
15.1
6 15
.16
15.6
8 22
.80
15.6
8 15
.68
23.8
5 23
.85
23.8
5
27.3
3 27
.26
23.1
0 20
.25
20.1
7
22.8
1 15
.26
16.2
3 14
.67
13.8
0
16.5
1
13.8
0 11
.70
13.0
6
1.12
4.
13
3.72
2.
26
0.28
7.16
7.
16
1.02
25
.60
11.3
4 8.
30
11.0
0 2.
04
8.84
7.
78
5.75
4.
94
3.32
0.
00
1.02
7.
45
5.19
2.
58
9.58
4.
15
7.70
22.5
8 26
.61
45.5
4 27
.62
54.4
0 31
.49
29.0
3 63
.40
31.4
9 34
.26
33.6
0
0.08
0.
05
0.05
0.08
0.
07
0.05
0.06
0.
03
0.05
0.
05
0.04
0.
04
0.06
0.
62
0.11
0.
08
0.07
0.
17
0.10
0.
15
0.61
0.
13
0.07
0.
19
0.10
0.
05
0.52
0.
07
0.04
0.
03
0.13
0.
10
F 5.
Not
es: N
ew Z
eala
nd pr
ices
are
for
the f
irst
qua
rter
of 1
994,
not J
anua
ry 1
994.
LS =
low
sulp
hur;
HS
= hi
gh s
ulph
ur; srn =
smal
l; lg
= la
rge.
Tab
le 2
Ta
x el
emen
t in
tota
l pri
ces,
as o
f Jan
uary
199
4 U
S do
llars
Aus
tral
ia
Bru
nei
Can
ada
Chi
na
LPG
$/b
0.
60
Gas
olin
e $/b
U
nlea
ded
regu
lar
39.3
2 3 1
.25
Unl
eade
d pr
emiu
m
38.9
6 0.
53
33.4
2 14
.39
Lead
ed re
gula
r 0.
53
14.1
3 Le
aded
pre
miu
m
39.2
7 0.
52
Nap
htha
$/b
K
eros
ene $
/b
9.41
0.
52
14.1
5
Hon
g T
aiw
an K
ong
Indo
nesi
a
I994
da
ta
40.8
6 no
t 43
.56
avai
l. 5.
56
43.5
6
29.1
4 2.
23
Die
sel $
/b
Aut
omot
ive
35.6
4 0.
53
25.7
0 12
.23
27.2
2 3.
02
Indu
stria
l 30
.38
1.58
2.
86
Pow
er s
ecto
r 1.
58
3.02
M
arhe
3.
02
LS sm
indu
stria
l 1.
10
1.55
Fu
el o
il $/
b
LS Ig
ind
usm
al
6.91
1.
10
LS p
ower
sec
tor
1.10
H
S sm
indu
stria
l 2.
38
HS
lg in
dust
rial
2.38
H
S po
wer
sec
tor
2.38
2.90
2.
60
1.59
0.47
0.
47
Nat
ural
gas
$/m
cf
Res
iden
tial
Com
mer
cial
In
dust
rial
Pow
er s
ecto
r
Coa
l $/t
R
esid
entia
l La
rge
indu
stria
l Po
wer
sec
tor
Ele
ctri
city
$/kW
h R
esid
entia
l C
omm
erci
al
Indu
stria
l L
Nor
es: L
S =
low
sulp
hur;
HS
= h
igh
sulp
hur;
sm
= sm
all;
lg =
larg
e.
!2
Sout
h Ja
pan
Kor
ea
3.37
3.
37
80.0
6 70
.88
80.0
6 67
.57
67.5
7 3.
36
1.50
3.
36
8.09
49.1
2 6.
55
3.36
9.
74
3.36
2.
73
3.36
2.
73
3.36
1.
82
3.36
2.
07
3.36
1.
48
8.76
1.
03
0.80
0.
68
3.65
1.60
1.
80
0.40
0.
01
0.40
0.
40
0.01
Mal
aysia
0.58
28.6
5 32
.78
32.7
8
6.87
7.69
7.
69
7.69
7.
69
0.92
0.
92
0.92
0.
92
0.92
0.
92
New
Z
eala
nd
38.2
0
40.6
2
4.83
3.96
3.10
1.66
1.30
0.01
Papu
a N
ew
Gui
nea
Phili
ppin
es
Sing
apor
e T
haila
nd U
S
Tar
5.72
7.
69
rate
s no
t 56
.33
15.9
2 av
ail.
59.5
2 2.
49
15.9
2 18
.75
3.17
20
.13
74.1
2
8.58
0.
42
8.29
8.
54
2.24
18
.32
8.29
8.
29
8.29
5.72
5.
72
5.72
0.00
25
0.00
26
0.00
24
Tabl
e 3
Con
sum
er (e
nd-u
ser)
per
gallo
n pr
ices
, as o
f Jan
uary
199
4 US
dol
lars
Han
g A
ustr
alia
Br
unei
Can
ada
Chi
na T
aiw
an K
ong
Indo
nesia
Ja
pan
0.74
4.38
4.
68
Sout
h K
orea
0.24
2.89
Mal
aysia
N
ew
Papu
a N
ew
Zeal
and
Gui
nea
Phili
ppin
es
0.56
0.
72
1.88
Sing
apor
e Th
aila
nd
US
0.79
LP
G $
/gal
G
asol
ine $
/gal
U
nlea
ded
regu
lar
Unl
eade
d pre
miu
m
Lead
ed p
rem
ium
Le
aded
regu
lar
Nap
htha
$/g
al
Ker
osen
e $/g
al
Die
sel $
/gal
A
utom
otiv
e In
dustr
ial
Pow
er se
ctor
M
arin
e
0.59
0.
99
1.65
0.21
1.42
1.
67
0.17
19
94
data
2.
16
not
1.64
2.48
1.
04
2.63
1.
49
1.24
2.92
1.
14
1.78
1.
25
0.83
1.
65
1.25
1.08
2.
30
avai
l. 1.
06
2.30
1.32
1.
53
1.47
1.
57
0.90
0.89
0.92
0.
41
0.36
0.
36
2.89
3.
72
0.39
1.
18
0.39
1.
66
2.85
2.
05
0.86
0.
89
0.72
0.
65
1.67
0.
47
1.12
1.
76
0.53
0.72
0.
68
0.72
0.
72
1.72
0.
95
0.79
1.14
1.
08
0.96
1.
56
0.73
1.
02
1.23
1.47
0.
54
0.54
0.94
1.
63
1 .oo
0.99
0.
71
0.64
0.48
0.
54
0.39
0.97
1.
49
0.95
1.
26
0.88
0.
88
1.26
0.
88
Fuel
oil $
/gal
LS
sm in
dustr
ial
LS le
indu
stria
l 0.
57
0.37
0.
54
0.37
0.
39
0.31
LS G
wer
sect
or
0.37
H
S sm
indu
stria
l H
S Ig
indu
stria
l 0.
51
HS
pow
er se
ctor
Not
es: LS
= low
sulp
hur;
HS
= hi
gh su
lphu
r; sm =
smal
l; lg
= la
rge.
0.57
0.
57
0.57
0.65
0.
55
0.48
0.35
0.
33
0.33
0.
48
0.28
Tabl
e 4
Con
sum
er (e
nd-u
ser)
tota
l pri
ces, as o
f Jan
uary
199
0 US d
olla
rs
Y
Hon
g So
uth
New
Pa
pua
New
A
ustr
alia
B
rune
i C
anad
a C
hina
Tai
wan
Kon
g In
done
sia
Japa
n K
orea
M
alay
sia
Zea
land
G
uine
a Ph
ilipp
ines
Si
ngap
ore
Tha
iland
US
LPG
$/b
27.9
7 35
.78
14.8
3 8.
98
54.1
4 20
.52
10.9
4 71
.72
25.0
4 G
&k
e $
/b
Unl
eade
d reg
ular
70
.45
Unl
eade
d ore
miu
m
72.7
3 10
6.43
77
.82
112.
51
131.
49
86.7
7 15
0.12
86
.77
55.2
6
86.3
9
88.3
1
43.7
6 43
.72
62.5
8 51
.66
47.3
5 86
.84
60.4
8 42
.25
93.0
6 65
.10
77.2
5 49
.97
~e
ad
ed
regu
lar
29.9
9 72
.08
Lead
edpr
emiu
m
71.4
1 40
.30
112.
