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THE MONITORING OF PRICES IN THE OIL AND OIL PRODUCT MARKETS The case of Portugal, a non-oil producing, small open econom

THE MONITORING OF PRICES IN THE OIL AND OIL PRODUCT MARKETS The case of Portugal, a non-oil producing, small open economy . Manuel Sebastião Portuguese Competition Authority Kazan, September 2012. FIRST QUESTION . Russia: Oil-producing country Big, relatively closed economy Portugal

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THE MONITORING OF PRICES IN THE OIL AND OIL PRODUCT MARKETS The case of Portugal, a non-oil producing, small open econom

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  1. THE MONITORING OF PRICES IN THE OIL AND OIL PRODUCT MARKETSThe case of Portugal, a non-oil producing, small open economy Manuel Sebastião Portuguese Competition Authority Kazan, September 2012

  2. FIRST QUESTION • 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) M. Sebastião - Prices in the oil and oil product markets

  3. CONTENTS 1. LIQUID FUEL SECTOR • FOREIGN TRADE • BRENT, PLATTS AND DOMESTIC PRICES • WEEKLY PRICE CHANGES • PRICES IN PORTUGAL AND EUROPE • VALUE CHAIN • PRICES PER OPERATOR / REGION • MOTORWAY PRICES M. Sebastião - Prices in the oil and oil product markets

  4. 1. LIQUID FUEL SECTOR • Introduction • The 8 topics of my presentation today reflect the PCA conceptual framework in analysing and monitoring the liquid fuel sector in Portugal • They illustrate well the work carried out since the 2008 oil shock • They allow me to focus on 4 key issues: • High and volatile liquid fuel prices are a difficult, sensitive issue in any country • But it is not a competition issue; it is a tradable goods issue • 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 • They could be lower and more stable only if they were regulated . But if so, there are unavoidable costs attached M. Sebastião - Prices in the oil and oil product markets

  5. 1. LIQUID FUEL SECTOR • PCA conclusions on the liquid fuel sector in Portugal • 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 • 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 • 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 • The vertical integration (refinery → pipeline → warehouse) in part of the sector is efficient and has not raised competition concerns so far • It function exclusively according to market rules • Adjustment program for Portugal: no MoU measures M. Sebastião - Prices in the oil and oil product markets

  6. 1. LIQUID FUEL SECTOR • The liquid fuel sector in a nutshell: • Tradable goods sector • 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 • All players have complete information on prices and spreads in real time => few or no incentives to collude on prices • 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) • Limited room for manoeuvre in the case of open economies & non-oil producing countries M. Sebastião - Prices in the oil and oil product markets

  7. 1. LIQUID FUEL SECTOR • The liquid fuel sector in a nutshell: • It is also a very “emotional” sector • Very prone to be “understood” according to two rules of thumb: • “If prices go up there is cartel, if prices go down there is competition” • “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 M. Sebastião - Prices in the oil and oil product markets

  8. 1. LIQUID FUEL SECTOR • Three basic points • Three markets • Market for crude oil (Brent, London) • International market for gasoline and diesel ( Platts NWE) • Domestic market for gasoline and diesel (price before tax, price after tax) • Two price transmission mechanisms • Price of crude  International prices for gasoline and diesel • Brent Platts gasoline / diesel • 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 • Asymmetries in rises and falls of domestic prices for gasoline and diesel • Fundamentally from outside the domestic market (asymmetries in Platts) • Less noticeable outside times when there is an oil shock M. Sebastião - Prices in the oil and oil product markets

  9. 1. LIQUID FUEL SECTOR • Tradable goods: • Goods that are the subject of international trade (exports or imports) • Whose prices are set in international markets • 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 M. Sebastião - Prices in the oil and oil product markets

  10. 1. LIQUID FUEL SECTOR • 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 M. Sebastião - Prices in the oil and oil product markets

  11. 1. LIQUID FUEL SECTOR • 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 M. Sebastião - Prices in the oil and oil product markets

  12. 1. LIQUID FUEL SECTOR • 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? M. Sebastião - Prices in the oil and oil product markets

  13. 1. LIQUID FUEL SECTOR • 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 M. Sebastião - Prices in the oil and oil product markets

  14. 1. LIQUID FUEL SECTOR Two major issues: • ENERGY AND ENVIRONMENT • REFLECTIONS ON THE 2008 OIL SHOCK AND WHAT HAS HAPPENED SINCE THEN M. Sebastião - Prices in the oil and oil product markets

  15. 1. LIQUID FUEL SECTOR • 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 M. Sebastião - Prices in the oil and oil product markets

  16. 1. LIQUID FUEL SECTOR • 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 M. Sebastião - Prices in the oil and oil product markets

  17. 1. LIQUID FUEL SECTOR • 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.” M. Sebastião - Prices in the oil and oil product markets

  18. 1. LIQUID FUEL MARKET • 7 BASIC IDEAS • Upstream and downstream value chain • Conceptual model: 3 markets • Comparisons of price changes • Liquid fuels = Tradable goods • Value chain (downstream) and competition concerns • How to stabilize the international liquid fuel market? • How to stabilize the domestic liquid fuel market? M. Sebastião - Prices in the oil and oil product markets

  19. 1. LIQUID FUEL MARKET • IDEA # 1 • Upstream and downstream value chain • Upstream: from drilling to refining • Downstream: from refining to end user M. Sebastião - Prices in the oil and oil product markets

