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No. 16 Petroleum Sector Briefing Note June/July 2009
Getting Petroleum Products to Market
The sharp price increases in the world oil market in 2007 and 2008 took everyone by surprise. And just
as some oil analysts were forecasting US$200 a barrel or even higher, the oil price collapsed in the last
four months of 2008. The speed at which the price changes on the world market were transmitted to
retail prices became the subject of much debate. Consumers the world over argued that something was
not right with the way their petroleum markets were functioning, benefitting oil companies and harming
consumers. What determines these prices? This briefing note provides an overview of the petroleum
product supply chain and factors contributing to retail prices.
O
il prices rose from 2004 to historic highs in mid- price of gasoline, kerosene, diesel, and other fuels. In 2007
2008, only to fall precipitously in the last four months in the United States, for example, the average retail price
of 2008 and lose all the gains of the preceding four of regular gasoline was US$0.74 per liter, of which the cost
and a half years. The pace at which retail prices rose and fell of crude was $0.43 (or 58 percent), refining costs and prof-
during this period became the subject of much discussion. its $0.13, distribution and marketing $0.07, and govern-
Consumers felt that retail prices caught up rapidly with world ment taxes $0.11 [1]. Crude oils vary in price because they
market prices as long as prices were rising, but fell all too differ in quality. Crude oil is extracted and transported to a
slowly when the world oil price began to collapse. How does refinery, typically by ship or pipeline. Because each refin-
a petroleum product market work? What are the main deter- ery is configured for specific types of crude, minimizing
minants of retail prices? This note describes different stages cost is not simply a matter of purchasing the lowest-cost
in the petroleum product supply chain (Figure 1). crude. As [2] explains, the "sweeter" (less sulfur-contain-
ing) and lighter the crude oil, the more expensive it tends
to be. Everything else being equal, the closer the refinery
Crude Oil Supply is to the source of crude oil, the lower the price of crude
The cost of crude oil is a major component in the oil at the refinery gate.
2 Petroleum Sector Briefing Note June/July 2009
Refining (Sokimex runs its own fleet of road tankers) or outsource
most of the road transport activities to independent owner-
Crude oil is next processed into finished products in operators and use storage depots owned by others under
refining facilities. Refineries are generally large- scale and throughput fee arrangements.
located near major markets with complex processing facili-
ties adapted to the market requirements. These requirements
Retail Distribution and Marketing
include relative amounts of different fuels consumed--a
market with high ownership of cars may consume more gaso- Retail marketing involves selling gasoline, diesel, and
line than one that is dominated by industrial activities requir- lubricants at service station outlets and kerosene and lique-
ing more fuel oil for boilers and diesel fuel for freight trans- fied petroleum gas (LPG) through other shops. Depending
port--and fuel quality such as the octane number of gaso- on the arrangements with dealers, oil marketing companies
line. Among Cambodia's neighbors, Singapore is the largest have varying degrees of ownership of the assets of their
refining center. Spot prices (prices for immediate delivery own network. When an oil marketing company first enters a
and payment) of petroleum products in Singapore are quoted new market, it is common to start out with largely self-owned
on a daily basis and set the benchmark. and operated facilities such as trucking and service stations,
but many increasingly outsource such activities as the busi-
Product Supply ness matures. The degree to which oil marketing companies
own and operate assets varies by company philosophy, strat-
After refining, petroleum products of the required amount egy, and the level and duration of involvement in a particular
and quality are purchased and transported to storage facili- market.
ties close to the final markets. This activity entails coordina-
tion of procurement and transport logistics, including con- Special Case of LPG
siderations of volumes required, procurement methods, price,
location, contracting terms, and supply reliability. Transport LPG can be sourced from a refinery or a natural gas
modes from refineries to secondary storage include marine processing plant. Natural gas is a mixture of several com-
tankers, pipelines, road tankers, rail, and barges. In Cambo- pounds including LPG components, and LPG is separated
dia, the largest oil terminal in the country is at the site where from the rest of natural gas during gas processing. World-
there was once an oil refinery. Located some 10 kilometers wide, 60 percent of LPG comes from natural gas. LPG is trans-
north of the main port of Sihanoukville, the refinery opened ported by large LPG carriers, pipelines, or trains to storage
in 1969 and was destroyed a year later at the outset of civil terminals which may be underground, refrigerated, or pres-
war. Sokimex holds a concession for managing the terminal. surized. LPG is next delivered by train, road, coastal tanker,
The pier serving the terminal is the primary point of entry for or pipeline to cylinder filling plants and intermediate-size stor-
petroleum products and is managed by Sokimex Jetty Corpo- age areas where it is generally stored in pressurized vessels
ration. There are other smaller oil terminals in the country. or spheres. Cylinders are filled with LPG at bottling plants.
