SONA 2018: Cha-cha, US free trade deal, and all-out economic liberalization under Duterte

Charter change for greater liberalization of the economy and a bilateral free trade deal attest to the leading role that the US continues to play in shaping Philippine economic direction even amid the rise of China.

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(US Pres. Donald Trump with PH Pres. Rodrigo Duterte at the ASEAN gala dinner in Manila on November 12, 2017; Photo from here)

Manila’s ambassador to Washington Jose Manuel Romualdez recently announced that the first round of negotiations for a bilateral free trade agreement (FTA) with the US will start in September in the US capital. The FTA negotiations, with an estimated timeline of one to two years, is the direct result of US President Donald Trump’s Manila visit in November last year where he agreed with President Rodrigo Duterte to, among others, discuss a potential FTA between the two countries.

(Based on a report which came out two days prior to the statement by Romualdez, and quoting Finance chief Carlos G. Dominguez III and US Deputy Trade Representative for Asia Jeffrey Gerrish, the bilateral FTA talks appear to be still exploratory. Nonetheless both camps are said to be “prepared to move forward” and proceed to “high-level discussions in the near future”.)  

The envoy’s announcement came as the Duterte administration shifts into high gear its charter change (Cha-cha) drive, with the President planning to endorse the draft federal charter as a priority measure and a new Constitution already ratified as early as next year per Malacañang’s target.

US remains a key player in PH economy

We may thus be seeing the real possibility of a new wave of liberalization of the economy under Pres. Duterte where foreign business interests could be allowed as much as 100% ownership of Philippine lands and public utilities, among others. Although the Duterte administration has depicted the shift to federalism as the main motive behind Cha-cha, current efforts to rewrite the Constitution remain driven, as in the past, by the persistent push of American and other foreign lobby groups to further open up the economy.

While China is rising and cultivates an increasingly more prominent role in the Philippines and elsewhere, the US (along with Japan) remains a key player in the national economy. From 2007 to 2017, the US accounted for 24.1% of the cumulative net foreign direct investments (FDI) that flowed into the country, the second largest behind Japanese FDI.

During the said period, US net FDI flows totaled US$4.10 billion while Japan had US$4.36 billion (25.6%). European Union (EU) countries’ net FDI flows to the Philippines recorded US$1.46 billion (8.6%) while ASEAN members had US$1.38 billion (8.1%). China, on the other hand, posted a measly US$84.74 million or just 0.5% of the total. (Note: the figures exclude reinvestment of earnings and debt instruments where country breakdown data are not available, per the Bangko Sentral ng Pilipinas or BSP.)

Direct bilateral trade with the US remains significant at US$168.58 billion from 2006 to 2016 or 13.3% of total trade during the period (second largest behind Japan’s 14.4%), based on data generated from the World Bank’s World Integrated Trade Solution (WITS) online database. The US is the second largest foreign market for Philippine exports, accounting for 15.6% of total exports (behind Japan’s 18.5%) at US$88.95 billion, and second largest source of imports with 11.4% of total imports (behind China’s 11.8%) at US$79.63 billion.

American businesses operating in the Philippines are bullish about the country’s growth prospects and the potential to generate greater profits here as the Duterte administration and its economic manager remain firmly committed to liberalization. In the 2018 ASEAN Business Outlook Survey conducted by the US AmCham, 85% of Manila-based executives representing US firms anticipate increased profitability from their Philippine operations while 70% expect to expand their operations in the country in the coming years. (As cited here)

Talks of a US-Philippines FTA have long been floated by various American and Filipino trade officials but have not really taken off. Under former Pres. Barack Obama, the US had focused more on plurilateral or regional FTAs, especially the Trans-Pacific Partnership (TPP) of which the Philippines – despite the previous Aquino administration’s repeated expression of interest – never became a party to mainly due to foreign ownership restrictions in the 1987 Constitution.

PH bilateral FTA with US to have TPP elements

While Trump has abandoned the TPP and now prefers bilateral arrangements, it remains the standard with which the US will pursue bilateral FTAs including with the Philippines. As one trade official put it, a US-Philippines FTA must have the elements of the TPP as a “new age” FTA, which means that it should cover not just trade in goods but also services and international standards.