51
127.
27
Nap
htha
$lb
K
emse
ne $
lb
74.8
9 16
.87
23.4
2 63
.86
46.9
1 D
iese
l $/b
A
utom
otiv
e 61
.46
26.2
4 65
.73
14.8
9 79
.06
88.9
3 In
dustr
ial
43.6
3 3 1
.76
49.5
6 Po
wer
sect
or
3 1.7
6 M
arin
e 29
.34
LS sm
indu
stria
l 17
.37
23 1
1 LS lg
indu
stria
l 29
.54
17.3
7 33
.86
LS p
ower
sect
or
17.3
7 H
S sm
indu
stna
l H
S lg
indu
stria
l 18
.83
HS
pow
er se
ctor
Fuel
oil
$/b
60.5
5 18
.68
21.6
9 46
.02
43.2
7 17
.33
22.4
2 20
.67
22.4
2 22
.42
60.0
5 35
.10
54.6
0
51.9
5 35
.10
42.2
4 51
.24
32.0
9 47
.40
32.2
1 32
.21
47.4
0 32
.21
75.6
1 42
.34
55.8
8 41
.64
32.4
4 33
.53
30.5
7 18
.10
54.1
8
31.1
2 21
.88
28.9
3 25
.82
28.8
7 35
.16
34.6
8
25.1
8
22.6
8 21
.90
20.2
4 24
.22
24.2
2 24
.22
19.0
8 19
.08
19.0
8
27.4
6 25
.27
20.7
4 25
.21
16.6
5
Nat
ural
gas
$/m
cf
Res
iden
tial
Com
mer
cial
Indu
stria
l Po
wer
sect
or
Coa
l $It
Res
iden
tial
Larg
e ind
ustr
ial
Pow
er se
ctor
Ele
ctri
city
8kW
h R
esid
entia
l C
omm
ercia
l In
dustr
ial
e
h,
Not
es: LS
= lo
w su
lphu
r;
1.34
4.
15
7.91
16
.62
19.6
7 12
.98
9.43
7.89
5.41
4.
98
3.50
3.
00
10.0
6 9.
66
9.95
30.1
1 49
.02
40.4
3 54
.08
61.3
0 31
.49
69.2
0 3 1
.49
32.0
1
0.05
0.
04
0.08
0.
04
0.09
0.
08
0.04
0.
07
0.07
HS
= h
igh
sulp
hur;
sm
= sm
all;
Ig =
larg
e
0.48
0.
11
0.09
0.
47
0.13
0.
40
0.08
0.
04
0.06
0.
07
0.03
0.16
0.
08
0.17
0.
08
0.11
0.
04
0.07
0.
06
0.08
0.
06
0.08
0.
07
0.06
0.
07
0.05
e
h)
P
Tabl
e 5
Tax
elem
ent i
n to
tal p
rice
s, as
of J
anua
ry 1
990
US
dolla
rs
Hon
g So
uth
Aus
tral
ia
Bru
nei
Can
ada
Chi
na T
aiw
an K
ong
Indo
nesi
a Ja
pan
Kor
ea
Mal
aysi
a
LPG
$lb
G
asol
ine $
/b
Unl
eade
d re
gula
r 34
.61
Unl
eade
d pr
emiu
m
0.00
Le
aded
regu
lar
0.00
Le
aded
pre
miu
m
34.4
7 N
apht
ha $
lb
Ker
osen
e $l
b 6.
01
Die
sel $
lb
Aut
omot
ive
31.9
3 In
dust
rial
23
.43
Pow
er s
ecto
r M
arin
e
LS sm
indu
stri
al
LS Ig
indu
stri
al
3.60
LS
pow
er s
ecto
r H
S sm
indu
stri
al
HS
Ig i
ndus
tria
l HS p
ower
sec
tor
Nat
ural
gas
$/m
cf
Res
iden
tial
Com
mer
cial
In
dusm
al
Pow
er se
ctor
Fuel
oil
$/b
2.00
32.2
1 33
.58
0.44
33
.32
0.44
0.44
0.44
24
.51
4.29
4.
29
2.35
2.
35
2.35
26.4
8 27
.99
27.9
9 73
.02
6.09
3.87
17
.50
36.3
1
2.68
2.90
0.
51
2.56
0.
5 1
1.62
Coa
l $11
R
esid
entia
l La
rge
indu
stri
al
Pow
er s
ecto
r
8 E
lect
rici
ty $l
kWh
c1
Res
iden
tial
? In
dust
rial
cn
Com
mer
cial
s. s N
otes
: LS
= low
sulp
hur;
HS
= h
igh
sulp
hur;
sm =
smal
l; lg
= la
rge.
4.37
1.73
2.24
2.
07
2.24
2.
24
1.91
1.
91
1.91
2.55
6 1.5
7 61
.57
2.62
2.
62
29.2
5 2.
62
2.62
2.
62
2.62
2.
62
2.62
6.73
2.81
1.80
2.
00
0.31
0.
3 1
0.31
1.46
35.8
3
40.0
5
1.97
3.
93
6.60
6.
49
1.99
2.
35
1.88
1.18
0.
91
0.88
0.01
0.01
6.88
24.6
9 23
.22
0.43
0.93
New
Pa
pua
New
Z
eala
nd
Gui
nea
Phili
ppin
es
Sing
apor
e T
haila
nd
US
TU
0.00
T
U
rate
s in
fo
avai
l. no
r 10
.58
avai
l. 10
.58
24.0
9 47
.96
10.5
8
41.1
4 no
t
41.8
1 0.
00
50.3
9
9.90
17.0
7
3.91
3.85
1.52
1.36
0.01
8.92
7.
40
13.1
0 8.
92
8.92
0.
00
0.00
0.
00
0.00
Tab
le 6
C
onsu
mer
(end
-use
r) p
er g
allo
n pr
ices
, as o
f Jan
uary
199
0 U
S do
llars
Hon
g So
uth
New
Pa
pua
New
A
ustr
alia
B
rune
i C
anad
a C
hina
Tai
wan
Kon
g In
done
sia
Japa
n K
orea
M
alay
sia
Zea
land
G
uine
a Ph
ilipp
ines
Si
ngap
ore
Tha
iland
US
LPG
$/g
al
0.67
0.
85
0.35
0.
21
1.29
0.
49
0.26
1.
71
Gas
olin
e $/
gal
Unl
eade
d re
gula
r 1.
68
1.73
2.
53
3.13
2.
07
2.06
Lead
ed re
gula
r 0.
71
1.72
2.
07
1.32
Le
aded
pre
miu
m
1.70
0.
96
2.68
3.
03
1.44
2.
10
1.84
Unl
eade
d pr
emiu
m
1.85
2.
68
1.04
3.
57
Nap
htha
$/g
al
0.44
0.
52
Die
sel $
/fa
[ K
eros
ene
$/ga
l 1.
78
0.40
0.
56
1.52
1.
12
0.41
1.
10
1.03
1.
43
0.60
1.13
1.
19
0.84
1.49
2.
07
1.44
2.
22
1.55
1.30
1.04
1.
23
1.01
Aut
omot
ive
1.46
0.
62
1.57
0.
35
1.88
2.
12
0.53
1.
80
1.01
In
dust
rial
1.04
0.
76
1.18
0.
49
1.33
0.
99
Pow
er s
ecto
r 0.
76
0.53
0.
77
0.84
1.
01
1.22
0.
76
1.70
1.
24
1.13
0.
77
n 77
".. I
~
~~
Mar
ine
0.70
0.
53
0180
0.
73
0.43
1.
13
0.77
LS s
m in
dust
rial
0.41
0.
55
0.74
0.
52
LS Ig
indu
stria
l 0.
70
0.41
0.
81
0.69
0.
61
0.93
LS
pow
er s
ecto
r 0.
41
0.69
0.
48
HS
sm in
dust
rial
0.45
0.
65
0.58
H
S Ig
indu
stria
l 0.
45
0.45
0.
60
0.49
0.
92
0.58
H
S po
wer
sec
tor
0.45
0.
60
0.40
0.
