the monitoring of prices in the oil and oil product markets the case of portugal, a non-oil...

THE MONITORING OF PRICES IN THE OIL AND OIL PRODUCT MARKETS

The case of Portugal, a non-oil producing, small open economy

Manuel SebastiãoPortuguese Competition Authority

Kazan, September 2012

M. Sebastião - Prices in the oil and oil product markets September 2012 2

Russia: Oil-producing country Big, relatively closed economy

Portugal Non-oil producing country Small open economy

Does it make any difference for domestic retail gasoline and diesel prices? No? Yes? May be? Levels versus rates (price levels versus rates of change of prices)

FIRST QUESTION

September 2012 3M. Sebastião - Prices in the oil and oil product markets

1. LIQUID FUEL SECTOR

2. FOREIGN TRADE

3. BRENT, PLATTS AND DOMESTIC PRICES

4. WEEKLY PRICE CHANGES

5. PRICES IN PORTUGAL AND EUROPE

6. VALUE CHAIN

7. PRICES PER OPERATOR / REGION

8. MOTORWAY PRICES

CONTENTS



Introductiona. The 8 topics of my presentation today reflect the PCA conceptual framework

in analysing and monitoring the liquid fuel sector in Portugal

b. They illustrate well the work carried out since the 2008 oil shock

c. They allow me to focus on 4 key issues:

1) High and volatile liquid fuel prices are a difficult, sensitive issue in any country

2) But it is not a competition issue; it is a tradable goods issue

3) Domestic retail prices cannot be very different from what they are, given international prices and domestic taxes. To say otherwise is to pander an illusion

4) They could be lower and more stable only if they were regulated . But if so, there are unavoidable costs attached



PCA conclusions on the liquid fuel sector in Portugal1) It is a sector where the PCA has not detected any infringement to competition

law so far and where the PCA monitoring system in place is sufficiently robust so that the likelihood of detection is very high

2) It is a tradable goods sector where domestic prices fundamentally reflect international prices and domestic taxes and retail prices in any service station are available to anyone online

3) It is a sector where existing competition pressure could be improved mainly by structural measures aimed at expanding imports and storage essential facilities with easy access to potential competitors

4) The vertical integration (refinery → pipeline → warehouse) in part of the sector is efficient and has not raised competition concerns so far

5) It function exclusively according to market rules

6) Adjustment program for Portugal: no MoU measures



The liquid fuel sector in a nutshell:1) Tradable goods sector

2) Domestic prices basically reflect: (a) International gasoline and diesel prices (Platts NWE); and (b) Domestic taxes (Fuel tax and VAT); these two items account to around 90% of the retail price

3) All players have complete information on prices and spreads in real time => few or no incentives to collude on prices

4) The retail market works very much the same in all market economies: (a) indexed to international prices (Platts, not Brent); (b) high volume and narrow margins; (c) strict safety controls, mandatory reserves and tax compliance requirements (bonded warehouse => on-site fuel tax collection)

5) Limited room for manoeuvre in the case of open economies & non-oil producing countries



The liquid fuel sector in a nutshell:

6) It is also a very “emotional” sector

Very prone to be “understood” according to two rules of thumb:

i. “If prices go up there is cartel, if prices go down there is competition”

ii. “If prices are equal there is cartel, if prices are different there is competition”

Rules not easy to enforce ... especially in a tradable goods sector


1. LIQUID FUEL SECTOR Three basic points

1) Three marketsa) Market for crude oil (Brent, London)b) International market for gasoline and diesel ( Platts NWE)c) Domestic market for gasoline and diesel (price before tax, price after tax)

2) Two price transmission mechanismsa) Price of crude International prices for gasoline and diesel

Brent Platts gasoline / diesel b) International prices for gasoline and diesel domestic prices for gasoline and

diesel before tax with lag (average of the previous week Platts) Platts gasoline / diesel avg. pre tax price for gasoline / diesel

3) Asymmetries in rises and falls of domestic prices for gasoline and diesela) Fundamentally from outside the domestic market (asymmetries in Platts)b) Less noticeable outside times when there is an oil shock



Tradable goods:

a) Goods that are the subject of international trade (exports or imports)

b) Whose prices are set in international markets

c) That any economy, especially any samall open economy, cannot control

Liquid fuels, like crude oil, are tradable goods. Thus, any non-oil producing open economy has no option other than adjusting to international prices



PCA work since the 2008 oil shock Initial Report, June 2008: January – April 2008

