By Christopher Tan
A PETROL price war has ignited, hours after Caltex - the smallest pump operator here - re-introduced 92-octane petrol and priced it below the prevailing market rate.
No fewer than three rounds of cuts were made within the day yesterday, as the four oil companies tried to outdo one another.
ExxonMobil was the first to react by lowering its 92-octane fuel by 2.2 cents a litre to match Caltex's $1.536 (before discount). The giant, which has the largest pump network of 67 stations, made the change at 10am yesterday - 10 hours after Caltex's surprise move.
Singapore Petroleum Co (SPC) followed suit at 12.30pm.
And by around 4pm, Shell - which is the second biggest player with 63 stations - did a double-barrelled reduction. It matched its rivals' 92-octane price and cut 95-octane by 2.9 cents a litre to $1.537.
Its price advantage was short-lived. At 5pm, Caltex and ExxonMobil matched Shell's 95-octane rate.
Caltex upped the ante by bringing its 92-octane - which it re-introduced after phasing it out in 2000 - 2.9 cents lower to $1.507 a litre.
And at 5.30pm, SPC matched the market's prevailing 95-octane rate. An hour later, this home-grown player matched Caltex's 92-octane rate.
The industry has not seen this thrust-and-parrying for several years now. In recent times, pump price movements have been relatively tame, with one player making a change and then others matching it uniformly within a day.
Asked why it reacted so swiftly to a far smaller competitor, ExxonMobil Singapore retail manager Loh Chee Seng said: 'It's not about size but about Esso's commitment to providing our loyal customers with competitive prices.'
A Caltex spokesman said her company was likewise striving to be 'price competitive'.
'We'll continue to keep watch on the market,' she said when asked how much farther it would go.
Yesterday's adjustments widened the gap between 'premium' and 'regular' petrol.
At the end of the work day, 98-octane fuel was 16.3 cents pricier than the two cheapest 92-octane fuels.
The price premium for Shell's so-called ultra-premium V-Power is even wider. At 34.2 cents a litre higher than the two cheapest 92-octane fuels, it will cost $20 more per tankful on a medium-sized car.
V-Power is alone in this price segment as Caltex has since lowered its Platinum grade - a V-Power rival - to $1.67 a litre, the same price as all other 98-octane fuels.
Asked about the state of the price war at 6.30pm yesterday, and whether a 'ceasefire' had been reached, Mr John Sam, retail manager at Chevron Singapore, which markets the Caltex brand, said: 'It has just started.'
Motorists here have been favouring 92- and 95-octane grades since pump prices started soaring from 2007. The current downturn is fuelling the shift. Data from the Ministry of Trade and Industry showed sales of 92- and 95-octane fuel growing 13 and 14 per cent respectively last year, while 98-octane sales shrank by 18 per cent.
The two lower grades accounted for 64 per cent of sales last year. As recently as 2005, 98-octane sales outstripped the sale of 92- and 95-octane grades combined.
Observers reckon the next round of rate cuts would be for the 'premium' grades.
Article Review:
This article is about the 4 oil companies here in Singapore slashing pump prices at least 3 times on that day itself. This certainly means good news for consumers. This scene is different and unusual as these companies have not engaged in this kind of “Price war” for a few years. In that case, why are oil companies so concerned about cutting prices now?
- Oil companies are reducing prices due to the decrease in demand for oil.
As seen in the graph above, as the demand for oil decreases, suppliers would need to cut prices such that quantity supplied is equal to quantity demanded.
- The decrease in demand is a result of the economy recession that had drastically reduced consumer income. Many people are either retrenched or have lower salary as compared to a year ago. This resulted in people giving up the option of driving cars and opting for public transport instead.
- As seen in the article, motorists are favouring ‘regular’ petrol (inferior goods) over ‘premium’ grades (normal goods). As consumer income decreases, the demand for inferior goods rise and the demand for normal goods drop. Shell’s premium petrol would “cost $20 more per tankful on a medium sized car” than regular petrol. Consumers are switching from consuming normal goods to consuming inferior goods as they have lesser to spend now. The increase in demand for regular petrol also caused Caltex to reintroduce its 92-octane fuel which it phased out in 2000. The marginal benefit of supplying the goods now exceeds the marginal cost of supplying it due to the influx of people preferring cheaper grades of petrol.
- Petrol companies are pitting against each other to reduce prices to competitive levels because demand for their product is also affected by changes in price of substitute goods. Substitute goods refer to alternatives that satisfy the same consumer wants. If Caltex has lower prices than the other 3 companies, consumer would prefer Caltex to the other companies. Therefore, the other companies matched Caltex’s prices so that demand for their own brands would not fall.
- This also shows that the demand of the individual brands of petrol is price elastic. As there are close substitutes available in the market, consumers can always switch to other brands if the companies do not offer competitive prices. A market strategy would be making consumers loyal to their own brand of petrol. The different companies here have been offering points reward system such that customers would earn points when they top up petrol and accumulated points can be exchanged for other goods. Thus, consumers would tend to buy from that company even though it has a slightly higher price.
Kenneth Soo
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