Government adopts measures to alleviate impact of oil price hikes

This article was published by the Taiwan Headlines on April 19, 2006. It reports that in order to deal with the mounting inflationary pressure, the government in Taiwan recently announced six price-stabilization measures, including reduction of gasoline tariff to 5 percent. The government also plans to introduce competition from foreign oil products in order to control further price hikes by the Chinese Petroleum Corporation and the Formosa Petrochemical Corporation.

The government decided to adopt these price-stabilization measures after the Chinese Petroleum Corporation announced recently that it would raise prices of various petroleum products, including gasoline, diesel fuel, fuel oil and liquefied petroleum gas, by up to 9.3 percent. The result of this price hike is that prices of gasoline and diesel oil in Taiwan will be raised by NT$2 per liter. Fuel oil prices will be raised by NT$740 per kiloliter, while the price of liquefied petroleum gas will be NT$1.41 more expensive per kilogram. The Formosa Petrochemical Corporation is also expected to raise its prices soon.

Despite the hikes of oil prices, the Council for Economic Planning and Development is confident that consumer price hike in 2006 will be kept under 2 percent, and that the government's target of 4.4-percent economic growth rate is still attainable. If inflation eventually becomes worse than expectation, then the government will cut exercise tax and increase subsidies to fishing boats when necessary.

According to the Directorate General of Budget, Accounting and Statistics, every 10 percent hike in domestic oil prices will boost the consumer price index by 0.385 percent. Although the Chinese Petroleum Corporation decided to raise its gasoline price by NT$2 per liter, as mentioned above, the increase of the consumer price index can still be kept under 2 percent.

Meanwhile, in order to break the market currently controlled by the Chinese Petroleum Corporation and the Formosa Petrochemical Corporation, the government decided recently to halve the gasoline tariff to 5 percent, from the original 10 percent. Although the government generally abides by the principle of no interference regarding price hikes, it is worried about the impact of oil-price hikes on the consumer price index and the daily life of the people in Taiwan. Therefore, the Fair Trade Commission and the Consumers Protection Committee will closely monitor price situation and will strictly penalize price manipulations in order to maintain market order.

Nonetheless, after domestic prices of gasoline and diesel oil have approached the minimum levels in the neighboring nations, the setting of oil prices in Taiwan must return to market mechanism. Therefore, after oil prices stabilize, the Chinese Petroleum Corporation will adopt floating prices to reflect the fluctuation of international oil prices, in order to eliminate the expectation among consumers. The company also proposed an NT$10.6-billion program that aims to elevate its business performance and cut operational costs.

According to this article, the current round of price hike for gasoline and diesel oil is the highest since 1999 in terms of dollar value and scale. The Chinese Petroleum Corporation claims that since January 2005, international WTI (West Texas Intermediate) price for crude oil has surged 67 percent from US$42 per barrel to US$70. During the same period, the company's gasoline price has risen only 11.8 percent, diesel oil price 19.4 percent, and fuel oil price 16.3 percent.

Meanwhile, the Chinese Petroleum Corporation argues that since Taiwan's oil product market has been fully liberalized, various oil prices should return to the determination of market mechanism, as practiced in Japan, South Korea, Singapore and Hong Kong. In these nations and regions, fully liberalized market mechanism is embraced so that strong competition among several oil suppliers exists in the market.