Interim Report, December 2008: January – September 2008

Final Report: March 2009: January – December 2008• More complete and detailed analysis of full year 2008• Wealth of data + Economic, statistical and econometric analysis• Comprehensive approach based on actual and empirical evidence• Analysis of structural and regulatory features

• To play a part in moving the debate on from a stance based merely on opinion to positions based on facts, data and the discipline of a rational discussion


Final Report: Not “the last word”

Monthly Statistics First issue: September 2009

Quarterly Fuel Market Newsletter First issue, 2004/Q2, released in September 2004 Each issue regularly released ever since 2008/Q3 issue: major improvements in parallel with Interim Report




Important – but difficult – to focus the debate on

Future challenges

Essential to focus on the real problems and main issues (economic / social; present / future)

What are the right incentives for economic agents in the liquid fuel market?



The PCA reports and subsequent work have been instrumental

To make sensible recommendations

To undertake competition advocacy based on sound knowledge of the sector

To carry out the competition assessment of • the contracts between operators in the sector• the vertical agreements between oil companies and retailers


Two major issues:

1. ENERGY AND ENVIRONMENT

2. REFLECTIONS ON THE 2008 OIL SHOCK AND WHAT HAS HAPPENED SINCE THEN



Energy and environment

Major constraint

EU Energy and Solidarity Action Plan, 11-12 December 2008

Current stage: window of opportunity to work out medium and long-term solutions without price pressure, knowing already how brutal the price increases can be (size, speed)

Liquid fuels = non-renewable energy resource =>• Incentives to foster energy-saving and efficiency• Incentives to foster the use of renewable energy

CO2 emission permits => Critical for any new refinery



Reflections on the 2008 oil shock What we can learn from how Portugal and other countries reacted to

the 2008 oil shock and to past shocks

Important to understand Volatile markets: volatility tends to reflect fears and expectations

more than physical realities What is structural and what depends on the conjuncture What is global/European and what is Turkish or Portuguese

“The day after” Do not rest Prepare for the future



Reflections on the 2008 oil shock

“Recoil”, The Economist, May 31st 2008

“Painful though it is, this oil shock will eventually spur huge change. Beware the hunt for scapegoats”

“The first two oil shocks banished oil from power generation. How fitting if the third finished the job and began to free transport from oil’s century-long monopoly.”



1. LIQUID FUEL MARKET

7 BASIC IDEAS

1. Upstream and downstream value chain

2. Conceptual model: 3 markets

3. Comparisons of price changes

4. Liquid fuels = Tradable goods

5. Value chain (downstream) and competition concerns

6. How to stabilize the international liquid fuel market?

7. How to stabilize the domestic liquid fuel market?



IDEA # 1

Upstream and downstream value chain

Upstream: from drilling to refining

Downstream: from refining to end user



IDEA # 2

Conceptual model: 3 markets

1. Market for crude (in Europe, Brent price)

2. International liquid fuel market (In Europe, Platts Rotterdam or Lavera)

3. Domestic market for liquid fuels



IDEA # 3

Comparisons of price changes

2 transmission mechanisms:

• Brent Platts & Platts Domestic pre-tax

2 currencies: Brent and Platts in $; Domestic prices in € or TL

Compare changes in domestic prices with

• Changes in Platts, not in Brent

• Changes in Platts in the same currency



IDEA # 4

Liquid fuels = Tradable goods Refinery inputs and outputs: international prices (Brent and

Platts + spreads)

Competitive pressure: refineries have to be efficient within this input-output international price range

Ex-refinery price cannot be lower / higher than Platts + spread a) It cannot be higher: if it was, it would be better to

import b) It cannot be lower: this makes no economic sense



IDEA # 5

Value chain (downstream) and scrutiny by NCA Important to understand for each stage: the economics; the

regulation (technical and prudential); the tax regime; and the relative weight of each component in the chain value

NCA focus: Ex-refinery prices, Logistics, and Retail

Ex-refinery prices = Platts + spread

Logistics and retail: small relative weight in all EU countries, around 10% of retail price, 21% of pre-tax price



IDEA # 6

How to stabilize the international fuel market?

Nick Butter, FT 16-12-2008 Agreement on a broad target range for crude price ($50-$70 a

barrel) Strategic stock holding to be augmented or deployed when

prices diverge from the range Trading limited to agents with direct physical interest in the

market Longer term: infrastructure investment + climate change



IDEA # 7 How to stabilize the domestic fuel market?