The Philippines TPP readiness assessment, a 2016 report backed by the US Chamber of Commerce (AmCham) and US Agency for International Development (USAID), identified key areas of policy reforms that the country must undertake to meet the TPP’s requirements. This report could serve as a useful guide in what the US could seek in its negotiations with Filipino trade officials on the planned bilateral FTA.

According to the report, while the Philippines “is already ‘TPP-ready’ in many key respects, pursuing TPP membership will demand… further significant adjustments in the policy environment, as embodied in administrative measures, laws, and the Constitution itself.” It noted that constitutional provisions restricting foreign ownership and participation in Philippine businesses is the biggest hurdle to our TPP accession.

These include, among others, the provision of national treatment obligations (i.e., foreign investors and investments must be given treatment no less favorable than what Filipino investors and investments enjoy) to trade partners that will require the Philippines to “revisit the current range of constitutional constraints relating to nationalized industries and service sectors, and adopt policy reforms in selected areas” namely mass media, private radio networks, advertising; natural resources or mining enterprises; land ownership; public utilities; and education and practice of professions.”

If Duterte’s Cha-cha pushes through, many of the US concerns – also annually reported as foreign trade barriers by the US Trade Representative (USTR) such as its 2018 report on the Philippines and other US trade partners – would be substantially addressed.

Federal charter for all-out liberalization

In the draft federal charter prepared by the Consultative Committee to Review the 1987 Constitution, the new Article XV on National Economy and Patrimony gives Congress the authority to change by law the constitutional requirements on the lease of alienable lands of the public domain supposedly “considering the general welfare of the people and the necessities of conservation, ecology, development and agrarian reform” (Section 3). Congress can reduce or even eliminate the constitutional limit on foreign ownership or control (pegged at 60% Filipino shares of stocks) of entities that can lease a maximum of 1,000 hectares for 25 years (renewable for another 25 years).

Another is on the exploration, development and utilization of natural resources (Section 4) which shall be a shared power of the federal and regional governments. While setting a minimum requirement of 60% Filipino-ownership or control of voting capital for entities with whom the federal or regional governments can have a co-production, joint venture or production-sharing agreements, Congress is again given the power to change by law the said voting capital requirement for the “federal and regional interest of the people, and thus theoretically allow up to 100% foreign ownership or control.

Meanwhile, ownership and management of mass media is reserved exclusively to Filipinos while the advertising industry is restricted to Filipinos owning at least 70% of the voting capital (Section 12) and educational institutions at 60% (Section 15). But similarly, these constitutional requirements can be changed (reduced or removed) by Congress through legislation supposedly for “public welfare and national security” although “for this purpose, such entities shall be managed by citizens of the Philippines”. In other words, such entities can be fully foreign owned although still managed by Filipinos.

For public utilities, the proposed charter (Section 13) states that Filipinos shall own at least 60% of voting capital of a public utility which can be operated through a franchise, certificate or authorization for 25 years (renewable for another 25 years). But like in mass media and advertising as well as educational institutions, Congress can modify the voting capital requirement (allow greater foreign control or ownership) provided that management will still be reserved to Filipinos.

It is also worth noting that Philippine telecommunications which is a particular concern for the US (as pointed out in its TPP readiness assessment) may be already liberalized even before Cha-cha is implemented through the ongoing amendment of the Public Service Act (also a priority legislation of the Duterte administration) that will limit public utilities to the transmission and distribution of electricity and waterworks and sewerage systems.

Duterte to implement long-standing US agenda

Other key provisions of the 1987 Constitution pertaining to preference for Filipino investments over foreign capital have been removed entirely in the proposed new charter of the consultative committee. Most notable is the current Section 10 of Article XII which states that: “The Congress shall… reserve to citizens of the Philippines or to corporations or associations at least sixty per centum of whose capital is owned by such citizens, or such higher percentage as Congress may prescribe, certain areas of investments. The Congress shall enact measures that will encourage the formation and operation of enterprises whose capital is wholly owned by Filipinos.”

Aside from economic sectors, the so-called federal charter is liberalizing as well the practice of all professions (Section 14) which while limited to Filipinos could be opened up to foreign professionals not just through federal law but also by “international agreements providing for reciprocity” (e.g., an FTA). This modification in the Constitution is consistent with the US push to open up to foreigners the practice of professions reserved to Filipinos as noted in the AmCham/USAID TPP readiness assessment of the Philippines (e.g. on nationality requirements for senior management position).