58
Fuel
oil
$/ga
l
Not
es: L
S =
low
sulp
hur;
HS
= h
igh
sulp
hur;
sm
= sm
al/;
lg =
larg
e.
0.60
0.54
0.
52
Tabl
e 7
APE
C m
embe
r pri
cing
reg
ulat
ion
com
pari
son
Hon
g So
uth
New
Pa
pua
New
A
ustr
alia
B
rune
i C
anad
a C
hina
Tai
wan
Kon
g In
done
sia
Japa
n K
orea
M
alay
sia
Zea
land
G
uine
a Ph
ilipp
ines
Si
ngap
ore
Tha
iland
US
Petr
oleu
m p
rodu
cts
Yes
Yes
No
Yes
No
LPG
No
Yes
No
Yes
Yes
No
Yes
No
Yes
Yes
No
No
Yes
Yes
No
Yes
Yes
No
No
No
Gas
olin
e N
o Ye
s N
o Ye
s Ye
s N
o Ye
s K
eros
enel
jet
No
Yes
No
Yes
Yes
No
Yes
No
Yes
Yes
No
Yes
Yes
NO
N
o N
o D
iese
l N
o Ye
s N
o Ye
s Ye
s N
o Ye
s N
o Ye
s Ye
s N
o Ye
s Ye
s N
o N
o N
o Fu
el o
il N
o Ye
s N
o Ye
s Ye
s N
o Ye
s N
o Ye
s N
o N
o Ye
s Ye
s N
o N
o N
o
Oil
No
No
No
Yes
Yes
No
Yes
No
Yes
No
No
Yes
Yes
NO
N
o N
o G
as
Yes
Yes
No
Yes
Yes
No
Yes
No
Yes
No
No
da
d
a
Yes
No
No
da
N
O
da
N
o N
o C
oal
No
nla
No
No
No
No
No
No
Yes
No
No
Ele
ctri
city
Ye
s Ye
s Ye
s Ye
s Ye
s Ye
s Ye
s Ye
s Ye
s Ye
s N
O
Yes
Yes
Yes
Yes
Yes
Plan
s to
dere
gula
te
inne
ar fu
ture
? Ye
s N
o d
a
Yes
No
da
Ye
s Ye
s Ye
s N
o d
a
No
Yes
da
Ye
s d
a
Not
es:
in c
ases
whe
re t
he s
urve
y re
spon
ses f
or q
uest
ions
or
ques
tions
diff
ered
bet
ween
gov
ernm
ent
and
indu
stry
sou
rces
, the
aut
hors
of
the
study
dec
ided
whi
ch a
nsw
ers
were
mos
t ap
pria
te, g
iven
exi
sting
pri
ces a
nd p
olic
ies
in th
e re
spec
tive
coun
trie
s. nl
a =
not
app
licab
le.
(1) gasoline; low sulphur fuel oil (Australia);
(2) gasoline; diesel; low sulphur fuel oil (Canada);
(3) gasoline; diesel; natural gas (Taiwan); and
(4) natural gas (South Korea).
For information on the tax components of both the 1994 and 1990 prices listed, see tables 2 and 5, respectively.
b) Pricing trends The overwhelming trend in energy sectors across the Asia-Pacific region has
been for: (1) a reduction in regulations; and (2) a greater reliance on market forces, when it comes to energy pricing. In countries where petroleum product prices are regulated by the government (table 7), pricing policy has attempted to satisfy two conflicting priorities: social equity for the poor, and the promotion of economic growth. This policy often translates into a familiar pattern, in which the price of kerosene is kept artificially low, because it is used for cooking by the poor, while gasoline and jet fuel (considered luxury fuels) are priced much higher. For industrial fuels, including diesel and fuel oil, prices are often kept low to pro- mote development.
While such a pricing pattern exists in Singapore, Japan, South Korea and Hong Kong, it is, admittedly, for different reasons. As was noted in tables 1 4 , gasoline is the highest priced petroleum product in all the countries surveyed. While gasoline captures the highest price at the wholesale level, taxes are the pri- mary reason for the difference in prices. Taxes on gasoline in Japan, for example, are in the region of $70--85/b. US gasoline taxes are used to build and maintain roads, while, in other countries, where higher tax rates apply, the revenue is some- times used to support costly government-supported programmes.
Reducing regulations, which inhibit market forces in the energy sector, is clearly a current trend in most Asia-Pacific countries. Some of the more developed nations, including Canada, Hong Kong, New Zealand, Singapore and the US, already rely on free-market prices. In these countries, increasingly restrictive en- vironmental regulations are likely to have the greatest impact on energy prices.
Most of the other countries analysed in this study are either in the process of decreasing energy-pricing regulations, or have plans to do so in the near future. In Australia, retail prices for petroleum products and coal are not regulated, but those for natural gas and electricity prices are. Coal prices were freed from regulation as recently as 1992, and plans are at present being made to reduce restrictions in the natural gas and electricity sectors. China has been moving domestic prices closer to market prices and has announced plans to deregulate retail petroleum product prices by 1996. In 1991, Taiwan announced that its prices would be based on costs;
June 1996 127
while prices will continue to be regulated, basing prices on costs introduces a significant tie to market pricing.
Thailand, the Philippines, Malaysia and South Korea have had similar pricing systems, in that all four countries cross-subsidised prices through a government- established fund that kept the pricing structure stable. Thailand recently completed a transition from regulating prices, using the price stabilisation fund, to a market pric- ing system. The transition was made in two phases, between May 1991 and Novem- ber 1992. The Philippine government is planning a similar deregulatory process, the implementation of which is yet to be scheduled. In Malaysia, the situation is slightly different. Retail consumer products, including gasoline, diesel and household LPG, are regulated, while wholesale diesel, fuel oil and jet fuel are sold at negotiated or market contract prices. The South Korean government has utilised the price stabili- sation fund model to regulate prices and correct for what it perceived to be the inef- ficiencies of direct market pricing. South Korea has been in the process of reducing pricing regulations on petroleum products since 1983, when controls on jet fuel and solvents were lifted, but the latest round of policy changes has come as recently as February 1994. Since 15 February, product prices have been adjusted monthly, based on international prices and exchange rates.
Indonesia’s system of cross-subsidising fuel prices has cost the government enough money ($450 million in fiscal year 1991/92) to encourage price reform. Instead of deregulating, Indonesia has taken a different approach. The government plans to introduce coal briquettes to displace demand for kerosene by low-income groups. Once the alternative is in place, the price of kerosene will be increased. Though this process is expected to improve the pricing balance, it is not expected to solve it completely.
The supply shortages and resulting price increases, brought on by the oil crises of the 1970s, left Japan with one of the most highly regulated energy sectors in the world. Since that time, Japan’s regulations have focused on energy supply security, which has led to aggressive energy efficiency and fuel diversification pro- grammes. There is significant pressure to reduce or eliminate many rules and restrictions in the energy sector. Though Japan is eliminating some regulations, changes to date have been negligible and slow in coming.
In Papua New Guinea, the government is actually increasing regulation, to work towards a goal of reducing the urbdrural price imbalance. Brunei is in a situ- ation unique to the region. Prices are regulated by the government, but they are very near market prices. Taxes are so low, they are practically non-existent. This situation exists because Brunei is a small, relatively rich oil-exporting country and therefore does not need to charge taxes on products.
As for regional prices, a trend has emerged in the Asia-Pacific area towards a less regulated energy sector, though the extent of deregulation varies significantly from country to country. While the transition to more market-oriented prices may be difficult, the dominance of market prices is expected by many analysts to make the region more competitive over the longer term. If individuals and industry do not pay the market-determined price for energy, governments generally must make
I28 OPEC Review
up the difference and the incentive to allocate resources efficiently is reduced. Bal- ancing that fact with often conflicting domestic policy goals is clearly difficult. A look at regional trends indicates that most countries are attempting to reduce en- ergy price regulation, believing that more efficient conditions will be facilitated by market (or near market) prices.
11. National pricing policies As is generally known, some nations in the Asia-Pacific region still use regu-
lated domestic pricing for energy resources and their products, mostly for socio- political reasons. The common practice in the petroleum industry, for example, is the cross-subsidy among products. This partially explains the difference in consumption patterns across the barrel, which are quite distinct, compared with other regions. Also, such policies are partially responsible for the relative consumption growth among products (e.g. the staggering growth of diesel consumption). Until a few years ago, many of the nations could afford this, since most of their consumption was met by domestic refineries and thus required only a fairly small amount of input.