When international markets are volatile, there is little room for manoeuvre in a small, open economy

Stable prices only if they are regulated Market prices + additional imports and storage facilities + easier access

to such facilities: on balance, the best option


IDEA # 2: 3 Markets




3 Markets

Each of the 3 markets is not a “single market”, but “a variety of markets.” However, to understand how these markets work and interact, it is easier to think of each one as a “single market”

Key points concerning the interface between the 3 markets1) The relationship between the 3 markets2) The lags between the 3 markets3) The symmetry or asymmetry of each market


1. LIQUID FUEL MARKET OIL MARKET & INTERNATIONAL LIQUID FUEL MKT

Oil market• Supply:Cartel of sovereign states• Demand: Big players (oil companies + big brokers)

International liquid fuel market• Supply:Big players (oil companies, exporters, ...)• Demand: Big players (oil companies, importers, wholesalers...)

Market behaviour• Oil Market: Very volatile + “Symmetric”• Int. Liq. Fuel Mkt: Less volatile + “Asymmetric” (rockets and

feathers)


1. LIQUID FUEL MARKET DOMESTIC LIQUID FUEL MARKET

Domestic retail market• Supply: Big players (oil companies, importers,

wholesalers ...)• Demand: Small players (consumers, businesses, ...)

Domestic retail market follows international wholesale market closely• With lags• Same asymmetric behaviour (rockets and feathers)

Statistical and econometric analysis required to understand lags and asymmetric behaviour

Volume business with narrow margins


1. LIQUID FUEL MARKET OIL MARKET & INTERNATIONAL LIQUID FUEL MKT

Medium and long-term• International liquid fuel market follows oil market• Quasi-perfect relationship with stable lags

Short-term• Less perfect relationship• Pressure of other oil derivative markets• Pressure of other geographical markets • Lags and asymmetries when prices go up or down


1. LIQUID FUEL MARKET LIQUID FUEL MKT: INTERNATIONAL & DOMESTIC

Short, medium and long-term• Quasi-perfect relationship

• Lags + Asymmetries (rockets and feathers)

• Similar behaviour even in periods of great volatility


LIQUID FUEL MARKET

International prices (Platts, Rotterdam or Lavera)

International “location spread” or “location premium” for each refinery and each product

Ex-refinery prices cannot be above or below Platts + spread

All market players know everything about prices and spreads in real time

Incentives to engage in illegal price arrangements?



LOCATION SPREAD (OR PREMIUM)

“World Scale”: two-entry tables, harbour to harbour, “World Scale Indicators for Maritime Transportation of Oil Products” set by IMO (International Maritime Organisation)

Daily maritime freight quotations known to all market players in real time

Each harbour “location spread” is a function of distance to “price centre;” harbour features; and daily freight quotations and insurance premiums



DOMESTIC MARKET: TWO MAJOR CONSTRAINTS

Refineries and wholesale storage subject to two major constraints• “Prudential” – Mandatory stock holdings• “Fiscal” – Bonded warehouses

(on-site fuel tax collection)

These constraints have nothing to do with competition concerns



MANDATORY STOCK HOLDINGS Mandatory stock holdings, set for each product and supervised by

IEA (International Energy Agency); refineries can benefit from “crude equivalents” to balance stock holdings of different products

Mandatory stock holdings based on previous year average daily sales: • Strategic stock holdings (30 days, 1/3)• Security stock holdings (60 days, 2/3)

Operational stocks (10 days)

Total stocks: 30 + 60 + 10 days

First year mandatory stock holdings based on business plan revised quarterly




DOMESTIC LIQUID FUEL MARKET

Main points Tradable goods market Cannot be seen in isolation from international markets

Note Perhaps the most important fact concerning competition

in the last three years in Portugal and Spain is that 3 major players – Shell, Esso and Agip – all decided to move out of the Iberian peninsula. NCA role in this: none!


DOMESTIC LIQUID FUEL MARKET Other features:

a. Non-price competition is also important

b. Non-price competition: scale, quality, scope, …

c. At a gasoline station, 1 litre of water may cost more than 1 litre of gasoline or diesel

d. Demand-price elasticity

e. Environmental concerns: non-renewable resource & CO2 emissions (a major problem for new refineries)



ROCKETS AND FEATHERS




Lags and Asymmetries in Price Adjustments Rockets and feathers: prices rise like rockets and fall like

feathers

“Adjustment delay” and “adjustment amplitude” until full convergence to price change is completed

Most visible in periods of high market volatility; almost invisible in normal times (much ado about nothing …)

