Explainer: Moving to curb pump prices

Explainer: Moving to curb pump prices

A petrol station is seen full of cars ahead of a fuel price hike. (Photo: Sarot Meksophawannakul)
A petrol station is seen full of cars ahead of a fuel price hike. (Photo: Sarot Meksophawannakul)

Lowering the gross refining margin is a top priority for the government.

How is the government addressing high petrol prices caused by the gross refining margin (GRM)?

After a meeting between Prime Minister Prayut Chan-o-cha and his economic team on Thursday, the Energy Ministry made a three-point announcement regarding the government's handling of the skyrocketing energy price situation.

The meeting was called following a remark made by Korn Chatikavanij, a former finance minister and now leader of the Kla Party, that the GRM has surged 10-fold over the past two years.

According to Mr Korn, on June 10 this year the GRM rose to 8.56 baht per litre -- that's compared to only 88 satang in 2020 and 87 satang last year.

In the announcement, the government first encourages oil traders to maintain a 1.4 baht per litre margin.

Second, the government asks for cooperation among oil refineries in contributing to the Oil Fuel Fund, wherein firms use part of windfall profits gained following approval of their requests to raise the GRM in response to the effects of the Russia-Ukraine war.

The refineries, moreover, are obliged to contribute to the fund only from next month to September, during which time their contributions are expected to be 6-7 billion baht per month from diesel refining and 5-6 billion baht per month from petrol refining.

Third, gas separation plants supplying liquefied petroleum gas (LPG) to the petrochemical-making sector are encouraged to set aside 50% of their windfall profits to pay into the fund as well.

About 1.5 billion baht of these contributions is expected per month in the same three-month period.

In total, between 7.5 and 8 billion baht in fund contributions are expected every month in the next three months, or at most a cumulative total of 24 billion baht by September.

How will these measures affect oil prices in the country?

The retail prices of petrol will instantly decrease by 1 baht per litre. Diesel prices, however, won't decrease at petrol stations; instead, expected savings will be collected into the Oil Fuel Fund, which is now running a total deficit of 90 billion baht after months of diesel price subsidies.

What exactly is the gross refinery margin, or GRM?

Here is an explanation recently given by Sompop Pattanariyankool, spokesman for the Energy Ministry. The GRM is profit calculated before deductions. Refineries are like any factories that have operating costs to cover including those for labour, utilities and maintenance.

The calculation of GRM varies from refinery to refinery depending on what types of crude oil they refine.

What is the formula for calculating GRM?

GRM calculation involves mainly prices of crude oil and processed oil, which in turn are usually based on pricing benchmarks used in Asian oil markets that sell oil from three crude oil sources, namely Dubai, Oman and Tapis (a benchmark in Singapore).

A basic formula for calculating GRM is the total value of all processed oil products minus the total cost of crude oil used in that particular oil distillation -- which may yield a different amount for different products including diesel, petrol, paraffin oil, fuel oil, jet fuel and LPG.

What percentage does GRM account for in the price of one litre of oil?

The GRM is an average margin calculated by taking into consideration the margin across all oil products received in the same crude oil distillation. In June the average GRM has been about 5 baht per litre.

How has the GRM value changed over the past five years?

In 2020 when Covid-19 was spreading rapidly around the world, the average GRM for the year was 70 satang. Later in 2021, the average GRM for that year rose to 89 satang.

In 2020, all oil refineries in Thailand sustained losses. The average GRM in the past 10 years stood between two baht and three baht per litre. The GRM is in effect a metric that reflects the prices of processed oil products.

What are the key factors now driving up the GRM?

One unusual factor observed at the moment is a widening gap between the prices of crude oil and those of processed oil, which in a normal situation are usually proportionate to one another.

The reason behind this unusual oddity is that while demand for processed oil is rising dramatically, existing oil distillation capacity hasn't kept up with surging demand. This is believed to be an impact of the Russia-Ukraine war given the demand for processed oil first began to increase in April.

Because Russia is one of the world's major oil-exporting nations, its decreased supply to other countries has given rise to considerable differences between crude oil and processed oil prices. Normally when crude oil prices go up, processed oil prices rise proportionately.

How will oil prices change in the future?

They will be highly volatile yet remain high for now, at least while the war drags on.

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