Recent, dramatic economic development in Asia has brought about an im- pressive increase in petroleum product consumption in the newly industrialised economies, as well as the developing countries; but, in most cases, their domestic refinery expansions have not been able to cope with the increased demand (not to mention their additional efforts to adapt to more Middle Eastern crudes and to increasingly restrictive environmental regulations). Imports have been particularly problematic, since domestic prices are usually lower than international prices, exacerbating current account deficits. Moreover, the difference in the demand growth of products has resulted in changes in price differentials, boosting the prices of certain products.
Indeed, some of these countries have recently changed their pricing policies, or have made plans to reduce regulations and allow the market to determine prices. Since it is common that the pricing of many fuels follows oil prices, distortions caused by oil price regulations can affect the efficient allocation of the other resources. To promote the use of certain other fuels, however, several countries in the region have adopted fiscal policies that encourage or discourage a consumer from using a particular fuel. For example, in the phasing-out of leaded gasoline, the price of unleaded gasoline is usually lower than that of leaded, because of a higher tax imposed on the latter.
The following pages summarise the energy-pricing policies of many Asia- Pacific countries, namely Australia, Brunei, the People’s Republic of China, Tai- wan, Hong Kong, Indonesia, Japan, the Republic of South Korea, Malaysia, New Zealand, Papua New Guinea, the Philippines, Singapore and Thailand. Policies for both Canada and the US are also examined. Information gathered throughout the region reflects policy changes made through autumn 1994. Primary source data were generally considered accurate and left unmassaged, except in obvious situ- ations. For further information on energy-pricing policies in these countries, readers may refer to the bibliographic sources listed at the end of this paper.
June 1996 129
a) Australia Australia is a major net energy exporter, with coal and liquefied natural gas
(LNG) being the major exports. Energy exports provide one out of every five dol- lars of export revenue. In an effort to achieve a more efficient energy sector, the government recently began a series of microeconomic reforms to eliminate un- necessary regulations and taxes, particularly with regard to electricity, oil and gas pricing. One of the current impediments to increased energy efficiency is the exis- tence of cross-subsidies, whereby residential customers enjoy relatively low rates for gas and electricity, at the expense of commercial and some industrial users.
Australia’s crude oil production satisfied 82 per cent of domestic consump tion in 1991/92. Imports generally consist of heavier crude oil and products, while exports tend to be higher-valued light oil and oil products. Wholesale gasoline and diesel price ceilings are established by the Prices Surveillance Authority (PSA), based on the cost of producing or importing crude, plus refining, marketing and dis- tribution costs. The PSA has the task of surveillance of, and holding inquiries into, prices charged for the supply of certain goods, among which are petroleum prod- ucts. Most of Australia’s petrol is derived from locally produced crude oil.
Tax rates are adjusted every six months, based on the consumer price index. The current Commonwealth Excise Tax is (Australian) A$0.29573 per litre for gasoline and diesel. As of 1 February 1994, excise rates for leaded and unleaded gasoline have been differentiated, with leaded at A$0.3 175/1 and unleaded one cent lower, at A$0.3075/1. To speed up the reduction of leaded fuel consumption, on 1 August 1994 the excise tax on leaded was raised by one cent, widening the differential between leaded and unleaded gasoline to A$0.02/1.
Because of the location of Australia’s gas reserves, as well as the lack of inter- connections between state pipeline systems, most markets effectively have only one source of gas in Australia. The 1991 National Gas Strategy included price monitor- ing by the PSA for interstate pipeline operations. The Strategy sees the federal com- petition law of Australia, administered by the Trade Practices Commission, and price monitoring by the Prices Surveillance Authority as underlying a light-handed, market-driven regulatory regime for interstate pipeline operations. General carrier/open access and competitive pricing arrangements are made as appropriate.
As for coal, in July 1992 the coal export duty of A$3.50 per metric ton (which applied to certain Queensland opencast mines) was abolished and the A$O.O5/t research and development levy suspended. Under the new arrangements, industry is responsible for R&D funding, and the levy of A$0.20/t has been replaced by an industry-financed plan. The government has also been pushing for the removal of coal subsidies in other countries, arguing that they distort the global market and result in socioeconomic costs to the Australian coal sector.
The government has controlled coal exports in Australia since 1973. Usually it does not become involved in coal price negotiations, but Australian coal exporters are required to submit export settlements to government authorities for approval. Though the government usually approves them quickly, rejections are made when national security interests are involved.
130 OPEC Review
The Australian power sector is in transition, from being a state-owned, verti- cally integrated system to one that will become more market-driven. Recom- mendations include the separation of ownership of generation, transmission and distribution systems and the privatisation of existing utilities, to overcome inef- ficiencies. Electricity prices are set by individual state commissions and approved by the state governments. Most electricity companies are exempt from federal income tax, sales tax and some other state taxes and charges. The National Elec- tricity Strategy recommends turning public sector agencies into corporations, increasing private sector involvement and ending exemptions from taxes and charges. The national government has offered to contribute up to A$100m towards transmission infrastructure investment for an integrated national grid. Some state- owned electric utilities have already begun separate accounting mechanisms for production, transmission and distribution, so that each has separate profitability and efficiency objectives.
b) Brunei Prices for all energy commodities in Brunei are regulated by the government
or, more specifically, by the Ministry of Finance and the Petroleum Unit within the Office of the Prime Minister. Brunei Shell has a monopoly on domestic sup- plies of petroleum products and natural gas. Oil exports provide a very large por- tion of Brunei’s revenue. The government has used some of that revenue to cross-subsidise petroleum product prices. As is common in such a policy, gasoline prices are kept high, while kerosene and diesel prices are low. Very little tax is collected on products; in fact, at $O.Ol/b, petroleum product taxes in Brunei are the lowest in the region.
c) Canada Canada is well endowed with energy resources, including large amounts of
oil, natural gas, coal, hydropower, uranium and biomass. It is a net exporter of all primary energy commodities, including electricity, oil and natural gas to the US and coal and uranium to world markets. Canada has made numerous structural adjustments in the past decade to increase the market orientation of its energy sec- tor, including the relaxation of ownership restrictions in the upstream oil and gas sectors, the termination of subsidies for oil exploration and fuel switching, and a move towards employing a market-based assessment process for evaluating energy exports.
Domestic prices for all energy commodities, except electricity, are estab- lished through market forces. Electricity prices are regulated at the provincial lev- els of government. Energy taxes include the Provincial Sales Tax, Goods and Services Tax and Federal Excise Tax. A seven per cent Goods and Services Tax was imposed on 1 January 1991, replacing a 13.5 per cent Manufacturing Tax. Excise taxes on unleaded gasoline are 8.5 centsh, and diesel taxes are 4.0 $A.
June 1996 131
d) People’s Republic of China Since 1983, crude oil and oil product pricing has been based on a two-tier
pricing system. The government established a two million barrels per day quota for the national oil industry and different quota levels for individual oil fields. Crude production up to the quotas was priced at ‘in-plan’ prices, while consumption above quota levels was sold at a much higher ‘out-plan’ price (closer to inter- national prices). Product pricing was linked to crude prices, in that products from in-plan crude were sold at in-plan product prices, and products from out-plan crude were sold at out-plan product prices. Since the initial policy implementation in 1983, the government has made several mild adjustments to both in-plan and out- plan prices.
As of May 1994, the government planned to phase in a reform package to increase control over the volatile oil market. According to the plan, the two-tier pricing system for crude oil would remain, but both the in-plan and out-plan prices would be fixed above the international market price for refined products. Sinopec, China’s national refining and petrochemical corporation, was designated to be responsible for the distribution of all onshore crude and the allocation of all refin- ing contracts. In addition, Sinopec would be responsible for fixing refined product prices for China’s 35 cities (capitals of the 29 provinces and other cities, where inflation rates are reported) at prices close to current national average retail prices. One wholesale and one retail price would be established in each area. Pricing in all other areas would be fixed by local governments, with approval from Sinopec, tak- ing into consideration differentials in transportation and other costs.