Serious econometric analysis is required to understand rockets and feathers

Simpler but rigorous analysis: weekly price changes



Lags and Asymmetries in Price Adjustments

2 transmission mechanisms• Brent Platts and Platts Domestic pre-tax prices• Brent Platts is key to understand rockets and feathers• Domestic prices follow Platts

Beware of emotional reactions


Volatility of international liquid fuel prices

Alternative domestic price regimesa) Administrative fixed price

Budget deficit + domestic consumers decoupled from international prices and cushioned from market volatility + single price for whole country + total absence of price competition between companies and in places where costs may be higher or lower

b) Maximum indexed price Tendency for prices to converge towards the maximum Less reaction among consumers to market volatility

c) Market price Volatile but rational if there is no “market failure”

d) Regulatory model Key to allocate costs between “user-payer” and “taxpayer”




2. FOREIGN TRADE




6. VALUE CHAIN

7. PRICES PER OPERATOR

8. MOTORWAY PRICES

CONTENTS


2. FOREIGN TRADE

Q1/06

Q2/06

Q3/06

Q4/06

Q1/07

Q2/07

Q3/07

Q4/07

Q1/08

Q2/08

Q3/08

Q4/08

Q1/09

Q2/09

Q3/09

Q4/09

Q1/10

Q2/10

Q3/10

Q3/10

Q1/11

Q2/11

Q3/11

Q4/11

Q1/12

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

Portugal: oil and liquid fuelsMo = Imports of oil and liquid fuels, GDP = Gross

Domestic Product

Mo/GDP


2. FOREIGN TRADE

Q1/06

Q2/06

Q3/06

Q4/06

Q1/07

Q2/07

Q3/07

Q4/07

Q1/08

Q2/08

Q3/08

Q4/08

Q1/09

Q2/09

Q3/09

Q4/09

Q1/10

Q2/10

Q3/10

Q3/10

Q1/11

Q2/11

Q3/11

Q4/11

Q1/12

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

Portugal: oil and liquid fuelsOB = Balance of oil and liquid fuels, CA = Current

Account

OB/GDP CA/GDP (CA-OB)/GDP


2. FOREIGN TRADE

1T/06

2T/06

3T/06

4T/06

1T/07

2T/07

3T/07

4T/07

1T/08

2T/08

3T/08

4T/08

1T/09

2T/09

3T/09

4T/09

1T/10

2T/10

3T/10

4T/10

1T/11

2T/11

3T/11

4T/11

1T/12

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

Portugal: Deflator of imports of oil and liquid fuelsYear-on-year rate of change

Deflactor


Volatility of foreign trade reflects volatility in the international price of oil and liquid fuels (tradable goods)

1) Oil and liquid fuel imports /exports

2) Oil Balance of the Current Account (CA) of the Balance of Payments (BoP)

3) Year-on-year rates of change (volume and deflators)

2. FOREIGN TRADE


Volatility of foreign trade

Would it be reasonable to expect domestic prices of tradable goods not to react to fluctuations in the foreign trade bill essentially due to moves in international prices, which implied steep increases and decreases in the value of oil imports or in the balance of oil and liquid fuels ranging up to 2 to 3 percentage points of GDP in short periods of time (2 to 6 quarters)?

Note: 3% of GDP is the maximum budget deficit for any EU country under the Stability and Growth Pact

2. FOREIGN TRADE


Volatility of foreign trade

How can the domestic market in liquid fuels be kept on an even keel when there is extreme volatility in the international market? In other words, what is the best price regime for the country?

a) Administrative price regime

b) Maximum indexed price regime

c) Market price regime

2. FOREIGN TRADE



2. FOREIGN TRADE




6. VALUE CHAIN


8. MOTORWAY PRICES

CONTENTS



Dec-07

Mar-08

Jun-0

8

Sep-08

Dec-08

Mar-09

Jun-0

9

Sep-09

Dec-09

Mar-10

Jun-1

0

Sep-10

Dec-10

Mar-11

Jun-1

1

Sep-11

Dec-11

Mar-12

Jun-1

240

50

60

70

80

90

100

110

120

130

140

150

160Brent 1-month futures in € and $ and Exch. Rate $/€

Brent €/bbl Brent $/bbl

Inde

x 10

0 =

Dec

embe

r 200

7



Dec-07

Mar-08

Jun-0

8

Sep-08

Dec-08

Mar-09

Jun-0

9

Sep-09

Dec-09

Mar-10

Jun-1

0

Sep-10

Dec-10

Mar-11

Jun-1

1

Sep-11

Dec-11

Mar-12

Jun-1

240

50

60

70

80

90

100

110

120

130

140

150

160

170

Brent 1-mth futures, Gasoline (Platts and APBT) in €

Portugal, APBT €/lt Platts €/lt

Inde

x 10

0 =

Dece

mbe

r 200

7



2. FOREIGN TRADE




6. VALUE CHAIN


8. MOTORWAY PRICES

CONTENTS


4. WEEKLY PRICE CHANGESWeekly price changes in 2010 (28 December 2009 - 27 December 2010)

Platts Platts Portugal Spain EU27 NWE FOB NWE FOB APBT APBT APBT Brent Gasoline Diesel Gasoline Diesel Gasoline Diesel Gasoline Diesel Gasoline Diesel

