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Cablegate: Taiwan Fuel Prices to Reflect Market

VZCZCXYZ0005
RR RUEHWEB

DE RUEHIN #3487/01 2850747
ZNR UUUUU ZZH
R 120747Z OCT 06
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 2536
INFO RUEHBJ/AMEMBASSY BEIJING 5758
RUEHHI/AMEMBASSY HANOI 3138
RUEHKL/AMEMBASSY KUALA LUMPUR 3571
RUEHML/AMEMBASSY MANILA 9818
RUEHUL/AMEMBASSY SEOUL 8152
RUEHGP/AMEMBASSY SINGAPORE 6640
RUEHKO/AMEMBASSY TOKYO 8105
RHMFIUU/DEPT OF ENERGY WASHINGTON DC

UNCLAS AIT TAIPEI 003487

SIPDIS

SIPDIS

STATE PASS EAP/TC

E.O. 12958: N/A
TAGS: ENRG SENV ECON TW
SUBJECT: TAIWAN FUEL PRICES TO REFLECT MARKET

REF: A. 05 TAIPEI 04548

B. TAIPEI 02412

1. SUMMARY. Taiwan's China Petroleum Corporation (CPC),
announced September 27 a NT$0.9 per liter reduction in
wholesale prices of gasoline and diesel fuel and implemented
a system to base its wholesale prices on fluctuations in
international crude oil markets. This move follows years of
direct control over fuel prices. END SUMMARY

MARKET VERSUS GOVERNMENT PRICING
--------------------------------

2. With crude oil prices falling in international markets,
State run CPC announced on Sept. 27 a NT$0.9 per liter
reduction (NT$3.4/gallon or USD .10/gallon) in its wholesale
price of gasoline and diesel. At the same time CPC
introduced a new pricing scheme, using the price fluctuations
of West Texas Intermediate (WTI) crude as a benchmark.
Henceforth, every Tuesday new prices will be announced based
on the previous day's WTI cost per barrel. Under the old
pricing scheme, every time CPC wished to adjust oil prices,
it had to obtain approval of the Ministry of Economic Affairs
(MOEA). Now MOEA and CPC will jointly monitor and fine-tune
the pricing scheme on a trial basis until the system is
finalized next year. On October 10, the first Tuesday since
the plan was announced, CPC lowered the price of gasoline by
a further NT$0.2 bringing the total drop in prices in two
weeks to NT$1.10 or USD .035.

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CPC LOSING MONEY
----------------

3. Ironically, CPC can ill afford a price drop given the
huge losses of NT$25.4 billion (about USD 769.7 million) it
reported over the first eight months of this year. According
to the Taiwan Bureau of Energy, these losses are partly due
to gasoline being sold below cost. CPC has been selling at
government-set prices and has aging refining equipment which
results in higher production costs. To placate consumers,
MOEA Minister Chen Ruey-nong said on Sept. 25 that under the
new floating gasoline price scheme, gasoline rates will be
maintained at the lowest rate among Asian countries.

CPC: MULTIPLE PRESSURES
-----------------------

4. Industry insiders told AIT there is a lack of public
understanding of the burden CPC has to bear, both from
consumers and also from the legislature (Legislative Yuan or
LY). Analysts said mandated subsidies CPC must provide to
Taipower and transportation companies have resulted in ever
increasing deficits for CPC due to the increase in crude oil
prices. The latest market approach to pricing may reduce the
deficit at CPC analysts believe but legislators were likely
to continue to demand subsidized fuel prices for government
agencies and consumers. CPC has proposed to continue
providing subsidized fuel to Taipower and transportation
companies, but with quota limits. Once those limits are
reached the buyer must pay market prices.

TAXI DRIVERS SEE A PROBLEM
--------------------------

5. The latest gasoline price change drew protests from taxi
drivers in Taipei on September 30 when dozens of taxis queued
in front of CPC headquarters to protest what they saw as
price reductions not commensurate with the drop in
international oil prices. CPC admits that the company needs
to educate the public on the realities of fuel prices.

COMMENT
-------

6. Until the rapid increase in the price of crude oil
beginning this year, CPC and Taipower were able to stay
profitable, enabling the authorities to mandate low energy
prices in Taiwan. By doing so, the government has lulled
consumers into expecting low fuel prices indefinitely. Going
to a market-based pricing scheme will be politically painless
as long as international prices are falling. But, as prices
move up, as well as down, LY members and other elected
leaders will find it increasingly challenging to stay out of
CPC pricing decisions. With mayoral elections for Taipei and
Kaohsiung (Taiwan's two most populous cities) set for
December this year, it is no surprise CPC's pricing trial is
set to run through the end of the year and be reviewed and
finalized next year. END COMMENT
YOUNG

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