The oil companies and the Marcos administration are earning almost a billion pesos per day in extra profits and taxes due to unreasonable weekly changes in pump prices.
As the public grapple with high prices, it appears that the oil firms and the government are making a killing from the perverse and speculative adjustments in the prices of petroleum products.
Making a killing
For diesel and gasoline alone, they are collecting an additional income of around ₱966.33 million per day. Of the said amount, the oil companies take some ₱850.37 million per day in extra profits while the government collects about ₱115.96 million daily in additional value-added tax (VAT) revenues.
The amounts are based on the estimated overcharge that oil firms implement weekly. As of the Oct 18 price adjustments, diesel price changes are around ₱25.48 per liter higher than what is supposedly warranted by movements in international benchmark prices and the foreign exchange. For the same period, the estimates for gasoline are pegged at ₱12.27 per liter. The estimates used the benchmark Mean of Platts Singapore (MOPS), which the Department of Energy (DOE) says is the reference for determining local pump price movements.
The estimated overcharge from the weekly price fluctuations is compared to the country’s diesel and gasoline consumption to reckon how much the oil firms and the government potentially make in additional profits and VAT revenues. In 2021, the demand for diesel was 10,590 million liters (ML), while it was marked at 6,757 ML for gasoline, according to the Oil Industry Management Bureau (OIMB).
Most of the extra profits the oil companies raked in went to the industry’s biggest players, based on their market share as of 2021. Petron, which accounts for 19% of the downstream oil market, cornered about ₱163.02 million daily. With a 15% market share, Shell gained around ₱127.21 million daily. Phoenix (7% share) got some ₱63.35 million, and Chevron (5%) was about ₱45.15 million.
The additional tax revenues that the government amasses from high prices and unfair price adjustments explain why it wants to keep the Oil Deregulation Law despite energy officials recognizing that global price fluctuations are mainly speculative.
Excessive global prices
What we see as apparent price manipulation in the weekly price movements of petroleum products does not fully capture the extent of excessive oil pricing. To illustrate this, one can look at the reported production cost of a barrel of crude oil and compare it with the international benchmark prices. In 2016, for instance, the production cost of crude oil in Saudi Arabia, Iraq, and Iran ranged from just $9 to 11 per barrel. During the same year, Dubai crude averaged $41.47 per barrel – or a difference of $30.47 to 32.47 a barrel.
Asian countries, including the Philippines, use Dubai crude prices to determine the cost of crude oil (and MOPS for refined petroleum products). In 2021, more than 60% of the country’s crude oil imports came from Saudi Arabia.
Oil importing nations refer to Dubai, MOPS, and other international benchmark prices to determine domestic pump prices and price changes. These benchmark prices reflect the price in the oil spot market – i.e., “on-the-spot purchases of a single shipment for prompt delivery at the current market price,” as defined by the US Energy Information Administration (EIA).
However, these volatile spot prices, prone to speculative assaults, do not accurately reflect the price of oil stored and sold in the local market. Long-term supply contracts, not spot prices, cover most of the physically traded oil and are retailed in refilling stations. Some estimates say the spot market accounts for 35-40% of physical crude oil sales.
In the Philippines, because of a deregulated and privatized downstream oil industry, policymakers and consumers are blind to how much of the oil in the market is covered by spot transactions and long-term supply contracts. We can assume, nonetheless, that the major players with ties to the transnational oil companies operate under the terms of supply contracts and not the spot market.
Financialization and speculation
Meanwhile, the greater financialization of the global oil futures market since the early 2000s paved the way for increased speculation in oil commodities that impact spot prices. According to the EIA, the futures market is where futures contracts (i.e., a standard agreement to buy or sell a specific commodity of standardized quality, such as crude oil, at a certain date in the future) are bought and sold.
The EIA explains, ” If oil producers want to sell oil in the future, they can lock in their desired price by selling a futures contract today. Alternatively, if consumers need to buy crude oil in the future, they can guarantee the price they will pay at a future date by buying a futures contract.”
But increasingly, under a highly financialized global economy, participants in the futures market are not only those with an actual commercial interest in buying and selling physical oil. They now include financial players who merely want to profit from the rise and fall in oil prices.
“In addition to oil producers and consumers, futures contracts are also bought and sold by market participants or speculators who do not produce or consume crude oil. These types of traders buy and sell futures contracts in anticipation of price changes, hoping to make a profit from those changes,” the EIA says.
Beyond fuel taxes
Economic fundamentals cannot explain the erratic behavior of oil prices in the past two decades. Global prices move based on the unregulated betting of big financial players on whether prices will go up or down in the future, taking a cue from emerging global events in geopolitics, economy, and even climate, among others. At one point this year, the pump price of diesel ballooned by ₱13.15 per liter, then fell by ₱11.45 the following week. Supply and demand do not account for these extreme price swings.
The overpricing that the oil firms impose from the weekly price adjustments alone – on top of what they overcharge on the actual costs of oil, especially by the big global players, and the impact of speculation – makes calls to reduce, suspend or remove oil taxes ultimately inadequate. Removing the VAT and excise tax will provide immediate relief, but they are not enough in the context of escalating prices and price manipulation. Such demands should complement the primary call to end the Oil Deregulation Law, regulate oil prices, and curb manipulation and speculation as an immediate people’s demand. ###