You might have already known that starting end of this week, the government would be introducing a price ceiling with a weekly revision for petrol prices at the pumps. Either its weekly or monthly, I believe that the effects are the same for petrol operators with high turnover on their inventory. Having too much inventory opens up pricing risk for an operator and this needs to be managed well.
Likely for the first months or so, petrol stations would follow the price ceiling set by government just to be safe than sorry. But as the months go by, some operators who are bigger and has a higher turnover might be more daring to tweak their margin in order to fulfill more sales. It takes one station to start adjusting prices somewhere on a congested road and you might see stations along the way adjusting their prices to compete as well.
In the future, this might turn into a familiar sight in front of petrol stations showing current selling price.
Deriving Price at Pumps
To derive prices that we are paying for at the pumps, the mathematical formula comes out to something like this.
Price at Pumps = MOPS + Oil Company Margin + Petrol Dealer Margin
MOPS stands for Mean of Platts which is denominated in SGD (that’s why you see petrol going higher when ringgit weakens)
Oil Company Margin is likely going to be standardized but for bigger petrol station operators, a bulk discount might be offered when a station buys up the full content of a refueling tanker. A station operator might pass this benefit down to customers.
Petrol Dealer Margin is where the magic happens. This would be fully adjustable to the operators’ preference.
So Fixed vs Ceiling?
In economics, we try to promote competition among retail to derive the best equilibrium price possible which benefits the economy as a whole. This is why we felt that having a price ceiling mechanism would benefit consumers in the long run.
Moreover, petrol companies would need to step up their game to sell more products to stay on top. Clearly the price ceiling mechanism is a way the government passes the ball on to the petrol companies to provide lower prices to the public rather than re-introducing subsidies in the short term. Obviously, we have yet to know if subsidies would be returning when oil rallies again.
From the illustration above, if the petrol retailer is selling below the ceiling price, it definitely benefits the consumer as you can see the lower prices creates consumer surplus. Eventually the excess demand shows as well that retailers would be able to sell more and lower margins could by offset by a higher volume on sales.
Let’s see what happens to the petrol retailers and the fight that would likely rage between oil companies. Our local Petronas could finally go against the internationals like Shell and Caltex fighting it out in the open market.
But for now, we should welcome the price ceiling mechanism starting end of this week then!