US$/bbl €/bbl US$ cts/lt € cts/lt € cts /lt € cts/lt € cts/lt

Number of changes

Increases 31 29 27 30 27 30 35 35 29 34 34 35

Decreases 21 23 25 22 25 22 17 17 23 18 18 17

Nominal price change

D Cummulative 16.27 17.11 11.12 13.13 11.65 13.26 12.37 14.95 12.72 15.46 13.21 15.93 D Weekly Maximum 4.40 4.29 4.28 3.59 3.75 2.73 2.40 1.65 2.13 2.54 2.72 2.13

Minimum -6.47 -3.65 -4.19 -4.53 -2.44 -2.74 -1.75 -1.24 -2.05 -2.11 -1.95 -1.80

Average Increase 1.85 1.47 1.58 1.39 1.18 1.05 0.70 0.67 0.94 0.91 0.69 0.72

Decrease -1.95 -1.11 -1.26 -1.30 -0.81 -0.83 -0.72 -0.50 -0.63 -0.86 -0.57 -0.54



Number Max./Min. Average Cummulative changeIncreases 31 5.7% 2.3% 25.5%Decreases 21 -8.1% -2.4%

28-de

z18

-jan

8-fev

1-mar

22-m

ar

12-ab

r3-m

ai

24-m

ai

14-ju

n5-j

ul26

-jul

16-ag

o6-s

et

27-se

t

18-ou

t8-n

ov

29-no

v

20-de

z-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

BRENT: % change weekly price, US$/bbl28 December 2009 - 27 December 2010



28-de

z18

-jan

8-fev

1-mar

22-m

ar

12-ab

r3-m

ai

24-m

ai

14-ju

n5-j

ul26

-jul

16-ag

o6-s

et

27-se

t

18-ou

t8-n

ov

29-no

v

20-de

z-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

BRENT: % change weekly price, €/bbl28 December 2009 - 27 December 2010




28-de

z18

-jan

8-fev

1-mar

22-m

ar

12-ab

r3-m

ai

24-m

ai

14-ju

n5-j

ul26

-jul

16-ag

o6-s

et

27-se

t

18-ou

t8-n

ov

29-no

v

20-de

z-8%-7%-6%-5%-4%-3%-2%-1%0%1%2%3%4%5%6%7%8%9%

PLATTS GASOLINE: % change weekly price, US$/lt 28 December 2009 2009 - 27 December 2010




28-de

z18

-jan

8-fev

1-mar

22-m

ar

12-ab

r3-m

ai

24-m

ai

14-ju

n5-j

ul26

-jul

16-ag

o6-s

et

27-se

t

18-ou

t8-n

ov

29-no

v

20-de

z-6%-5%-4%-3%-2%-1%0%1%2%3%4%5%6%7%8%9%

PLATTS GASOLINE: % change weekly price, €/lt 28 December 2009 - 27 December 2010




28-de

z18

-jan

8-fev

1-mar

22-m

ar

12-ab

r3-m

ai

24-m

ai

14-ju

n5-j

ul26

-jul

16-ag

o6-s

et

27-se

t

18-ou

t8-n

ov

29-no

v

20-de

z-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

EU27, GASOLINE: % change weekly APBT, €/lt28 December 2009 - 27 December 2010




28-de

z18

-jan

8-fev

1-mar

22-m

ar

12-ab

r3-m

ai

24-m

ai

14-ju

n5-j

ul26

-jul

16-ag

o6-s

et

27-se

t

18-ou

t8-n

ov

29-no

v

20-de

z-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

PORTUGAL, GASOLINE: % change weekly APBT, €/lt28 December 2009 - 27 December 2010



4. WEEKLY PRICE CHANGES28

-dez

18-ja

n

8-fev

1-mar

22-m

ar

12-ab

r

3-mai

24-m

ai

14-ju

n

5-jul

26-ju

l

16-ag

o

6-set

27-se

t

18-ou

t

8-nov

29-no

v

20-de

z

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

PLATTS DIESEL: % change weekly price, US$/lt 28 December 2009 2009 - 27 December 2010