Beyond liberalization, however, is the greater protection for American investments that the US seeks in so-called 21stcentury FTAs such as the TPP. A bilateral FTA with the US thus will likely require an investor-state dispute settlement (ISDS) provision that affords US investors with full protection under international law and allows them to sue governments for failure to provide, fulfill or ensure such protection for American investments.

In the TPP, ISDS allows foreign investors to challenge a government’s “conduct, including expropriation measures, through binding arbitration and panel proceedings.” Related to this are national treatment and most favored nation obligations that may require constitutional and other policy reforms for the Philippines, with serious implications for the country’s national sovereignty and patrimony.

Cha-cha for greater liberalization of the economy and a bilateral FTA attest to the leading role that the US continues to play in shaping Philippine economic direction even amid the rise of China as a major actor in the country especially under the Duterte administration. The biggest irony is that these long-standing agenda of the US (expressed through many previous and present initiatives of the AmCham, USAID and other US institutions) may be finally realized under a President who vows a foreign policy supposedly independent from its neocolonial master. ###

Minimum wage is only 13 to 27% of NEDA’s cost of decent living

Under fire for its Php10,000-gaffe, the National Economic and Development Authority (NEDA) is now saying, through Secretary Ernesto Pernia, that the cost of decent living for an ordinary family is Php42,000.

IMG_89E6320565AD-1

This admission by the country’s chief economist on the amount required by a Filipino household to afford a decent living has underlined the need and urgency of a substantial wage hike, including the proposed Php750-national minimum wage, which ironically Pernia and other economic managers of the Duterte administration are opposing.

Using data from the National Wages and Productivity Commission (NWPC), it appears that current wages in the country could only meet as low as 13% to just 27% of NEDA’s estimated cost of decent living.

In the National Capital Region (NCR), for instance, the daily minimum wage is just Php475 (for retail/service establishments with 15 or less workers) to Php512 (all other non-agriculture industries). These translate to a monthly income of about Php10,331.25 to Php11,136.00.

(Note: These estimates are based on the assumption that there are 261 work days a year or about 21.75 days a month. It excludes Saturdays and Sundays plus an extra day to account for a leap year. See here.)

This means that the minimum wage in NCR is equivalent to only 25% to 27% of NEDA’s estimated cost of decent living. Put another way, an ordinary household in NCR needs four minimum wage earners to afford a decent living.

The situation is much worse in regions outside NCR where the minimum wage is way lower. In the Autonomous Region in Muslim Mindanao (ARMM), for example, the minimum wage is a paltry Php270 (agriculture) to Php280 (non-agriculture) per day. Per month, the minimum wage in the region is about Php5,872.50 to Php6,090.00, which meets a meager 14% to 15% of the cost of decent living.

And worse, amid ever increasing prices and rising inflation and additional tax burden such as those under the TRAIN (Tax Reform for Acceleration and Inclusion) Law, the already meager wages of Filipino workers are further being eroded.

Meanwhile, the proposed Php750-national minimum wage is even less than 40% of NEDA’s cost of decent living. The workers are asking much less of what their families need to live decently and they are still being deprived.

The curious case of NEDA’s Php10,000

NEDA (National Economic and Development Authority) did not say that a family of five could live decently with Php10,000 a month, according to Rappler’s “Fact-Check”. End of debate?

Actually no. While NEDA may not have directly referred to the Php10,000 as enough for decent living, the whole issue is what the amount of Php10,000 represents.

That “hypothetical” amount – the budget of an average Filipino family, said NEDA – was in fact based on the official poverty threshold fora family of five (i.e., Php9,140 as of first semester 2015, latest official data).

The PSA (Philippine Statistics Authority) defines poverty threshold this way:

“Food threshold is the minimum income required to meet basic food needs and satisfy the nutritional requirements set by the Food and Nutrition Research Institute (FNRI) to ensure that one remains economically and socially productive. Poverty threshold is a similar concept, expanded to include basic non-food needs such as clothing, housing, transportation, health, and education expenses).”

For the government, that is around Php10,000.

