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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 economy . Manuel Sebastião Portuguese Competition Authority Kazan, September 2012. FIRST QUESTION . Russia: Oil-producing country Big, relatively closed economy Portugal

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slide1

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

slide2

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

slide3

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

slide4

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

slide5

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

slide6

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

slide7

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

slide8

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

slide9

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

slide10

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

slide11

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

slide12

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

slide13

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

slide14

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

slide15

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

slide16

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

slide17

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

slide18

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

slide19

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

slide20

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

slide21

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

slide22

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

slide23

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

slide24

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

slide25

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

slide26

1. LIQUID FUEL MARKET

IDEA # 2: 3 Markets

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

slide27

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

slide28

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

slide29

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

slide30

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

slide31

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

slide32

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

slide33

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

slide34

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

slide35

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

slide36

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

slide37

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

slide38

1. LIQUID FUEL MARKET

ROCKETS AND FEATHERS

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

slide39

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

slide40

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

slide41

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

slide42

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

2 foreign trade
2. FOREIGN TRADE

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

2 foreign trade1
2. FOREIGN TRADE

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

2 foreign trade2
2. FOREIGN TRADE

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

slide46

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

slide47

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

slide48

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

slide49

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

3 brent platts and domestic prices
3. BRENT, PLATTS AND DOMESTIC PRICES

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

3 brent platts and domestic prices1
3. BRENT, PLATTS AND DOMESTIC PRICES

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

slide52

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

4 weekly price changes
4. WEEKLY PRICE CHANGES

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

4 weekly price changes1
4. WEEKLY PRICE CHANGES

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

4 weekly price changes2
4. WEEKLY PRICE CHANGES

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

4 weekly price changes3
4. WEEKLY PRICE CHANGES

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

4 weekly price changes4
4. WEEKLY PRICE CHANGES

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

4 weekly price changes5
4. WEEKLY PRICE CHANGES

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

4 weekly price changes6
4. WEEKLY PRICE CHANGES

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

4 weekly price changes7
4. WEEKLY PRICE CHANGES

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

4 weekly price changes8
4. WEEKLY PRICE CHANGES

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

4 weekly price changes9
4. WEEKLY PRICE CHANGES

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

4 weekly price changes10
4. WEEKLY PRICE CHANGES

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

slide64

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

slide65

5. PRICES IN PORTUGAL AND EUROPE

  • 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

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

5 prices in portugal and europe
5. PRICES IN PORTUGAL AND EUROPE

Source: European Commission

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

5 prices in portugal and europe1
5. PRICES IN PORTUGAL AND EUROPE

Source: European Commission

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

5 prices in portugal and europe2
5. PRICES IN PORTUGAL AND EUROPE

Source: European Commission

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

5 prices in portugal and europe3
5. PRICES IN PORTUGAL AND EUROPE

Source: European Commission

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

slide70

5. PRICES IN PORTUGAL AND EUROPE

 Retail price in Portugal and Spain

  • Retail price in Portugal and Spain: difference almost all because of tax
  • Fuel Tax and VAT both lower in Spain
  • Fuel Tax
    • Portugal close to the average for Europe
    • Spain has one of the lowest tax levels in Europe

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

slide71

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

6 value chain
6. VALUE CHAIN

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

6 value chain1
6. VALUE CHAIN

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

slide74

6. VALUE CHAIN

  • Elements scrutinised by the PCA
  • Logistics (storage + transport), gasoline, diesel
    • Around € 0.02 / litre
  • Retail, gasoline and diesel
    • Around 0.12 – 0.14 €/ lt
    • Approximately 45% / 55% for costs and retail margin

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

slide75

6. VALUE CHAIN

  • Elements scrutinised by the PCA
  • Starts at ex-refinery prices (tradable goods)
  • Around 10% of the value chain

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

slide76

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

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7. PRICES PER OPERATOR

Portugal: Market shares

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7. PRICES PER OPERATOR

Portugal: Market shares

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7. PRICES PER OPERATOR

  • 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

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7. PRICES PER OPERATOR

  • 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:

    • Similar prices charged by various oil companies
    • Price increases by various oil companies
    • News and comments in the media (beware of the so-called experts …)
    • Higher prices in Portugal than in Spain

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7. PRICES PER OPERATOR

  • 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:

    • The two price transmission mechanisms
    • The exchange rate effect

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7. PRICES PER OPERATOR

  • 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

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7. PRICES PER OPERATOR

  • PARALLEL CONDUCT
    • Parallel conduct cannot be regarded as furnishing proof of concerted practices unless such practices constitute the only plausible explanation for such conduct

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7. PRICES PER OPERATOR

  • 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

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7. PRICES PER OPERATOR

  • ABUSE OF DOMINANT POSITION
    • Article 102 TFEU (Treaty of Lisbon)
    • Case law in the European Court of Justice:
      • Has defined the concept of excessive price on a case-by-case basis and always in a restrictive way; and
      • Has tried to avoid confusion between competition law and price regulation

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7. PRICES PER OPERATOR

  • ABUSE OF DOMINANT POSITION
    • The articles mentioned in the previous slide prohibit abuse, not the mere holding of such a dominant position
    • Assessment has focused on two aspects:
      • Excessive pricing
      • Barriers to entry

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7. PRICES PER OPERATOR

  • ABUSE OF DOMINANT POSITION
    • Taking into account all the information available:
      • 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.
      • It has not been possible to findevidence of excessive pricing that could be imputed to the dominant firm in the market

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7. PRICES PER OPERATOR

  • 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?

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7. PRICES PER OPERATOR

 Parallel conduct and/or similar prices

  • 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.

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7. PRICES PER OPERATOR

 Parallel behaviour and/or similar prices

  • 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.

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7. PRICES PER OPERATOR

 Parallel conduct and/or similar prices

  • 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.

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7. PRICES PER OPERATOR

 Parallel conduct and/or similar prices

  • 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.

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7. PRICES PER OPERATOR

 Parallel behaviour and/or similar prices

  • 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.

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7. PRICES PER OPERATOR

  • 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

    • Lower location costs
    • Lower relative personnel costs
    • Smaller range of products
    • Economies of scale, even more as demand increase

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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

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8. MOTORWAY PRICES

 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

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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!

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8. MOTORWAY PRICES

 Motorway prices mistrust

  • 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

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8. MOTORWAY PRICES

 Motorway prices mistrust

  • 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

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CONTENTS

APPENDIX 1 – Acronyms

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ACRONYMS

APBT Average price before tax

APATAverage 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

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