Trucks transport LPG cylinders from the bottling plant to
Wholesale Distribution and Marketing retailers as well as to bulk customers. LPG is available to end-
users through cylinder sales points such as commercial stores
Wholesale distributors are generally synonymous with and service stations.
oil marketing companies, of which Sokimex is the largest in
Cambodia. Other major wholesale distributors in the country LPG can be used for many different purposes: for cook-
include Tela, Total, and Caltex. Wholesale marketing involves ing, heating, air conditioning, refrigeration, and as an auto-
the acquisition from the bulk supply link of petroleum prod- motive fuel. Because LPG is transported and stored in pres-
ucts of the quality and in the volume appropriate to the mar- surized containers, it is more expensive to distribute than
ket. Products are delivered by road tanker to the oil market- liquid fuels. To use LPG as an automotive fuel, the vehicle
ing companies' affiliated (branded) retail service stations, as engine needs to be modified. There are three barriers to
well as to bulk consumers such as power generation plants, using LPG as a household cooking and heating fuel. First,
industry, large commercial customers, government agencies, the household needs to pay a down deposit for an LPG
and transport fleet operators such as trucking companies cylinder, which could cost upwards of US$20 a cylinder.
and bus operators. In other countries, oil marketing compa- Second, LPG is not a cheap fuel. Its world price doubled
nies may also deliver petroleum products to independent between 2004 and 2008, and metal management--distribut-
retailers under supply contract sales arrangements. Oil mar- ing and storing LPG in pressurized containers--adds to the
keting companies may own the assets used in its operations cost of using LPG. Third, because LPG needs to be stored
June/July 2009 Petroleum Sector Briefing Note 3
under pressure, it is sold in discrete quantities matching dem with crude oil prices, but even here there is no one-to-
the size of the LPG cylinder, typically in increments of 10� one correspondence between crude price and product price
15 kilograms at a time for household use. A daily wage earner changes. This is apparent from comparing the prices of gaso-
may have just enough cash to buy a very small quantity of line and diesel in Singapore in Figure 2. Their prices were the
kerosene for cooking every so many days, but such a pur- same in some months but diverged sharply in May�July 2008.
chasing pattern is not generally an option for LPG users. Between January and June 2008, the average of three bench-
Introducing small LPG cylinders addresses this barrier to a mark crude oil prices rose 45 percent, the price of regular
degree, but international experience has been mixed. Be- gasoline in Singapore rose 39 percent, and that of diesel rose
cause there are economies of scale in cylinder management, 55 percent. The much higher diesel prices reflect greater de-
selling LPG in small cylinders substantially adds to the cost mand resulting in a much narrower supply-demand gap for
of fuel distribution, making LPG much more expensive on a diesel than for gasoline, driven in Asia in part by China re-
weight basis. portedly building stocks of diesel ahead of the Beijing Olym-
pics and coal shortages requiring more diesel use for power
generation. Widespread power shortages generally increase
Factors Affecting International Prices demand for diesel fuel and drive up diesel prices. There are
Prices are determined by as much by the balance be- also seasonal variations in demand: gasoline is consumed
tween supply and demand as by costs of production. This more during the summer driving season in the northern hemi-
can be readily seen by considering the crude oil price move- sphere, and conversely demand for heating oil increases in
ment since January 2004 (Figure 2). The price more than qua- winter. Demand fluctuations in large markets can affect glo-
drupled by mid-2008, not because the cost of crude produc- bal demand and hence world prices. Refineries can, to a de-
tion had quadrupled, but because global demand for oil grew gree, adjust production of different fuels to better match de-
much faster than the rate of supply increase during this pe- mand, but conversion of residual fuel oil to gasoline and
riod, creating a tight market. Similarly, oil prices collapsed in diesel or a large increase in the production of diesel in the
the last four months of 2008, not because it suddenly be- place of gasoline would require new processing units and
came much cheaper to produce crude oil, but because de- large investments.
mand for oil collapsed in the face of the world financial crisis.
Because crude oil accounts for most of the production Looking to the future, (relatively) low oil prices and the
costs of refined products (77 percent in the U.S. example financial crisis are resulting in delays and cancellations of oil
given above), the prices of petroleum products rise in tan- projects, raising the specter of a supply shortage once the
Sources: Platts Oilgram Price Reports for crude oil, gasoline and diesel, Reuters for LPG.
Note: Crude oil is the average of West Texas Intermediate, Brent, and Dubai Fatah. Gasoline is 92 research octane number
unleaded and diesel is 0.05 percent sulfur gasoil in Singapore. LPG is the average of Saudi Aramco contract prices for
propane and butanes.
