Why is Hong Kong’s petrol price the highest around the world?

According to the latest "Worldwide Cost of Living (WCOL)" report published by the Economist Intelligence Unit (EIU), although Hong Kong's cost of living ranking has dropped to the fifth place, the oil price per litre tops the world again. In fact, even in April 2020, when the international oil price dropped to the negative range, the local oil price was still completely unaffected. In today's Kwiksure feature, we will analyze the reasons behind the high oil prices in Hong Kong.

How expensive is oil in Hong Kong?

At the time of writing, petrol in Hong Kong was USD? $2.50 per litre, up by about 14% from last year's USD? $2.19. The city with the second highest petrol price is Amsterdam, at USD $2.18 per litre, significantly lower than Hong Kong by 14%.

Source of Hong Kong’s petrol is, surprisingly, Singapore

All local refined oil products come from Singapore. The petrol produced is then transported to Hong Kong by oil trucks and stored in the oil depot in Tsing Yi, because the transportation cost of cruise ships is higher than that of land. Due to the high rent of oil depots, there are only four oil companies in Hong Kong that import petrol from Singapore, namely Shell, Caltex, Sinopec, and Esso. Both PetroChina and Feoso Oil buy refined petroleum products from these four oil companies.

In addition, the cost of opening a gas station is costly because the land price in Hong Kong is sky-high, and the "land" auctioned to oil companies is merely the right to use for 21 years, instead of actual ownership.

Petrol prices are not only affected by the cost of oil

About 22% of each litre of petrol in Hong Kong goes to the production? cost, about 33% goes to taxes (because the government regards fuel as a luxury item, and has imposed a fuel tax of USD $6.06 per litre of unleaded petrol since 1997), and about 43% is the gross profit of oil companies. Therefore, changes in international oil prices can only affect the cost of oil, and have a limited impact on the overall price.

Oil companies refuse to introduce cheaper petrol varieties

Only three types of fuel, 98-octane standard unleaded petrol, 98-octane premium unleaded petrol, and one diesel, are currently available in Hong Kong. Cheaper alternatives like 92- and 95-octane petrol options are not available.

Former Chairlady of the Competition Commission Anna Wu said she was particularly unhappy with the government's explanation for its refusal to mandate that oil companies reintroduce the cheaper 95-octane petrol, as it offers consumers a cheaper alternative. The government has refused to reintroduce this alternative fuel even though motor fuel reports from other countries show that more than half of the drivers choose to use 95-octane petrol, which is 15% cheaper than 98-. Although in 1991, both 95- and 98-octane unleaded petrol were available in Hong Kong, all oil companies decided to withdraw 95-octane unleaded petrol from the market in less than a year of sales. Retailers have said in the past that their decision to only sell 98-octane petrol reflected customer preference. The government chose "not to interfere with the fuel industry" on the grounds of maintaining a "free market".

"Higher increase, lower decrease " and "Faster increase, slower decrease"

In addition, analysts pointed out that neither the Competition Commission nor the Consumer Council could find evidence that the four companies “colluded in setting prices” (that is, once one oil company adjusts the price, the other oil companies will follow within a day or two). They could at most call it "parallel pricing". It is because oil companies offer discounts on fuel cards, fleet cards, and limited-time discounts, causing the final price paid by different consumers to be different. But it is not difficult to find a price trend of "higher increase, lower discount" and "faster increase, slower decrease". Structural problems have always existed in Hong Kong's oil market, yet the government has not adjusted its policies to regulate the profit model of oil companies.

"Higher increase, lower decrease"

According to the Consumer Council’s "Auto-fuel Price Monitoring Analysis 2020", comparing the cumulative increase or decrease in petrol and Brent crude oil prices in the 7 years between 2013 and the first quarter of 2020, when the oil price dropped, the petrol price also dropped but the magnitude was smaller by USD? $2.4. When the oil price increased, the petrol price also increased but the magnitude was larger by USD? $1.99.