And there lies the problem. Using the ridiculously low poverty threshold as reference to show that the impact of high inflation and the TRAIN law on ordinary households is tolerable highlights the basic flaw of government’s appreciation of the true extent of poverty in general and of the impact soaring prices and regressive taxes in particular. #

Inflation surges for 5th straight month since TRAIN law

Inflation as of May 2018There is no end in sight for high prices under President Duterte.

Inflation rate has reached a new 5-year high this May at 4.6 percent. It has been continuously accelerating every month since the TRAIN Law took effect in January 2018.

Even Duterte’s economic managers could not say whether inflation has already peaked. This means that the public should brace for more surges in prices of basic goods and services in the months ahead.

By the second half of the year, for instance, we are looking at big-time increases in water rates in Metro Manila (earlier reports indicated a basic charge hike of Php8+ to Php12+ per cubic meter) as well as in LRT-1 fares (Php5-7) thanks to privatization. Public transport fares will likely increase too amid deregulated oil price hikes.

The poorer families obviously are the hardest hit but even middle-income households are also not spared.

Transport service Grab has been hiking their rates with impunity, taking advantage of the lack of a reliable mass transport system. Meanwhile, some 170 private schools in NCR have jacked up tuition by 5-15% this school year, which will hit monthly household budgets as most pay on installment basis.

Duterte’s economic managers assure the public that inflation will eventually taper off later in the year. What this means is that prices will continue to increase although at a slower pace than they are doing today. This assumes that global oil prices and foreign exchange rates will move favorably, which is difficult to bank on amid worsening geopolitical uncertainties.

Further, because the downstream oil industry is deregulated, government does not have the needed policy tool to ensure that the public and the economy are protected from sudden and drastic and often speculative increases in global oil prices. Not to mention that the industry remains monopolized and the prices dictated.

Oil continues to be one of the biggest drivers of high inflation in the country. According to the joint DBM-NEDA-DOF statement, oil price increases contributed 0.70 percentage points to the 4.6% May inflation. But increasing petroleum prices also pushed up food prices, with fish and seafood and bread and cereals, for instance, significantly contributing as well to the May inflation with 0.65 and 0.56 percentage points, respectively per NEDA data.

What is certain is that the impact of the additional taxes on consumer prices under the TRAIN law is permanent unless they are removed. Including the latest (June 3) oil price adjustments, the TRAIN law accounts for 29.3% of the total increase in diesel prices this year; gasoline, 32.6%; and kerosene, 34.4 percent.

Blog 08 Table OPH TRAIN

Amid all these, people do not simply complain but make concrete policy proposals that could at least provide immediate relief, such as removing the additional taxes under the TRAIN law.

But typical of the Duterte administration, we get responses ranging from the arrogant (e.g., Budget Sec. Benjamin Diokno’s crybaby remark) to the ludicrous (e.g., Finance Sec. Carlos Dominguez’s claim that the public’s supposed wasteful spending of their additional income under TRAIN is further driving prices up). #

Oil prices under Duterte

As we face another round of oil price hikes this week, here’s a look at how oil prices have skyrocketed so far under the Duterte administration. Before Duterte took over, the common price of diesel in Metro Manila was Php27.95 per liter while gasoline (RON95) was pegged at Php41.15. Today, these have jumped to Php42.85 and Php58.07 per liter, respectively. In some gas stations in Metro Manila, diesel is being retailed by up to almost Php48 per liter, and gasoline by almost Php61. Prices in other regions are even higher.

Prior to this week’s oil price adjustments, the TRAIN law accounts for 28% of the total price hikes in diesel, and 31% for gasoline. When gas stations implemented the TRAIN in mid-January this year, the common price of gasoline and diesel in Metro Manila immediately jumped by more than Php4 to almost Php6 per liter. Thus, while it is true that the TRAIN law is not the sole reason behind the recent spike in oil prices and consequently of faster inflation rate, it is certainly a major contributor.