4 Petroleum Sector Briefing Note June/July 2009
global economy begins to recover. Underinvestment today Relative magnitudes of the above components may be
could indeed erode spare capacity with economic recovery gleaned from the suggested retail price structure of refined
and oil supply could begin to tighten again, taking the world products in Tanzania in November 2008. Taking kerosene as
oil market into a new cycle of high prices. an example, kerosene at the port of loading cost US$0.47 a
liter, freight and insurance $0.06, wharfage $0.008, inspec-
Factors Affecting Domestic Prices tion upon landing $0.006, and transit losses $0.003. Local
transport costs add $0.008 a liter, oil marketing companies'
The landed prices of petroleum products are determined margins $0.083, and taxes and other government-imposed
by the developments in the world oil market. Shipping petro- fees $0.05, resulting in a suggested retail price of $0.69 a
leum products to Cambodia incurs costs for freight, insur- liter; taxes and other levies on gasoline and diesel are much
ance, wharfage (charge assessed against cargo for usage of higher than for kerosene [4].
a wharf or pier and its facilities), inspection, demurrage (charge As with the prices on the global market, supply and
for detaining a ship over and above the time normally given demand interactions influence domestic prices. Fuel short-
to unload), and marine transit losses (the amount unloaded ages cause retail prices to soar, and a large surplus tends to
in Cambodia would always be slightly less than the amount push down prices. The market structure and the level of
of fuel loaded). Congested ports, slow customs clearance, regulatory enforcement matter--a lack of competition tends
and any other factor delaying discharging of the fuel could to keep prices higher than in a highly competitive market,
incur large demurrage costs. Once landed and sent to a bulk and rampant commercial malpractice (short-selling,
oil terminal, petroleum products incur additional costs, in- mislabeling, fuel adulteration) also affect price levels.
cluding storage, transport, retailing, and wholesalers' and
retailers' profit margins.
Because crude oil and petroleum products are quoted in
Observations
U.S. dollars, exchange rate fluctuations affect domestic prices. Petroleum product prices are determined by demand and
However, the Cambodian economy is highly dollarized and supply in the world and local economies. Global fuel de-
the relationship between the riel and the dollar has been stable. mand is affected mainly by economic conditions, and also
Taxes make up a sizable fraction of retail fuel prices in electricity supply shortages (for diesel) and the weather (for
many countries. Taxes on petroleum products are a critical heating oil). A disruption anywhere in the supply chain could
source of government revenue for low-income countries be- lead to fuel shortages and price hikes. In addition, the mar-
cause taxing fuel is one of the easiest ways to get revenue: ket structure and consumer behavior in the petroleum sector
collecting fuel taxes is relatively straightforward and there is also affect the price movements, which will be the subject of
generally a robust relationship between consumption of fuels the next briefing note.
as a group and income--consumption tends to go up at the
same rate as income [3]. In Cambodia, petroleum products are
subject to import, excise, and value-added taxes and a small
References
specific tax. The first three are in percentage terms, and as [1] www.eia.doe.gov/bookshelf/brochures/gasolineprices
such price increases are magnified in absolute terms as inter- primer/printer_friendly.pdf.
national prices rise. For example, an excise tax of 33.3 percent [2] World Bank. 2007. "Introduction to Oil and Gas" Pe-
on 900 riel is 300 riel, but becomes 900 riel if the fuel price troleum Sector Briefing Note No. 1, March.
triples. That is to say, taxes levied in percentage terms transmit [3] Robert Bacon. 2001. "Petroleum Taxes." http://
any change in world oil prices to the final end-user prices. In go.worldbank.org/FTOBS3ETC0.
contrast, specific taxes, which are set in riel instead of in per- [4] EWURA. 2008. www.ewura.go.tz/pdf/Notices/
centages, are independent of the price of the fuel, making their 2Petroleum%20Pricing%20Formula%20-
"rates" relatively high when world oil prices are low (that is, %20November%202008.pdf
when translated into percentage terms, the tax rate is high),
and conversely low when world oil prices are high. In Cambo-
dia, import, excise, and value-added taxes are based on refer- For more information contact:
ence prices rather than the actual landed costs, and the gov- Mr. Bun Veasna
ernment froze the references prices in 2004, keeping them arti- Infrastructure Officer
ficially low when the world oil prices soared in the subsequent Email: vbun@worldbank.org or
years. This step correspondingly prevented the retail prices Masami Kojima
Lead Energy Specialist
from rising in tandem with world oil prices, benefitting con-
Email: mkojima@worldbank.org
sumers but at a significant cost to the treasury.