President Ma Ying-jeou's (馬英九) government has decided to remove the oil price freeze on state-run CPC Corp, Taiwan, to allow the market to determine prices. Given that Taiwan has only two oil refiners — CPC and Formosa Petrochemical Corp — market pricing is virtually monopolistic pricing. This not only forces consumers to absorb the costs of CPC's antiquated equipment, production inefficiency and huge staffing costs, but also violates the principle of social justice by allowing Formosa to enjoy exorbitant profits and opportunities for interest arbitrage.
Economists have said that governments need to enforce pricing or rate of return regulations on industrial monopolies to prevent businesses from abusing their position and extracting disproportionate profits. The freeze on CPC oil prices adopted by the previous government is such a regulation: It stabilizes commodity prices, while forestalling the profit guarantees hidden within the formula for floating oil prices. This measure could have forced CPC to step up production efficiency, reduce costs and adopt hedging measures to counter the rise in crude oil costs.
However, the Ma administration believes that the Chen government’s use of tax dollars to subsidize consumers would not help promote energy conservation and was unfair to taxpayers. Indeed, these controls needed to take into account inflation, energy, environment and fairness issues.
While the new government’s decision to remove the price freeze would reduce the burden on the national treasury caused by CPC’s deficit, it may also heighten inflationary pressures. Various subsidies have been proposed. However, these measures would not really help the national treasury and would only amount to using the money of consumers and taxpayers to subsidize taxis, public transport companies and even industrial oil consumers. This is unfair to both taxpayers and consumers.
Even more unfairly, Formosa has continued to hike prices while actively retreating from the local market and shipping more refined oil to China. This is tantamount to boosting China’s oil reserves while starving Taiwanese reserves. Not only has Formosa not sustained any damage from the oil crisis, it has even profited from it. For instance, Citigroup Global Markets Inc has been buying Formosa Plastics Group stocks on expectations that Formosa Petrochemical’s rising export prices and the full operations of its refining facilities will sustain its performance.
From Formosa Petrochemical’s point of view, there is nothing unfair in fulfilling its function as a business by attempting to generate the highest return for its shareholders. But consider the fact that while Formosa ships its refined oil abroad, the environmental costs of refining are left in Yunlin, Chiayi and Tainan counties. This kind of behavior, which does not absorb environmental and social costs while profiting at their expense, not only adds to the greenhouse effect but is also unfair to residents in these areas.
The fundamental solution to these injustices is to reconsider the structure of the energy industry: Replace monopolies with competition, deregulate oil imports and push for market liberalization. At the same time, CPC should thoroughly review its problems, including production inefficiency and a bloated staff. As for Formosa, the government should consider levying environmental taxes. Formosa should also consider that aside from ensuring maximum returns for its shareholders, it needs to shoulder its corporate social responsibility.