It is important to note a $3.50/b price differential of gasoline over diesel in the proposed wholesale prices. With such strong growth in diesel demand, diesel prices in the entire Asian petroleum market are expected to be higher than gasoline prices, with the gap widening in the near future. Higher gasoline prices will encourage refineries to turn out more gasoline and less diesel, contrary to demand. If the government were to increase diesel prices, on the other hand, the farmers would suffer. The new pricing policy is designed to stabilise the market so that the government can eventually deregulate retail prices. It is also important to note that China’s price reform in the petroleum sector has resulted in defucro price regu- lation, but above Singapore prices.
Consumer coal prices vary dramatically in China, because of differences in transportation costs, transaction costs and producer prices. In 1994, price controls on coal were eliminated. Though producers did not increase prices substantially, consumer prices were increased disproportionately. The difference in price is attributed largely to the increased transaction costs of middlemen, so the additional money paid by consumers is channelled into private pockets. For example, coal prices in Shanxi are as low as $13/t, while, in Guangdong Province, coal prices are as high as $36/t. Beijing reports coal prices around $20/t.
As for electricity, before 1985, tariffs were under strict government control and were basically fixed. Increasing fuel prices appear to have been an important factor in the rapid decrease in profitability in the power sector during the 1980s.
132 OPEC Review
Between 1980 and 1991, profits decreased almost 40 per cent. The profit rate of the power sector is now reportedly under 3.7 per cent.
Since 1985, China has followed a multi-rate system. Currently, a significant and increasing proportion of electricity is sold substantially above state-fixed tar- iffs. Most old power plants are able to make modest profits, because of low capital charges resulting from state subsidies and/or low interest rates. Under fixed elec- tricity tariffs, newer power plants are unable to cover their costs. The average state- fixed electricity price is only about 2.5 $/kWh, which is the lowest in Asia.
According to the Ministry of Electric Power Industry, electricity production in China falls short of demand by about 20 per cent. To supply sufficient electricity to support China’s rapid economic growth, a series of policy changes has been made, to attract foreign investment into the power sector. These changes include reforming electricity tariffs, the foreign exchange system, the project approval process and the legal system. The Chinese government is also resolved to eventually allow a necessary economic rate of return on joint ventures in power to facilitate foreign investors.
Currently, except for the power plants in which the central government has invested, other new power plants are allowed to sell at prices that cover costs, taxes and ‘reasonable’ profits. The definition of ‘reasonable’, however, is still vague. For domestic investors, the State Council has agreed to increase electricity tariffs, so that power plants will have the ability to repay their loans. A formula is now used to adjust electricity tariffs annually, based on changes in fuel and trans- portation costs. Over the next few years, the government plans to free electricity prices slowly, so that they can adapt to market conditions.
e) Taiwan With the exception of coal prices, all energy prices are regulated in Taiwan.
The Chinese Petroleum Corporation (CPC) and the Ministry of Economic Affairs regulate petroleum product and natural gas prices, while Taipower regulates elec- tricity prices. In terms of domestic supply monopolies, the same situation applies, with CPC controlling oil and gas, Taipower in control of electricity, and coal with- out market dominance. As of 1991, the stated pricing policy dictated that prices should reflect actual costs and take into consideration the needs of energy conser- vation, environmental protection and economic development, as well as the main- tenance of an appropriate energy structure. The prices of petroleum products and natural gas should be set after considering their relative heating values and ability to substitute for one another. Electrical power pricing structures should reflect the cost of supplying energy at different times of the day and different seasons and should encourage off-peak use of power to promote load-levelling.
General taxes include a value added tax (VAT), which has been five per cent since 1986, and an energy excise tax. Excise taxes on petroleum products are taken as a government-established percentage of the appraised value of each individual product. Gasoline taxes are 90 per cent of the appraised value, diesel taxes 85 per cent and fuel oil taxes three per cent. Between 14 February 1992 and 2 January
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1994, Taiwan’s excise tax on gasoline was 75 per cent and, during the same period, the excise tax on automotive diesel oil was 60 per cent of the appraised value. Cur- rent electricity taxes include business taxes of 0.6 per cent, a stamp tax of 0.4 per cent and an education surtax of 0.15 per cent, in addition to the VAT.
f) Hong Kong Market prices apply to all energy commodities in Hong Kong, with the
exception of electricity, which is regulated by the Economic Services Branch. The system of taxation applied to petroleum products is very similar to the US system, with some remnants of the patterns most commonly employed in the region. Gaso- line and jet fuel prices are high, with fuels used in the industrial sector and domes- tic kerosene prices significantly lower. These price differentials are accomplished through the system of taxation. Consumption of kerosene has been declining, as a result of the increased availability of town gas for residential use. Naphtha reform- ing plants produce town gas, which is used primarily for water heating and cook- ing. Taxes on leaded gasoline are (Hong Kong) HK$0.55/1 higher than unleaded gasoline prices, to expedite the reduction in leaded gasoline consumption. All new cars registered after January 1992 are required to have catalytic converters and, therefore, run on unleaded fuel.
Since 1982, the two power companies have been encouraged by the govern- ment to switch from oil to coal for electricity generation. Today, over 90 per cent of the electricity generated comes from coal-fired generating units. The govern- ment is pleased with its decision to switch, because coal has remained less expen- sive than oil on a heat equivalent basis. Plans for the future include combined cycle generating units, which will use natural gas from the Hainan gas field.
g) Indonesia Petroleum product prices in Indonesia are regulated by the government, and
based on consideration of social income distribution, planned economic growth and industry revenue. Presidential decrees establish prices which are enforced by the Department of Mines and Energy. With the exception of kerosene, for which con- sumer prices are dictated at the provincial level, all other consumer product prices are set at the national level. Cross-subsidies are used, in an attempt to balance con- flicting policy goals. For example, since kerosene is considered a fuel used by low- income people, its prices are subsidised, and, to support industrialisation, diesel prices are also subsidised. As is common among countries using cross-subsidies, gasoline prices are higher, because gasoline is considered a luxury fuel. Unfortu- nately, the cross-subsidy system has not worked out in the government’s favour: in fiscal year 1991/92, energy subsidies cost the Indonesian government $450m. The government has begun introducing cheaper coal briquettes for cooking purposes, which are intended especially to cater to low-income groups. The intention is to dis- place the use of kerosene by this particular consumer group, so that the government will be able to eliminate the kerosene price subsidy in the near future.
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Coal prices in Indonesia are not regulated. In many cases, prices are deter- mined on a case-by-case basis between the coal company and the user (for exam- ple, the state electricity company). Prices are linked either directly or indirectly to petroleum product prices. Residential and commercial electricity prices, regulated by Indonesia’s Department of Mines and Energy, have generally risen over the five-year period 1990-94.
h) Japan Since Japan relies on imports for almost all its energy supplies, security of
supply is a policy priority. With almost no indigenous fossil resources, supply se- curity in Japan translates into self-sufficiency in the refining sector. Energy ef- ficiency, demand-side management, environmental protection and diversification from fossil energy on the supply side are the other stated objectives of Japan’s energy policy. Because all these goals are being pursued simultaneously, retail petroleum product prices are extremely high in Japan.
Most consumer goods are expensive in Japan, and energy is no exception. There are two reasons petroleum products cost so much more in Japan than any- where else. First, the refining industry is highly regulated. Japanese refineries are heavily indebted to banks, and so the government feels a responsibility for ensuring their viability. The oil industry is governed by supply and demand, and also by ‘administrative guidance’. This guidance is provided through the Ministry of Inter- national Trade and Industry, which approves supply, import and export plans for each individual refinery. The second reason petroleum product prices are so high is simply that the cost of doing business in Japan is high. For example, grassroots refinery construction would cost approximately $6 billion in Japan, compared with international prices ranging from $1.2 to $2 bn.
Gasoline, in particular, has been heavily regulated and taxed. Income from taxes is then used to cross-subsidise all other petroleum products. Until recently, gasoline production was regulated on a refinery-by-refinery basis. In response to the Gulf hostilities in 1990, Japan introduced a new petroleum product pricing for- mula, whereby product prices are related to the cost of crude procurement. At the retail level, in an effort to reduce administrative control, the government lifted the refinery gasoline production quota in 1988. In addition, the ‘post-adjustment’ sys- tem, which allowed retailers to be paid a cash sum by distributors, was eliminated. The post-adjustment was used to compensate for the retailers’ need to sell gasoline below cost, to compete for market share. Another significant change in the regula- tory environment will take place by the end of 1996. At that time, the law banning imports of petroleum products will be abolished, allowing for greater competition.