28-de

z18

-jan

8-fev

1-mar

22-m

ar

12-ab

r3-m

ai

24-m

ai

14-ju

n5-j

ul26

-jul

16-ag

o6-s

et

27-se

t

18-ou

t8-n

ov

29-no

v

20-de

z-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

PLATTS DIESEL: % change weekly price, €/lt 28 December 2009 - 27 December 2010




28-de

z18

-jan

8-fev

1-mar

22-m

ar

12-ab

r3-m

ai

24-m

ai

14-ju

n5-j

ul26

-jul

16-ag

o6-s

et

27-se

t

18-ou

t8-n

ov

29-no

v

20-de

z-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

EU27, DIESEL: % change weeekly APBT in €/lt28 December 2009 - 27 December 2010




28-de

z18

-jan

8-fev

1-mar

22-m

ar

12-ab

r3-m

ai

24-m

ai

14-ju

n5-j

ul26

-jul

16-ag

o6-s

et

27-se

t

18-ou

t8-n

ov

29-no

v

20-de

z-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

PORTUGAL, DIESEL: % change weekly price APBT in €/lt28 December 2009 - 27 December 2010




2. FOREIGN TRADE




6. VALUE CHAIN


8. MOTORWAY PRICES

CONTENTS


Comparison between prices in the EU27 Average price after tax (APAT) Average price before tax (APBT) Maximum, minimum, EU27 average: APAT, APBT, Tax burden Portugal and Spain

Main conclusion Domestic prices in Portugal compare well with the average for

Europe, usually on the first quartile, never maximum or minimum Ranking would improve if APAT reported to Brussels include

discounts, which are a widespread practice in Portugal




Source: European Commission

Q1/07

Q2/07

Q3/07

Q4/07

Q1/08

Q2/08

Q3/08

Q4/08

Q1/09

Q2/09

Q3/09

Q4/09

Q1/10

Q2/10

Q3/10

Q3/10

Q1/11

Q2/11

Q3/11

Q4/11

0.6

0.8

1.0

1.2

1.4

1.6

1.8

Gasoline: APAT (quarterly average)

Max.Por-tugalSpainEU27Min.

In e

uros




Q1/07

Q2/07

Q3/07

Q4/07

Q1/08

Q2/08

Q3/08

Q4/08

Q1/09

Q2/09

Q3/09

Q4/09

Q1/10

Q2/10

Q3/10

Q3/10

Q1/11

Q2/11

Q3/11

Q4/11

0.6

0.8

1.0

1.2

1.4

1.6

1.8

Diesel: APAT (quarterly average)

Max.

Portugal

Spain

EU27

Min.

In e

uros




Q1/07

Q2/07

Q3/07

Q4/07

Q1/08

Q2/08

Q3/08

Q4/08

Q1/09

Q2/09

Q3/09

Q4/09

Q1/10

Q2/10

Q3/10

Q3/10

Q1/11

Q2/11

Q3/11

Q4/11

0.2

0.3

0.4

0.5

0.6

0.7

0.8

Gasoline: APBT (quarterly average)

Max.

Portugal

Spain

EU27

Min.

In e

uros




Q1/07

Q2/07

Q3/07

Q4/07

Q1/08

Q2/08

Q3/08

Q4/08

Q1/09

Q2/09

Q3/09

Q4/09

Q1/10

Q2/10

Q3/10

Q3/10

Q1/11

Q2/11

Q3/11

Q4/11

0.3

0.4

0.5

0.6

0.7

0.8

0.9

Diesel: APBT (quarterly average)

Max.

Portugal

Spain

EU27

Min.

In e

uros


Retail price in Portugal and Spain

1) Retail price in Portugal and Spain: difference almost all because of tax

2) Fuel Tax and VAT both lower in Spain

3) Fuel Tax Portugal close to the average for Europe Spain has one of the lowest tax levels in Europe




2. FOREIGN TRADE




6. VALUE CHAIN


8. MOTORWAY PRICES

CONTENTS


6. VALUE CHAIN

Refinery Logistics Retail Tax APAT0%

20%

40%

60%

80%

100%

Gasoline: Breakdown of APAT (2011)


6. VALUE CHAIN

Refinery Logistics Retail Tax APAT0%

20%

40%

60%

80%

100%

Diesel: Breakdown of APAT(2011)


