Transcript Multi-fiber agreement

Why were more LPG pumps reported broken
at the designated pump stations when the
world price of LPG went up?
Ka-fu Wong
University of Hong Kong
1
Cleaning the air
 Pollution had become a major concern in Hong Kong and while
little could be done about factories across the border, actions were
taken at home. In his 1999 policy address Hong Kong chief
executive Tung Chee Hwa announced measures to tackle the
territory’s deteriorating air quality.
 A 1998 trial of 30 Hong Kong LPG taxis found that they performed
comparably well to diesel taxis, cost about the same to maintain,
emitted “extremely low emissions” and were “virtually free of
smoke”. Crucial factors to consider were the effect of fuel price on
operating cost and the sufficient availability of filling stations and
maintenance shops. Encouraged by the results, the government
set out to convert the territories diesel powered taxicab fleet.
Efforts were made to ease the transition with incentives offered to
owners, drivers and fuel suppliers.
2
Incentives offered to owners, drivers and fuel
suppliers
 To encourage the switch from diesel to LPG, the import of new
diesel taxicabs was banned and taxi owners were offered
HK$40,000 each for the purchase of new LPG vehicles.
 All oil and gas firms were welcomed to submit bids to “design,
build, and operate” filling stations selling only LPG priced according
to a government designed and implemented pricing mechanism. In
exchange for signing a 21-year contract to sell at or below capped
prices, companies received development land at zero cost. These
“dedicated station” contracts were awarded based on the lowest
operating price. No duties were levied on LPG sales.
3
The pricing formula at dedicated filling stations
 the formula (P = A + B) was comprised of the LPG international
price (A) and a LPG operating price (B). Ceiling prices were set
based on the international free-on-board price – updated once
every six months – with additions made for operating costs and
profit margins. Determined by the operators when they tendered
their original station contract bids, the LPG operating price
“operating cost and profit margin” component was updated once a
year in-line with the composite consumer price index.
Free-on-board : “FOB prices exclude all insurance and freight charges…effectively
priced at the loading port” (platts.com). The Saudi Aramco LPG contract price was
commonly quoted for trade in Asia.
4
Changes in LPG prices
3.50
2.50
2.00
1.50
1.00
International
Non-Dedicated Stations
S-05
D-05
D-04
M-05
J-05
J-04
S-04
D-03
M-04
J-03
S-03
S-02
D-02
M-03
D-01
M-02
J-02
J-01
S-01
0.50
D-00
M-01
HK$ per Litre
3.00
Dedicated Stations
5
Between the revisions, the LPG prices at
dedicated pump stations are fixed – regardless
of the world LPG prices.
Price
A
Usually at this regulated price, there will be excess demand
(i.e., quantity demanded > quantity supplied). Buyers will line up
for the product. Thus, buyers wind up paying with waiting time.
Supply
C
Dedicated stations are
willing to supply this
quantity only.
Price regulation
(ceiling)
Demand
D
Excess demand
Quantity
6
Broken nozzles
 When world LPG prices are rising, dedicated stations are not willing
to supply – for each unit they supply, they could be losing money.
That is, the revenue cannot even cover the variable cost. The
firms’ best decision is to shut down the stations.
 Can the stations be shut down?
 No. Because the dedicated stations are given a subsidy in land
lease, and they are under a service contract to supply LPG.
 What could be better if the nozzles were broken?
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Broken nozzles
 When world LPG prices are rising, dedicated stations are not willing
to supply – for each unit they supply, they could be losing money.
That is, the revenue cannot even cover the variable cost. The
firms’ best decision is to shut down the stations.
 Can the stations be shut down?
 No. Because the dedicated stations are given a subsidy in land
lease, and they are under a service contract to supply LPG.
 What could be better if the nozzles were broken?
8
Broken nozzles
3.50
HK$ per Litre
In December
3.00 2005 the average LPG price at the pump at
non-dedicated stations was HK$3.27 per liter compared
to HK$2.57 per liter at dedicated stations. Thus, the
2.50
dedicated
stations are likely making a loss on every
additional liter of LPG sold. During the same time taxi
drivers complained
of long lines and even “broken pump
2.00
nozzles”. From January to September 2005 the
government received only 1 complaint regarding queuing
1.50 filling stations. After a “hotline’ was
at dedicated
established in late November, complaints peaked at 306
in December.
1.00
International
Non-Dedicated Stations
S-05
D-05
D-04
M-05
J-05
J-04
S-04
D-03
M-04
J-03
S-03
S-02
D-02
M-03
D-01
M-02
J-02
J-01
S-01
D-00
M-01
0.50
Dedicated Stations
9
Should we have a more frequent price update?
 At its five year review, the pricing mechanism for “dedicated LPG”
was modified to update the international LPG price component
once a month as opposed to twice a year. The thought of more
frequent price adjustments upset some in the taxi trade. One
transport union official complained that since dedicated filling
stations received land premium-free, they “should bear the
fluctuation of fuel prices and not put the pressure on us.”
 Will a firm consider the cost of land when making a decision to
shut down or not (or more broken nozzles or not)?
 Land cost is a fixed cost, not variable cost!!
10
What will happen if the LPG prices are falling
abruptly?
Price
A
Usually at this regulated price, there will be excess supply
(i.e., quantity demanded < quantity supplied). Suppliers will
compete for buyers, offering additional attractions.
Supply
Price regulation
(floor)
C
Dedicated stations are
willing to supply this
quantity.
Demand
D
Excess supply
Quantity
11
End
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