Though Japan is taking steps to reduce regulation of the domestic oil market, it would not be appropriate to say that its market will be deregulated. The market is so heavily regulated and interdependent, that the proposed changes represent only small changes overall. In fact, the regulatory environment, and therefore prices in Japan, are not comparable with those in any other country.
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Japan is the world’s largest importer of LNG, which accounts for about 95 per cent of the country’s natural gas supply. Government plans are for the use of gas for electricity generation to increase in the near term and as infrastructure in the residential/commercial sector is developed.
In 1994, the Gas Utility Law was revised for the first time in 24 years. To promote natural gas consumption, certain deregulation measures were imple- mented. The tariff process for large consumers was streamlined to require reporting instead of governmental approval, and the expansion of a gas supply area was allowed without government approval. Increasing natural gas consumption is con- sidered a means of achieving the environmental goals of reduced C02 emissions. Natural gas is imported as LNG and used primarily to produce electricity. As demand for electricity grows, demand for LNG may also grow, depending on the price. Current LNG prices are too low to justify investment to increase LNG sup- plies. LNG prices are linked to crude prices, and low crude prices in recent years keep new LNG projects from appearing economic. Price increase requests are sup- ported by arguments that LNG is cleaner than other fossil resources and therefore should command an environmental premium. Another argument is that combined cycle power generation, using gas, is much more efficient.
i) South Korea South Korea is highly reliant on imported energy, and its pricing policies
have focused on promoting efficiency in use. Believing that international market prices would not promote efficiency, it has regulated petroleum product prices under the Petroleum Business Act. Accompanying this Act is the Petroleum Busi- ness Fund, established in 1979. Taxes on crude oil imports and low-sulphur fuel oil sales are used to stabilise domestic prices, finance stockpiling and development projects, and run an oil-quality check system. The South Korean government has been moving towards deregulation since 1983, when it lifted price controls on jet fuel and solvents.
There are three basic taxes on crude oil and products: an import duty of five per cent on crude and products; the Special Excise Tax (SET) on LPG, gasoline and diesel; and a value added tax of ten per cent on all goods. The SET for gaso- line was 150 per cent of the wholesale price, diesel was 20 per cent and LPG ten per cent.
The trend towards strengthening market-pricing mechanisms continues. As of 15 March 1994, the ‘floating oil system’ was introduced, allowing domestic oil prices to vary once a month in accordance with international prices and exchange rates. Price adjustments would be made on the 15th of each month. In February 1994, consumer product prices were lowered by four per cent. At the same time, the SET for gasoline was increased to 180 per cent, the diesel SET to 25 per cent and the LPG SET to 13 per cent. Additional revenue from the tax increase would be used to finance social infrastructure projects. The floating oil price system was considered a temporary step to allow consumers to adjust in the move towards full market pricing.
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Electricity prices are based on the long-run marginal cost and operate on a two-tariff system. Residential and commercial customers are subject to a lighting tariff, and industrial customers are charged according to a power tariff.
j) Malaysia Retail prices for liquefied petroleum gas (LPG), gasoline, diesel and
kerosene are regulated by the Ministry of Domestic Trade and Consumer Affairs. Through the use of the Automatic Pricing Mechanism (APM), product prices are kept relatively stable, while feed, marketing and distribution costs may vary. APM is a mechanism used by the government (i.e. Ministry of Domestic Trade and Con- sumer Affairs) to fix the retail prices of the four products. It was established to regulate retail prices when there are changes in product costs and marketing and distribution costs, and to provide a predictable basis for oil companies to plan and implement investment, while ensuring stability in supply.
Retail prices are calculated based on the fob price of the product, a tax or duty, and the oil industry’s marketing and distribution costs. As the product import costs and/or the marketing and distribution costs vary, the government mzy scljust the tax element to maintain the retail price. Product prices are reviewed each month. Those products regulated by the APM (retail mogas, retail diesel and household LPG) are therefore not affected by fluctuations in world oil prices. Prod- ucts not under the APM (fuel oil, jet fuel and some diesel), however, tend to have prices based on medium- and long-term negotiated contracts and thus are affected by international crude prices each time the contract is renegotiated. Product prices for industrial users are not subject to government regulation, and therefore the industrial sector is the only place where internaticaal market prices reign.
Petronas Dagangan Bhd’s (PDB) products can be divided into two cate- gories: those that are controlled by the APM and those that are not. Product mar- gins under APM, except for extreme short-term fluctuations, are not significantly affected by fluctuations in world oil prices, since, under the APM mechanism, the government varies the duty element to maintain the retail prices of the product and also the profit margin PDB enjoys. Short-term fluctuations in world oil prices have an effect on PDB’s profit, but medium- and long-term movements in world oil prices are taken into account in the negotiation of new contracts.
PDB sells products (diesel, fuel oil, LPG, gasoline and lubricants) to the industrial sector directly and also through its network of industrial dealers. Product prices in this market are not subject to government regulation (i.e. APM), and so competitive sales terms (i.e. price, credit) are a critical success factor in this market.
In terms of electricity prices, the Malay government recently introduced a new tariff system to replace the one that had been in effect since 1 September 1990. The new formula is a ‘tariff adjustment formula’, which provides for escalation of the non-fuel cost component, fuel cost pass-through and purchase cost pass- through.
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k) New Zealand New Zealand is richly endowed with most energy resources, but the country
imports about half its oil needs. Since 1984, the New Zealand government has been deregulating areas of industry to promote competition. In the energy sector, state-owned enterprises, including Electricorp, Coalcorp and Petrocorp, were established in place of direct government regulation. Petrocorp was sold to Fletcher Challenge Petroleum in 1987. Coalcorp and Electricorp have unresolved issues that must be addressed before privatisation can proceed. In March 1991, the Natu- ral Gas Corporation became a publicly-owned corporation.
The government’s Energy Sector Reform Bill mandated the elimination of price controls. In addition, all energy prices, costs and pricing policies must be made available to the public. Prior to 1988, gasoline prices were assigned maxi- mum and minimum levels, to ensure price stability for buyers and sellers. The minimum price was determined by establishing specific margins between all products.
Electricity generation is dominated by the Electricity Commission of New Zealand, which controls about 95 per cent of the country’s total capacity. The remaining portion is owned by a number of electrical supply authorities. While there are no price controls in the electricity industry, many aspects of electricity pricing are being debated. A major question is whether all electricity should be priced at the cost of new capacity, or whether marginal units should be priced at that rate. Another question is how fixed and variable costs should be reflected in end-user tariffs.
1) Papua New Guinea Because Papua New Guinea is an extremely rural country, with just a few
urban areas along the coast, its government has tried to ameliorate urban/rural price inequities. Infrastructure is limited and terrain is rugged and extreme, so transporting products into rural areas immediately drives up prices. For bulk sales, petroleum product prices are negotiated directly between suppliers and consumers. Maximum retail prices are set by the government for gasoline, diesel, jet fuel and kerosene. In recent years, retail prices have gone up significantly, because of increasing import taxes, distribution costs and wholesale and retail margins. The government reviews the landed cost of petroleum products monthly, distribution costs and margins annually, and freight differentials at least twice a year in each province.
Electricity generation in Papua New Guinea comes primarily from hy- dropower, with fuel oil making up most of the difference. A small amount of coal is consumed, and some solar power is used on the islands. Because of the country’s heavy reliance on hydropower, a recent drought has forced the emergency purchase of turbines from Australia to make up for the huge deficit in generating capacity. This solution was very costly and has created a need to increase prices.
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m) The Philippines The recently released Philippine National Energy Plan states five main insti-
tutional reform goals: (1) improving energy sector coordination; ( 2 ) consolidating energy regulatory functions under one agency; (3) privatising state-owned energy companies; (4) deregulating the downstream oil industry; and ( 5 ) streamlining approval systems for energy projects. In 1993, the Department of Energy was established, to work towards these goals.