Deregulation, which allows automatic oil price adjustments based on supposed global oil price movement and forex fluctuations, accounts for the rest. But is it true that government is helpless as its economic managers like to claim? Remember that like the TRAIN law, deregulation is a government policy. As such, it can be changed if only the Duterte administration has the political will to protect the public interest, especially the poor but also even the middle class who are reeling as well from escalating prices. Sadly, this is not the case. #

(Read more on how TRAIN law and oil deregulation are oppressing the people here – https://goo.gl/AMcgz8)

Oil firms profiteering thru excessive price hikes

From the start of the year up to May 15, the price adjustments in diesel may have been “excessive” by about Php1.03 per liter and gasoline by Php1.34 centavos per liter. This resulted in about Php53.74 million additional collections every day from diesel and gasoline products for the oil companies. Of this amount, Php6.45 million daily go to the Duterte government’s oil VAT collections (on top of its additional revenues from the TRAIN law’s oil excise taxes). 

(Photo from INQUIRER.net)

The Tax Reform for Acceleration and Inclusion (TRAIN) law is supposed to accelerate inclusive growth. But its immediate impact has been to accelerate the rate of movement of prices of basic goods and services in the country.

Since the implementation of TRAIN, the country’s inflation rate has continued to climb. Latest figures say that in April, inflation reached another five-year high at 4.5 percent. For the first quarter of the year, inflation averaged 3.8%, the fastest quarterly average since 2014.

Due to its domino effect on the costs of other basic commodities and services, the biggest driver of accelerated inflation rate it appears is oil. For one, TRAIN has significantly raised the pump prices of petroleum products. Inclusive of the 12% value added tax (VAT), the new petroleum excise taxes under TRAIN increased the pump price of gasoline by Php2.97 per liter; diesel, Php2.80; and kerosene, Php3.30 this year.

But TRAIN is just one, small part of the story behind high oil prices. For more than two decades now, oil price adjustments in the Philippines have been deregulated, thanks to the neoliberal policy impositions of the International Monetary Fund (IMF) in the 1990s.

Deregulation means that oil companies could automatically adjust prices at the pump. This year alone, there have been already 15 rounds of oil price hikes, as of mid-May. The weekly price adjustments increased the pump price of gasoline by Php5.10 per liter; diesel, Php6.15; and kerosene, Php5.85.

Table 1 summarizes the impact of the TRAIN law and the weekly oil price adjustments under deregulation on petroleum pump prices so far this year.

Tab 1 OPH 2018

These price increases in petroleum products – and the consequent direct and domino impact on inflation – are in fact even more burdensome and abusive for the public than they already are. Taking advantage of deregulation, it appears that oil companies continue their practice of implementing oil price hikes that are bigger than what the world market supposedly warrants. This allows them to pocket extra profits on top of their regular net income, as the government also reaps windfall tax revenues at the expense of consumers.

Looking at local oil price movement from the start of the year up to May 15, the price adjustments in diesel may have been “excessive” by about Php1.03 per liter and gasoline by Php1.34 centavos per liter. This resulted in about Php53.74 million additional collections every day from diesel and gasoline products for the oil companies. Of this amount, Php6.45 million daily go to the Duterte government’s oil VAT collections (on top of its additional revenues from the TRAIN law’s oil excise taxes).

The Department of Energy (DOE) and the oil companies explain that domestic price adjustments merely reflect the movement in global oil prices plus the fluctuations in the foreign exchange (forex). For the Philippines, the international benchmark for refined petroleum products is the Mean of Platts Singapore (MOPS).

But based on the weekly MOPS adjustments and forex fluctuations as posted in the DOE website, the total price adjustments in diesel for the year should have only been around Php4.12 per liter (as of May 15, excluding the week of March 26-30 which the DOE did not post MOPS and forex data on) while the actual net price hike reached Php5.15 during the same period (excluding the weekly adjustment after the March 26-30 period to allow comparison). The same thing is true for gasoline which posted a net increase of Php4.20 per liter when the total adjustments should have only been about Php2.86 per liter.

The process of estimating the price adjustment is pretty straightforward. Oil companies claim that price adjustments for the present week is determined by MOPS price adjustments (expressed in US dollars per barrel) and the average forex in the past week. For instance, if last week the MOPS diesel increased by US$2 per barrel with the forex pegged at Php50 per dollar, how much should the price hike be in local diesel prices for the current week?

Step 1 is to convert the MOPS price adjustment into peso per barrel. So, US$2 x Php50 = Php100 per barrel.

Step 2 is to convert the MOPS price adjustment into pesos per liter. One barrel has 158.99 liters. So, Php100 / 158.99 = Php0.63 per liter.

