Sun, Jun 01, 2008 page8

• EDITORIAL: Fuel is crying for real competition

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  The unexpected announcement by Premier Liu Chao-shiuan (劉兆玄) last Tuesday that state-owned refinery CPC Corp, Taiwan (CPC, 台灣中油) would raise gasoline and other fuel prices the following day triggered harsh criticism from skeptics.

  Liu has faced criticism over his handling of the matter and the potential damage this could have on the new government’s administrative credibility. However, he has defended the policy as a way of preventing stockpiling and maintaining public safety.

  To mitigate growing inflation concerns and guard against a drop in consumer spending, Liu said consumers would only have to absorb 60 percent of the increases, with the government and CPC accounting for the rest in equal parts.

  The problem is simple: How long can the Chinese Nationalist Party (KMT) government afford to shield consumers with such subsidies without draining the national coffers? If the Democratic Progressive Party government deserved criticism for price controls — a practice that hurt the state oil company at the expense of all taxpayers — then it is difficult to see how the KMT’s measures are any different. The take home message is that both parties have little sympathy for the user-pays principle.

  The government should reconsider the benefits that would flow from a truly competitive domestic fuel market.

  Such a market appears more important by the day, given that the privately owned Formosa Petrochemical Corp (FPC, 台塑石化) said that it would raise gasoline and diesel prices two days after the government’s announcement to match those of its rival.

  Despite differences in financial structure and operations, CPC and FPC have allegedly colluded in a market that has become a duopoly since the withdrawal of ExxonMobil Corp from Taiwan in 2003.

  FPC’s latest price hikes remind us that the two refiners are almost certainly engaging in a protracted game of price-fixing, and this will continue indefinitely if there is no reform.

  One reason CPC can absorb 20 percent of the price increases is because the government agreed to lower the commodity tax on gasoline and diesel — by 19 percent and 35 percent respectively — for a period of six months to compensate the state refiner so that it could pass on lower increases to consumers.

  What makes informed consumers really angry is that the tax cut also applies to the profitable FPC, which already enjoys a handsome profit from fuel exports, at a time when the national coffers are estimated to be suffering losses of NT$9.6 billion (US$315.7 million) in tax revenue for this six-month period.

  Higher domestic gasoline and diesel prices are inevitable at this time, and the government must rely on tax cuts and other subsidies to cushion inflationary pressures in the short term.

  But the government’s role is different to that of private citizens and companies. Its goal is to maintain balanced development in the allocation of resources, wealth distribution and economic growth over the long term rather than getting bogged down in daily price adjustments.

  Creating a more competitive market is vital at times of privation, and requires the removal of barriers to petroleum imports, including high tariffs, as well as unpredictable — even nonsensical — government intervention.
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