  20. 1. LIQUID FUEL MARKET • IDEA # 2 • Conceptual model: 3 markets • Market for crude (in Europe, Brent price) • International liquid fuel market (In Europe, PlattsRotterdam or Lavera) • Domestic market for liquid fuels M. Sebastião - Prices in the oil and oil product markets

  21. 1. LIQUID FUEL MARKET • IDEA # 3 • Comparisons of price changes • 2 transmission mechanisms: • Brent Platts & Platts Domestic pre-tax • 2 currencies: Brent and Plattsin $; Domestic prices in € or TL • Compare changes in domestic prices with • Changes in Platts, not in Brent • Changes in Platts in the same currency M. Sebastião - Prices in the oil and oil product markets

  22. 1. LIQUID FUEL MARKET • 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 • It cannot be higher: if it was, it would be better to import • It cannot be lower: this makes no economic sense M. Sebastião - Prices in the oil and oil product markets

  23. 1. LIQUID FUEL MARKET • 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 M. Sebastião - Prices in the oil and oil product markets

  24. 1. LIQUID FUEL MARKET • 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 M. Sebastião - Prices in the oil and oil product markets

  25. 1. LIQUID FUEL MARKET • 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 M. Sebastião - Prices in the oil and oil product markets

  26. 1. LIQUID FUEL MARKET IDEA # 2: 3 Markets M. Sebastião - Prices in the oil and oil product markets

  27. 1. LIQUID FUEL MARKET • 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 markets • The relationship between the 3 markets • The lags between the 3 markets • The symmetry or asymmetry of each market M. Sebastião - Prices in the oil and oil product markets

  28. 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) M. Sebastião - Prices in the oil and oil product markets

  29. 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 M. Sebastião - Prices in the oil and oil product markets

  30. 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 M. Sebastião - Prices in the oil and oil product markets

  31. 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 M. Sebastião - Prices in the oil and oil product markets

  32. 1. LIQUID FUEL MARKET • 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? M. Sebastião - Prices in the oil and oil product markets

  33. 1. LIQUID FUEL MARKET • 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 M. Sebastião - Prices in the oil and oil product markets

  34. 1. LIQUID FUEL MARKET • 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 M. Sebastião - Prices in the oil and oil product markets

  35. 1. LIQUID FUEL MARKET • 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 M. Sebastião - Prices in the oil and oil product markets

  36. 1. LIQUID FUEL MARKET • 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! M. Sebastião - Prices in the oil and oil product markets

  37. 1. LIQUID FUEL MARKET • DOMESTIC LIQUID FUEL MARKET • Other features: • Non-price competition is also important • Non-price competition: scale, quality, scope, … • At a gasoline station, 1 litre of water may cost more than 1 litre of gasoline or diesel • Demand-price elasticity • Environmental concerns: non-renewable resource & CO2 emissions (a major problem for new refineries) M. Sebastião - Prices in the oil and oil product markets

  38. 1. LIQUID FUEL MARKET ROCKETS AND FEATHERS M. Sebastião - Prices in the oil and oil product markets

  39. 1. LIQUID FUEL MARKET • 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 M. Sebastião - Prices in the oil and oil product markets

  40. 1. LIQUID FUEL MARKET • 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 M. Sebastião - Prices in the oil and oil product markets

  41. 1. LIQUID FUEL MARKET • Volatility of international liquid fuel prices Alternative domestic price regimes • 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 • Maximum indexed price • Tendency for prices to converge towards the maximum • Less reaction among consumers to market volatility • Market price • Volatile but rational if there is no “market failure” • Regulatory model • Key to allocate costs between “user-payer” and “taxpayer” M. Sebastião - Prices in the oil and oil product markets

  42. CONTENTS 1. LIQUID FUEL SECTOR • FOREIGN TRADE • BRENT, PLATTS AND DOMESTIC PRICES • WEEKLY PRICE CHANGES • PRICES IN PORTUGAL AND EUROPE • VALUE CHAIN • PRICES PER OPERATOR • MOTORWAY PRICES M. Sebastião - Prices in the oil and oil product markets

  43. 2. FOREIGN TRADE M. Sebastião - Prices in the oil and oil product markets

  44. 2. FOREIGN TRADE M. Sebastião - Prices in the oil and oil product markets

  45. 2. FOREIGN TRADE M. Sebastião - Prices in the oil and oil product markets

  46. 2. FOREIGN TRADE • Volatility of foreign trade reflects volatility in the international price of oil and liquid fuels (tradable goods) • Oil and liquid fuel imports/exports • Oil Balance of the Current Account (CA) of the Balance of Payments (BoP) • Year-on-year rates of change (volume and deflators) M. Sebastião - Prices in the oil and oil product markets

  47. 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 M. Sebastião - Prices in the oil and oil product markets

  48. 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? • Administrative price regime • Maximum indexed price regime • Market price regime M. Sebastião - Prices in the oil and oil product markets

  49. CONTENTS 1. LIQUID FUEL SECTOR • FOREIGN TRADE • BRENT, PLATTS AND DOMESTIC PRICES • WEEKLY PRICE CHANGES • PRICES IN PORTUGAL AND EUROPE • VALUE CHAIN • PRICES PER OPERATOR • MOTORWAY PRICES M. Sebastião - Prices in the oil and oil product markets

  50. 3. BRENT, PLATTS AND DOMESTIC PRICES M. Sebastião - Prices in the oil and oil product markets

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