Step 3 is to include the 12% VAT to get the final estimated adjustment. So, Php0.63 x 1.12 = Php0.70 per liter.

Thus, a US$2-per barrel increase in MOPS diesel at Php50 forex rate in the previous week translates to a 70-centavo price hike in the domestic price of diesel in the current week. Anything above 70 centavos is supposedly unjustified or excessive, based on this price adjustment model.

It is important to stress that determining whether price adjustments are justified or not based on the MOPS and forex movements does not in any way represent the true extent of how much prices are artificially bloated due to the monopoly control of big oil companies in the global and local markets. It just illustrates how deregulation can be easily abused by the oil firms operating in the country through implementing adjustments that are beyond the supposedly justified amounts by so-called international benchmarks such as the MOPS.

With the Philippines being one of the world’s most oil intensive economies, even the several centavos that oil companies overcharge through questionable price adjustments already translate to massive extra profits for the oil industry.

Using 2017 domestic consumption data from the DOE, oil firms are earning (excluding the VAT, which goes to the government) an estimated Php27.23 million daily in extra profits from diesel and Php20.06 million daily from gasoline. These are derived at by multiplying the Php1.03 per liter in estimated excess price adjustment in diesel by the diesel consumption of about 29.94 million liters daily; and the Php1.34 per liter in estimated excess price adjustment in gasoline by the gasoline consumption of around 17.03 million liters daily.

Based on 2017 market share (per DOE report), the Big Three which continues to dominate the local market after more than two decades of deregulation, cornered 55% of the estimated daily extra profits of the oil firms – Petron, Php13.05 million a day; Shell Php9.46 million; and Chevron Php3.31 million.

Table 2 summarizes the estimated extra earnings of the oil companies and the government from excessive price hikes in diesel and gasoline.

Tab 2 Extra income OPH

Again, these guesstimates merely scratch the surface by comparing local and international price changes. In reality, with or without price adjustments, big oil companies that run and control the global oil industry – from the vast oil fields in the Middle East all the way to the thousands of gas stations nationwide, and all the technology and infrastructure that keep this massive network together – retail petroleum at prices many times their actual production costs.

To illustrate, the Philippines imports 79% of its crude oil from just three countries – Saudi Arabia, 35%; UAE, 28%; and Kuwait, 16% (as of first half 2017, according to the DOE). The production costs of crude oil in these countries, based on 2015 data (as cited by CNN Money), are just US$9.90 per barrel for Saudi Arabia; US$12.30 for UAE; and US$8.50 for Kuwait.

Yet, in 2015, Philippine domestic prices were based on the posted price of around US$51.23 per barrel (2015 average posted price of Dubai crude, based on International Monetary Fund or IMF monitoring). This means that oil firms in the Philippines pegged pump prices at crude oil prices that are about four to six times of the actual production costs.

Under deregulation, the government has abandoned its responsibility to determine if domestic oil prices – whether in terms of price adjustments based on global prices or more importantly, in terms of reasonable prices based on production costs – are justified or not. The public’s burden is aggravated more by price speculation in the global oil market that further artificially drives up local prices which consumers fully bear because of deregulation. #

(First published by Bulatlat.com, this article is an updated version of an earlier blog post.)

Oil firms, government earn almost PHP10 M daily extra income from unjustified price hikes

These guesstimates merely scratch the surface by comparing local and international price changes. In reality, with or without price adjustments, big oil companies that run and control the global oil industry retail petroleum at prices many times their actual production costs.

(Photo from Inquirer.net)

Taking advantage of deregulation, it appears that oil companies continue their abusive practice of implementing oil price hikes that are bigger than what the world market supposedly warrants. This allows them to pocket extra profits on top of their regular net income, as the government also reaps windfall tax revenues at the expense of consumers.

Looking at local oil price movement from the start of the year up to the third week of March, the price adjustments in diesel may have been overpriced by 24 centavos per liter and gasoline by 15 centavos per liter. This resulted in about PHP9.67 million additional collections every day from diesel and gasoline products for the oil companies. Of this amount, PHP1.16 million daily go to the Duterte government’s value-added tax (VAT) collections. (Note that the administration has also been collecting additional excise taxes from oil products this year under the Tax Reform for Acceleration and Inclusion or TRAIN law.)