Elements scrutinised by the PCA

1) Logistics (storage + transport), gasoline, diesel Around € 0.02 / litre

2) Retail, gasoline and diesel Around 0.12 – 0.14 €/ lt Approximately 45% / 55% for costs and retail margin

6. VALUE CHAIN


Elements scrutinised by the PCA

3) Starts at ex-refinery prices (tradable goods)

4) Around 10% of the value chain

6. VALUE CHAIN



2. FOREIGN TRADE




6. VALUE CHAIN


8. MOTORWAY PRICES

CONTENTS


7. PRICES PER OPERATORPortugal: Market shares

Number of service stations Sales in volume

2008 2009 2010 2008 2009 2010 *

Oil companies Galp 32% 31% 30% [40% / 45%] [35% / 40%] [30% / 35%]

Repsol 17% 16% 16% [10% / 15%] [15% / 20%] [15% / 20%]

BP 13% 12% 12% [15% / 20%] [15% / 20%] [15% / 20%]

Cepsa/Total 11% 10% 10% [5% / 10%] [5% / 10%] [5% / 10%]

Sub-total 1 73% 69% 68% 81% 75% 73%

Independents 21% 25% 25% 7% 9% 9%

Supermarkets 6% 6% 7% 12% 16% 18%

Sub-total 2 27% 31% 32% 19% 25% 27%

TOTAL 100% 100% 100% 100% 100% 100%

* First three quarters


7. PRICES PER OPERATORPortugal: Market shares

Type of service stations

2007 2008 2009 2010 *

COCO 31% 32% 31% 26%

CODO 41% 40% 41% 45%

DODO 28% 28% 28% 29%

Total 100% 100% 100% 100%

* First three quarters



COMPETITION ASSESSMENT

Analysis has focused on the existence of circumstantial evidence that could lead to the initiation of proceedings on

• Concerted practices among oil companies operating in Portugal• Abuse of dominant position by GALP (the Portuguese oil

company and the major player in the domestic market)

Assessment of contracts between oil companies operating in Portugal and between oil companies and retailers



CONCERTED PRACTICES BETWEEN OIL COMPANIES

Four factors led to the perception among the general public that there are concerted practices between oil companies or abuse of dominant position:

1) Similar prices charged by various oil companies

2) Price increases by various oil companies

3) News and comments in the media (beware of the so-called experts …)

4) Higher prices in Portugal than in Spain



CONCERTED PRACTICES BETWEEN OIL COMPANIES

Two factors tend to be ignored by the so-called experts, opinion makers and the public at large when assessing liquid fuel prices:

1) The two price transmission mechanisms

2) The exchange rate effect


PARALLEL CONDUCT

Article 101, §1 TFEU (Treaty of Lisbon) (Prohibited Practices)

Unlawful if it can be shown that it results from • Agreement between undertakings• Concerted practices• Decision of association of undertakings



PARALLEL CONDUCT

Parallel conduct cannot be regarded as furnishing proof of concerted

practices unless such practices constitute the only plausible

explanation for such conduct



PARALLEL CONDUCT

The information obtained cannot be seen as conclusive evidence that the parallel conduct is the result of unlawful behaviour between two or more oil companies; instead it tends towards the conclusion that companies adapt intelligently to the existing and anticipated market conditions and the conduct of their competitors

Note: • Price levels between the oil companies are not fully aligned• The dates of price changes, though close, are frequently different



ABUSE OF DOMINANT POSITION

Article 102 TFEU (Treaty of Lisbon)

Case law in the European Court of Justice:a. Has defined the concept of excessive price on a case-by-case

basis and always in a restrictive way; andb. Has tried to avoid confusion between competition law and price

regulation




The articles mentioned in the previous slide prohibit abuse, not the mere holding of such a dominant position

Assessment has focused on two aspects:a. Excessive pricingb. Barriers to entry




Taking into account all the information available:

a. It has not been possible to find evidence of more than a reasonable similarity between the economic value of a product provided in both wholesale and retail markets, given the operating costs, especially the rise in cost of the Brent input.

b. It has not been possible to find evidence of excessive pricing that could be imputed to the dominant firm in the market



ASSESSMENT OF CONTRACTS

Vertical restrictions• Price fixing to the final consumer?• Long-term exclusivity contracts?

Dominant position• Barriers to entry, other than “prudential” or “fiscal”?

Economic dependency• Abusive exploitation of economic dependence of suppliers or

clients in case of absence of an equivalent alternative?



Parallel conduct and/or similar prices

1) Such conduct does not necessarily derive from a cartel or an agreement between companies, as set down in Art. 101.(1) TFEU.

