Tue, Aug 07, 2007 page8

• Subsidies, taxes and the price of oil

  • By Jam Shou-jung 詹守忠
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  Bureau of Energy Director-General Yeh Huey-ching (葉惠青) has offered various explanations in an attempt to ease doubts about the floating oil price mechanism, but most Taiwanese remain unconvinced.

  Of course, people tend to be difficult to pacify when they know that their wallets have gotten thinner as the price of 40 liters of 95 octane gas has gone from NT$1,000 to NT$1,200.

  They tend to get cranky when they see that CPC Corp, Taiwan (CPC) has been reaping huge profits and giving its employees generous benefits.

  Therefore, as long as the basic nature of CPC doesn't change and its operating expenses remain higher than those of privately run Formosa Petrochemical, people will question every price increase.

  This will become an increasingly difficult political problem to handle.

  But in fact, a floating price mechanism is the best choice for a liberalized oil industry.

  This is because with the high international price of oil, if CPC were to absorb the increased costs, the increase would eventually be paid for out of the state treasury.

  This would be tantamount to unfairly forcing poorer citizens who don't use oil to subsidize wealthier people who do.

  But the problem is that there are many taxes attached to consumer oil purchases.

  Even if CPC turns a large profit, this is in fact a form of tax revenue.

  There are thus important tax considerations that must be made when deciding whether or not domestic oil prices should rise in step with international increases.

  For example, one liter of 92 octane unleaded gas costs NT$29.1, of which NT$11.14 is tax. If we add in CPC's statutory costs, 40 percent of the NT$29.1 that consumers spend on one liter of 92 octane unleaded gas goes to the government in taxes.

  On the surface, it would appear that the purpose of the floating price mechanism is to insulate CPC from losses.

  But in fact, its main purpose is to prevent losses in tax revenue. Considering the government's financial difficulties, it appears even less likely that the national treasury would be able to subsidize CPC.

  People have heavily criticized the enormous profits CPC has enjoyed ever since the floating price system was implemented.

  Their reasoning is very simple. The floating price mechanism bases profit calculations on percentages.

  Even though prices go up, CPC still sells the same quantity of oil. But as the unit price increases, its earnings go up as well. If the company's profits remain steady at 6 percent, CPC's total revenue will rise.

  For example, in 2003, CPC's total sales from major oil products were about NT$430 billion.

  At 6 percent profit, it would have made NT$25.8 billion. CPC is estimated to sell a total of NT$760 billion this year, which would earn it NT$45.6 billion at 6 percent profit.

  However, although there is a limit on the oil commodity tax, sales taxes also increase as oil prices rise. For example, when gas is NT$20 per liter, there is around a NT$1 sales tax on each liter. In this case, each year CPC would pay about NT$20 billion in sales tax.

  But prices have risen to NT$30 per liter, with a sales tax of NT$1.5 per liter, with the result that CPC will likely have to pay nearly NT$30 billion in sales tax this year.

  When the increase in profits is paired with the increase in taxes that come with floating oil prices, we see that they counterbalance one another.

  Thus, when the Consumers' Foundation and legislators question floating oil prices, their line of reasoning isn't necessarily accurate.

  It is, however, an undisputed fact that floating oil prices substantially benefit the national treasury.

  Taiwan depends on imports for nearly all of its crude oil. Compared with other countries that are similarly reliant on imported oil, Taiwan's oil prices are relatively cheap.

  However, this isn't because of particularly efficient operations on CPC's part, but because taxes on oil are comparatively low.

  Therefore, whether or not oil prices change is not purely an economic question of following market mechanisms.

  Rather, it is a political and financial question of subsidies and taxes.

  There will be no questions asked about the floating price mechanism if prices drop, but a sustained increase over a number of weeks is enough to set off a political storm.

  However, politicians know that speaking of tax increases can hurt their political careers.

  Thus, their statement that "the floating oil price mechanism can be reviewed at any time" is in fact the same as declaring that the system will be abandoned -- if it is politically necessary -- in the future.

  Jan Shou-jung is a legislative assistant.

  Translated by Marc Langer
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