The Department of Energy (DOE) and the oil companies explain that domestic price adjustments merely reflect the movement in global oil prices plus the fluctuations in the foreign exchange (forex). For the Philippines, the international benchmark for refined petroleum products is the Mean of Platts Singapore (MOPS). Since the country’s oil industry was deregulated more than two decades ago, these adjustments have been automatic.

But based on the weekly MOPS adjustments and forex fluctuations as posted in the DOE website, the price adjustment in diesel for the year should have only been around PHP1.31 per liter (as of March 20) while the actual net price hike reached PHP1.55 during the period. The same thing is true for gasoline which posted a net increase of PHP1.05 per liter when the adjustment should have only been about 90 centavos per liter.

The process of estimating the price adjustment is pretty straightforward. Oil companies claim that price adjustments for the present week is determined by MOPS price adjustments (expressed in US dollars per barrel) and the average forex in the past week. For instance, if last week the MOPS diesel increased by US$2 per barrel with the forex pegged at PHP50 per dollar, how much should the price hike be in local diesel prices for the current week?

Step 1 is to convert the MOPS price adjustment into PHP per barrel. So, US$2 x PHP50 = PHP100 per barrel.

Step 2 is to convert the MOPS price adjustment into PHP per liter. One barrel has 158.99 liters. So, PHP100 / 158.99 = PHP0.63 per liter.

Step 3 is to include the 12% VAT to get the final estimated adjustment. So, PHP0.63 x 1.12 = PHP0.70 per liter.

Thus, a US$2-per barrel increase in MOPS diesel at PHP50 forex rate in the previous week translates to a 70-centavo price hike in the domestic price of diesel in the current week. Anything above 70 centavos is “overpricing”.

It is important to stress that the “overpricing” based on the MOPS and forex movements does not in any way represent the true extent of how much prices are artificially bloated due to the monopoly control of big oil companies in the global and local markets. It just illustrates how deregulation can be easily abused by the oil firms operating in the country through implementing adjustments that are beyond the supposedly “justified” amounts by so-called international benchmarks such as the MOPS.

With the Philippines being one of the world’s most oil intensive economies, even the several centavos that oil companies overcharge through questionable price adjustments already translate to massive extra profits for the oil industry.

Using domestic consumption data as of the first half of 2017 from the DOE, oil firms are earning (excluding the VAT, which goes to the government) an estimated PHP6.25 million daily in extra profits from diesel and PHP2.26 million daily from gasoline. These are derived at by multiplying the 24-centavo estimated overpricing in diesel by the diesel consumption of about 29.34 million liters daily; and the 15-centavo estimated overpricing in gasoline by the gasoline consumption of around 16.66 million liters daily.

Based on market share (as of first half 2017, based on DOE report), the Big Three which continues to dominate the local market after more than two decades of deregulation, cornered 56% of the estimated daily extra profits of the oil firms – Petron, PHP2.43 million daily; Shell PHP1.76 million; and Chevron PHP0.56 million.

Again, these guesstimates merely scratch the surface by comparing local and international price changes. In reality, with or without price adjustments, big oil companies that run and control the global oil industry – from the vast oil fields in the Middle East all the way to your neighborhood gas stations, and all the technology and infrastructure that keep this massive network together – retail petroleum at prices many times their actual production costs.

To illustrate, the Philippines imports 79% of its crude oil from just three countries – Saudi Arabia, 35%; UAE, 28%; and Kuwait, 16% (as of first half 2017, according to the DOE). The production costs of crude oil in these countries, based on 2015 data (as cited by CNN Money), are just US$9.90 per barrel for Saudi Arabia; US$12.30 for UAE; and US$8.50 for Kuwait.

Yet, in 2015, Philippine domestic prices were based on the posted price of around US$51.23 per barrel (2015 average posted price of Dubai crude, based on International Monetary Fund or IMF monitoring). This means that oil firms in the Philippines pegged pump prices at crude oil prices that are about four to six times the actual production costs.

Under deregulation, the government has abandoned its responsibility to determine if domestic oil prices – whether in terms of price adjustments based on global prices or more importantly, in terms of reasonable prices based on production costs – are justified or not. The public’s burden is aggravated more by price speculation in the global oil market that further artificially drives up local prices which consumers fully bear because of deregulation. #