The price of oil has been falling since the middle of this year because of an increase in global supply. This is partly due to a shale oil boom in America as well as lower demand in the European Union and Asia. Brent crude has, in fact, fallen by more than a third, hitting a 4-year low of $76.76 a barrel on 14 November 2014.
Shale oil refers to unconventional oil produced from oil shale rock fragments. The organic matter within the rock is converted into synthetic oil and gas. The resulting oil can be used immediately as a fuel or upgraded via a further refining process. The refined products can be used for the same purposes as products derived from crude oil.
Modern shale oil extraction industries were established in France during the 1830s and in Scotland during the 1840s. The oil was used as fuel, lubricant and lamp oil during the industrial revolution, in place of expensive and hard-to-get whale oil.
By the late 19th century, shale oil extraction plants were built in many parts of the world. However, the discovery of cheap crude oil in the Middle East in the 20th century brought most of these industries to a halt. When petroleum became expensive at the turn of the 21st century, shale oil became economically feasible again. With new extraction techniques, the cost of extracting shale oil will go down, putting pressure on the price of crude oil.
The largest shale oil deposits in the world are in the American Green River Formation, which covers portions of Colorado, Utah, and Wyoming. About 70% of this resource lies on land owned or managed by the United States federal government. Deposits in the United States are estimated to constitute 62% of the world’s shale oil resources.
In Singapore, pump rates did fall on the back of sliding oil prices, with the cheapest 92-octane petrol falling below the $2 level for the first time since 2012. The most popular 95-octane grade petrol is now $2 a litre before discount. Premium 98-octane ranges from $2.12 to $2.18 a litre, while Shell’s V-Power is still the costliest at $2.43 a litre.
Pump prices are 14 cents lower than in October, and about 20 cents lower than last year’s prices. Even so, they are still 15% to 20% higher than in 2010, when brent crude was last at the current level of US$70 a barrel. In other words, oil prices may have come down by a third since June this year but pump prices have not come down in tandem.
Petrol stations paying high rent to HDB
One reason pump prices are not coming down as quickly as oil prices have fallen is because of high HDB rent incurred by petrol stations, according to industry observers.
HDB is able to command high rent because of intense “market competition” among the oil companies in bidding for petrol station sites.
According to HDB, Shell recently secured a 3,700 square metre 30-year lease site in Hougang from HDB for a sum of $53.4 million in an October 2014 tender (i.e. $17.8 million per 10 years).
According to the media, in the past 10 years, petrol station sites fetched an average of $15 million for a 10-year lease.
However, in May 2014, Esso bid a record $27 million for a 2,000 square metre 10-year lease site in Ang Mo Kio. This was an almost 100% increase from the average $15 million in the past.
$27 million for a 10-year lease works out to rent of $225,000 a month or $7,500 a day.
That means the petrol station in question must make a gross profit of $7,500 a day just to pay the HDB rent alone.