The Energy Regulatory Board (ERB) is the quasi-judicial body tasked with reviewing and fixing the domestic prices of petroleum sold by oil companies and dealers. In addition, it regulates coal imports and sets tariffs for electric utilities in the Philippines. Though it is responsible for assuring that the 27 private and mu- nicipal distribution utilities operate according to reasonable standards, and that their power tariffs provide them with sufficient return to finance loss-reduction pro- grammes and systems expansion, the ERB has no authority to set rates for power generation, which comprise the major portion of those costs. XAPOCOR, the government-owned supplier of most electric power to these utilities for distribution and sale, it not under ERB jurisdiction.
The Philippine petroleum downstream refining industry (refining and market- ing) is serviced by three refineries: one at Bataan, owned by Petron Corporation, a subsidiary of Philippine National Oil Company (PNOC); and two at Batangas, owned by the multinational Caltex (Philippines) Inc. and Philipinas Shell Petroleum Corporation. The three refineries have a combined crude refining capacity of 291,000 barrels per calendar day. Each oil company sells at the wholesale (bulk plant) level. At the retail level, there are oil company-owned, oil company-operated and independently owned and operated outlets for petroleum products.
In terms of pricing policy, all price-setting functions were recently consoli- dated under the ERB. Petroleum product prices have been heavily regulated, according to a socialist pricing framework, but the latest government initiatives include plans to move slowly towards international market prices and to promote economic efficiency, as well as generate government revenue. The government controls domestic product prices by imposing import duties on crude oil and fin- ished products, setting ceilings for oil company prices and revenue and imposing internal taxes on product sales.
To assess the impact of fluctuations in crude oil prices and foreign exchange rates on consumer prices, the ERB reviews petroleum product prices every 60 days. Prices may be adjusted by changing oil company profit margins, or by adjust- ing prices using the Oil Price Stabilisation Fund (OPSF). The OPSF was created in 1984 to minimise energy price fluctuations. When prices fluctuate significantly, money from the OPSF is used to keep prices stable. A socialised pricing system is used, meaning that products are also subject to cross-subsidies. Products consid- ered ‘luxuries’, including gasoline and jet fuel, are taxed at a higher rate, while LPG, kerosene, diesel and fuel oil are subject to lower taxes.
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As for coal, Philippine coal is dominated by two government-owned compa- nies: PNOC Coal and Semirara, which together account for about 60 per cent of the coal produced in the Philippines. The two largest private producers, DMC- CERI (at Bislig) and Luvimin, together account for about 19 per cent of domestic coal production. The remaining 21 per cent is produced by 30 other private com- panies. Half the total coal consumption is supplied from domestic mines and the remainder is imported. The majority of the low-quality domestic coal is blended with higher-quality imported coal, before being shipped to users for power gene- ration, cement manufacture and various industrial, metallurgical and process industries.
The ERB neither sets coal prices nor regulates the volumes of imported coal. Its regulatory function has merely been to enforce a 1 : 1 ratio between the tonnage of imports and the tonnage of domestic coal production. In addition, imports from ASEAN countries are subject to a 15 per cent duty and imports from other coun- tries a 20 per cent duty.
While the ERB is not involved in coal price-setting, electricity prices in the Philippines are regulated by the ERB. During the past four years (1990-93), the Philippines have experienced severe power supply shortages. In addition, inef- ficient distribution systems and low load-density service areas make system losses high. At approximately $O.lO/kWh, the Philippines have one of the highest elec- tricity rates in Asia. It is hoped that recent government efforts to streamline the approval process for new generating units will help improve the situation.
n) Singapore The agencies involved in price regulation in Singapore include the Ministry
of Trade and Industry (MTI) and the Public Utility Board (PUB). The MTI con- trols overall price regulation in Singapore, and its decisions are vetted by the Prime Minister’s Office before they are released. There is occasional input from the Econ- omic and Trade Development boards, but their opinions are supplementary to decision-making. Singapore’s PUB is responsible for implementing tariffs for gas, water and electricity. No coal is used in Singapore.
All petroleum products in Singapore have been free of price controls, since bunker fuel oil prices were deregulated in 1985/86. There is, however, a tax thresh- old system for retailing gasoline. If a retailer moves its sales price outside a price band, it must pay higher taxes to the government. Petroleum products can be imported by any company in Singapore.
Natural gas is used in two forms in Singapore - town gas from a naphtha- burning plant in the Kallang Basin, and piped natural gas from Malaysia, which is used solely by the Senoko power plant. The PUB has a monopoly on both types of gas. There are hopes that increased volumes of gas can be imported from Malaysia, for residential use by the end of the decade.
Gas is sold at four different rates: residential, bulk tariff A (with a minimum consumption of 1,000 cubic feet per month), bulk tariff B (with a minimum con- sumption of 50,000 cf/m) and wholesale prices, for which only the PUB is eligible.
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Wholesale prices from Petronas carry a ceiling of 150 mcf/day. The price formula is 107 per cent of the average posted Singapore price of medium sulphur fuel oil, which, on a calorific equivalent basis, works out at 112 per cent.
The price of natural gas to the utility is regulated, not by the government, but by the terms of PUB’S contract with Petronas. This has a baseload price and adjust- ments on a medium fuel oil equivalent factor. It is noted that PUB buys fully stripped dry gas containing C 1/C2 only.
Electricity prices in Singapore are regulated by the MTI, vetted by the Prime Minister’s Office and implemented by the PUB. There are just two sales categories, commercial/industrial and residential. There is a difference between peak and off- peak prices for residential use, but, for commercial/industrial users, peak period electricity is sold at 8.03 $/kWh and off-peak use is one cent cheaper, at 7.03 $/kwh.
0) Thailand Since 1991, the Thai government has developed a number of progressive
energy policies and environmental plans. Many changes have been made in the energy policies to provide a framework for the nation’s energy management for the next 15 years. The main concerns are to improve the effectiveness of national en- ergy management, to mitigate environmental problems related to energy consump- tion, to increase the role of the private sector and reduce the monopoly power of the government in the energy sector, and to ensure energy availability in the future.
Domestic oil prices in Thailand were under government control for decades (Intarapravich, 1994). The ex-refinery price was set by the government and based on Singapore postings (low, average or high postings, as the government saw fit), plus freight. The retail price was subject to taxes and a marketing margin specified by the government.
Domestic prices of oil have, however, been deregulated since 24 May 1991, as part of the main feature of the government’s policy to promote competition and increase the role of the private sector in the oil market. The deregulation process was divided into two stages: first, a ‘semi-floating’ price system was introduced by deregulating retail prices and the marketing margin, while still controlling ex- refinery prices; and secondly, once the revamped domestic oil market began to function well, the ex-refinery price was also deregulated, on 19 August 1991. Sub- sequently, both the ex-refinery and the retail prices of domestic oil have fluctuated freely. Normally, they follow closely the fluctuation of oil prices in the Singapore market, which is the major oil supplier in the region. The current price structure of petroleum products is shown in table 8.
Both locally refined and imported products are subject to excise tax and the ‘interior’ tax (formerly called the ‘municipal’ tax). Imported products are also sub- ject to import duty. Excise and interior taxes are collected at the wholesale stage, at different rates for different products. However, ceiling rates for excise tax are set at five baht/l (about $0.74/gal) for gasoline and four baht/l (about $0.60/gal) for other petroleum products. Interior tax is collected at ten per cent of excise tax revenue.
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Table 8 Current price structure of petroleum products in Thailand
Locally refined Ex-refinery price
plus excise tax plus interior tax plus (minus) Oil Fund plus Conservation Fund
= wholesale price
plus marketing margin plus value added tax
= retail price
Imported Import price (cq) plus import duty plus excise tax plus interior tax plus (minus) Oil Fund plus Conservation Fund
= wholesale price
plus marketing margin plus value added tax
= retail price
Import duty is collected at the rate of 0.065 baht/l (about $9.7/1,000 gal) on all imported products, except LPG and fuel oil. The rate for LPG is 0.001 bahtkg (about $0.04/1,000 kg), and the rate for fuel oil is 0.01 baht/l (about $1.49/1,000 gal).