It may stem from behaviour acceptable in law, as competitive strategies from adaptation or response to market conditions

It cannot therefore be inferred on the spot that there is a cartel, simply because there is parallel behaviour visible in conduct and/or prices.



Parallel behaviour and/or similar prices

2) European jurisprudence is clear on this issue :

Parallel behaviour leading to price convergence can only be a serious indication of concerted action if it is possible to conclude, on the basis of an analysis of the market in question, that such parallel behaviour would only come about if there is collusion between the companies that operate in that market.



Parallel conduct and/or similar prices

3) Economic theory explains why it is not possible to infer that a cartel exists without previously verifying whether the parallel behaviour does not stem from companies adapting to market conditions, one element of which is the price, and if that price is known to all the operators in the market, there is no illicit collusion over prices.

Such adaptation does not breach competition rules. As such, it is within the law and does not warrant sanctions.

In particular, charging similar prices in the case of homogeneous products such as liquid fuels, where prices are known to all market operators, does not constitute a breach of competition law.



Parallel conduct and/or similar prices4) In the liquid fuel market, there is information on prices in the public

domain and in the light of this, there is no need for concerted action among operators if companies are looking to know the prices charged by their competitors.

Retail prices in all service stations across the country are available on the DGEG website, which means that consumers and market operators can find out from any computer the prices charged by the competing companies.

Where the motorways are concerned, there is information available on panels giving the prices in the next and then the following one or two service stations. This gives consumers the chance to see the prices charged by different oil companies and their decision to stop or not to stop at a particular service station puts pressure on suppliers to reduce the price at the most expensive outlet.



Parallel behaviour and/or similar prices

5) The parallel behaviour that can be seen results from individual decisions of operators, and it is possible to see differences in timing, in the number of changes and the amounts involved with each change, as the following charts and tables show.

The parallel behaviour becomes more visible when average monthly or quarterly figures are drawn up detailing the prices charged by the various oil companies, independent operators and supermarket chains. This information is made available later in the analysis.

But for the reasons already given, it is not possible to infer from an analysis of these averages that there has been illicit behaviour, bearing in mind the information in the public domain and the detailed analysis of prices.



How is it that supermarket chains can charge lower prices than oil companies or independent operators?

One reason is that the liquid fuels business line results in synergies for the other supermarket business lines, among them the number of customers and the chance to dispense with part of the distribution margin from an additional business line. Apart from this, there is an array of reasons connected with lower costs, among them

1) Lower location costs2) Lower relative personnel costs3) Smaller range of products4) Economies of scale, even more as demand increase




2. FOREIGN TRADE




6. VALUE CHAIN


8. MOTORWAY PRICES

CONTENTS


Motorway prices have raised mistrust: why?

Because, following a recommendation of the PCA, motorways have to display electronic panels with the prices of two or three consecutive petrol stations

And in each panel the prices of the different petrol stations are equal or very similar

8. MOTORWAY PRICES


Motorway prices mistrust

Equal or similar prices in each panel are difficult to understand by the public at large, opinion makers and politicians

Nevertheless, it is better understood in the context of a simple question with a simple answer:

• In each panel, prices could be very different?

• The answer is no!

8. MOTORWAY PRICES



Why in each panel prices could not be different?• Hommogeneous products

• Informed consumers

• Would anyone stop at a petrol station with much higher prices?

Nevertheless, are there reasons for ex-ante competition concerns? No.• Prices in any petrol station available to anyone online;

• Diferent prices in different panels in different motorways

8. MOTORWAY PRICES



Is there any warranty that prices in each panel tend to be the lowest rather than the highest?

• No, and that is the reason why the PCA continues monitoring the situation.

But there are reasons why the lowest price should prevail when petrol stations belong to different operators No dominant operator in the motorway network; Recession of the

economy and declining demand for liquid fuels

8. MOTORWAY PRICES


APPENDIX 1 – Acronyms

CONTENTS


APBT Average price before tax

APAT Average price after tax

COCO Petrol station – Company owned, Company operated

CODO Petrol station – Company owned, Dealer operated

DODO Petrol station – Dealer owned, Dealer operated

DGEG Portuguese Directorate General for Energy and Mines

NCA National Competition Authority

PCA Portuguese Competition Authority

PAT Price after tax

Platts CIF NWE Rotterdam price including cost, insurance and freight FOB NWE Rotterdam price free on board

VAT Value added tax

ACRONYMS

the monitoring of prices in the oil and oil product markets the case of portugal, a non-oil...

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