Thailand’s Oil Fund was established after the first oil crisis of 1973/74. The primary purpose of establishing the Oil Fund was to create a buffer stock to sta- bilise domestic oil prices. Products can be a net contributor to, or net recipient of, the Oil Fund subsidy, depending on the amount needed to keep the final price sta- ble, after accounting for ex-refinery cost, marketing margin and taxes. After de- regulation was in full force, the role of the Oil Fund faded, more or less, to simply another source of government revenue.
The Energy Conservation Fund was established in Thailand on 1 November 1992, to provide working capital grants and subsidies for energy conservation work. The initial capital for the fund was provided by transferring $59m from the Oil Fund. With the exception of LPG, all types of petroleum products (both local and imported) are taxed 0.07 baht/l (approximately $O.Ol/gal) into the Conser- vation Fund.
The government taxes and contribution to the Oil Fund and Energy Conser- vation Fund are a fixed amount that is added into ex-refinery prices, and the sums become the wholesale prices. This total is different between locally refined prod- ucts and imported products, because of the import duty and, in the case of LPG, the payment into the Oil Fund. The big difference can be seen in the case of LPG, where local LPG is charged $3.15/100 kg, whereas $11.11/100 kg is collected on imported LPG.
Two components account for the difference between the wholesale price and retail price: VAT and the marketing margin. The VAT system was introduced in
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Thailand on 1 January 1992 and covers all product transactions in the market at a rate of seven per cent.
The retail prices of all products (except LPG) in Thailand are currently lower than they were before deregulation. The diesel price after deregulation is lower, but it decreased by a smaller percentage than other petroleum product prices, since the domestic diesel price was already low, due to government subsidies enforced prior to decontrol. For any given product, retail prices differ among retailers, due to dif- ferences in quality and other factors, such as brand image and services.
p) United States Petroleum product prices are not regulated in the US, but they are taxed at
the retail level, which controls prices to some extent. Because the US is so reliant on automobiles, transportation fuels make up a large portion of the demand barrel. Taxes on ground transportation fuel, including LPG, gasoline and automotive, are higher than on any other product. Automotive diesel taxes are highest at $0.244/gal; gasoline is next, at $O.l84/gal; and LPG taxes are just under gasoline taxes, at $0.183/gal. Commercial jet fuel taxes are very low, by comparison, at just $O.Ol/gal, but they were due to be increased to $0.044/gal, as of 1 October 1995. State taxes are also charged on many petroleum products. State gasoline and diesel taxes range from $0.075/gal to $0.26/gal. County taxes and/or oil spill contingency fund fees may also be incorporated into the retail price.
In 1993, a British thermal unit (Btu) tax was proposed by President Clinton, to promote energy efficiency, encourage the use of non-fossil fuels and raise rev- enue to combat the growing deficit. The proposed Btu tax was defeated, in favour of a small increase in product taxes, as a result of loud protests from numerous consumer and industry groups. Nevertheless, the concept of a broad-based energy tax in the form of a carbon tax or Btu tax has not completely disappeared. Some groups in developed economies, such as the US and much of Western Europe, tend to favour the idea of a broad-based tax, to make the cost of fossil resources better reflect not only the current costs of production, but also the related environmental costs.
Other recent changes in energy policy are most often a result of attempts to make energy consumption less environmentally damaging. Natural gas is the fuel of choice, because it is considered the cleanest of the fossil fuels. California contin- ues to be the leader in terms of environmental regulations. Mandated reductions in the percentage of aromatics in gasoline and diesel, lower diesel sulphur specifi- cations, and mandated use of oxygenates in gasoline, are all measures sure to increase the prices of finished petroleum products, as refiners are forced to upgrade refineries to meet the new specifications. Several other states, concerned with air quality, are looking at the possibility of implementing California-type regulations. Future energy pricing policy in the US will continue to be affected directly by the types of environmental restrictions imposed on the energy sector.
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111. Key findings and general thoughts With so many non-market forces affecting the energy sector of every econ-
omy, decision-makers in an increasing number of countries are realising that energy sector pricing should be carried out within a national planning framework and on an integrated basis. In actuality, however, most energy-pricing is done on an ad hoc basis; electricity and oil domestic prices, for example, are generally determined independently from each other, as well as from other energy sectors. Such practices make it difficult for a government to guide its energy industry, and thus its national economy, effectively and efficiently.
Historically, there is a tradition of government intervention within the mar- kets of the Asia-Pacific region. The energy sector, in particular, is considered a matter of national security and has been subjected to significant levels of interven- tion in such countries as Japan, China, and Indonesia. Petroleum price stabilisation funds have even been established in some nations, generally leading to disastrous consequences. The same levels of intervention do not hold true in the US and Canada, where, despite some regulation, the markets are relatively free.
US government policy has always promoted reliance on market forces, for several reasons. First, dependence on market forces commonly yields equitable trade relationships among partners. If the prices of exports are made artificially low, because of government-subsidised energy prices, trading partners can argue that producers are receiving an unfair advantage. The use of market prices for all inputs, including energy, can therefore reduce trade friction. Economic theory argues that price advantages for equivalent goods and services should be based on comparative advantage, instead of being artificially created through government intervention in the market place.
Another reason for US government support of market pricing is rooted in the belief that market prices result in a minimal amount of market distortion, therefore minimising inefficient resource allocation. An enterprise or individual will lose money when resources are sold below market prices - if not an enterprise or indi- vidual, then a government. Though lower energy prices do encourage investment, a government that makes such a choice must be able to make a commitment to sus- taining the agreement over the long term. Once an investment is made, based on the agreed terms, a change in the enabling policy can reduce or eliminate the prof- itability of the investment.
Some countries also regulate prices to above the market value. China, Japan and, in some cases, South Korea, for example, have set prices above this value. This form of intervention is not, however, viewed so critically by competitors as below-market intervention, since it generally increases the incentive to use the resource efficiently. More specifically, as long as prices are not below market lev- els, inefficiencies are not rewarded.
Many countries with robust economic growth operate on something other than market prices. In the long run, however, a government that regulates to below the market price is negatively impacted, as a consequence of that decision. As any
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country that has found itself in that situation will attest, it is much more difficult to remove a subsidy than to establish one.
It is important to note that, in some Asia-Pacific countries, not only are energy prices out of line with international market levels, but price ratios between products may also be out of favour with world levels. Thus, it is harder to deregulate, since different product markets or sectors could be affected in different ways. Where domestic prices are regulated, they should be internally consistent within a country; that is, when prices for one energy group are fixed, or regulated, prices for other groups should also be adjusted accordingly. Whether or not domestic prices are higher or lower than international levels, they should have a distinct relationship with world rates. Price differentials ought to correspond to international levels, and the absolute differences in price among products are important, not the ratios.
IV. Conclusion This paper has highlighted the differences in energy-pricing policies for most
countries in the Asia-Pacific region. The emerging trend, towards reducing price regulations in the energy sector and allowing prices to be influenced increasingly by market trends, is expected to continue. Many governments are realising that it is not necessary to separate themselves entirely from energy issues; rather, they can supervise the market within the context of international market prices. The conse- quences of over-regulation generally catch up and remind government officials of this important point.
The tables presented in this paper provide useful, and generally unknown, information to Asian, US and Canadian government officials, enabling a better understanding of energy-pricing policy and related issues. Access to information on the prices and regulatory trends in each country will aid any future financial or political decision.
There are three major areas where future research is recommended by the authors:
a) comparing and contrasting the methods and impacts of price de- regulation in Asia-Pacific countries;
b) determining whether prices are internally consistent in individual countries for the different energy forms; and
c) determining whether domestic energy prices in regulated markets are set in a particular relationship to international prices.
Ideally, this paper has provided some answers to these important questions, allow- ing for more in-depth, follow-up studies in the future.
June 1996 145
Footnote
I . As part of the East-West Centre’s continuing assessments of Asia-Pacific energy mar- kets, its “Programme on Resources: Energy and Minerals” embarked on this study of domestic, end-user energy prices on behalf of the United States Department of Energy, under grant no. DEFG02-93P010089.AOOO. The contract title was “Asia-Pacific Econ- omic Cooperation (APEC) Energy Support Project”. The US DOE, and particularly Robert Price and Tom Cutler, are gratefully acknowledged for providing the financial support necessary to undertake this timely survey.
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