$130 a barrel oil: notes on recent oil price trends

The Inquirer’s headline today says that world oil prices have already reached $130 a barrel and that domestic oil companies are implementing weekly price increases supposedly to reflect the uptrend in international prices. But the article is actually referring to the New York Mercantile Exchange (NYMEX) futures price for July delivery. It does not have anything to do with the actual or physical supply and demand of oil in the Philippines but is only a speculative price based on speculative supply and demand.

However, it indirectly pushes local oil prices up as physical spot market prices are also affected. So is it reasonable to implement oil price hikes based on the spot price movements? In the Philippines, more than 90% of oil come from long-term supply contracts of transnational oil companies and not from the spot market. But why are oil companies allowed to implement weekly increases in local prices to reflect these movements in the spot market as well as speculative prices? Answer: deregulation which allows oil companies to automatically adjust pump prices. But why does the Arroyo government allow automatic oil price hikes? Answer: VAT.

Price movement

Oil companies, including the Big 3 (Petron, Shell and Chevron) claim that they use benchmark prices in the international oil market to determine domestic pump prices. For crude oil importers such as Petron and Shell, they refer to the Dubai crude spot price while other players that import refined petroleum products like Chevron refer to the Mean of Platt’s Singapore (MOPS) spot prices.

Table 1 shows that the spot price of the benchmark Dubai crude is now pegged at $110.72 per barrel as of the first seven days of May. It breached the $100 a barrel monthly average in April and is now 26.7% higher than its average last January. On the other hand, MOPS-based unleaded gasoline averaged $122.37 per barrel in the first nine days of May while diesel, $146.34 per barrel. The said figures are 21.7% and 35.6% higher, respectively than their averages last January. 

Table 1. Crude benchmarks & foreign exchange, Monthly average, 2008 (crude prices in $ per bbl; forex in P per $)

Month

Dubai

Brent

WTI

Forex

Dec 2007

86.87

92.51

94.67

43.20

Jan

87.37

92.19

94.24

40.90

Feb

90.02

94.73

95.53

40.66

Mar

96.76

103.26

106.07

41.35

Apr

103.41

109.98

112.80

41.84

May*

110.72

116.42

118.85

42.49

*May 1-7 ave only

Source: Department of Energy/Platt’s

Meanwhile, the country’s foreign exchange has been declining since the start of the year with a 1-7 May average of P42.49 per US dollar, weaker by P1.59 from its January average.

These factors have supposedly combined to push domestic pump prices up. Table 2 shows that during the period in review, the prevailing pump price of unleaded gasoline in the National Capital Region (NCR) surged by P4.11 per liter between its January average and 1-7 May average; kerosene, by P4.13; and diesel, by P3.09. Overall, the average retail price of various petroleum products increased by P3.58 per liter during the said period.  

Table 2. Prevailing pump prices in NCR, Monthly ave, 2008 (in P per liter)

Month

Premium

Unleaded

Regular

Kerosene

Diesel

LPG (per 11-kg tank)

Ave retail

Jan

45.08

44.45

41.76

39.99

38.45

602.93

41.10

Feb

44.66

44.04

41.35

39.61

37.03

580.89

40.16

Mar

45.95

45.33

42.63

40.90

38.31

571.84

41.45

Apr

47.91

47.29

44.60

42.86

40.28

566.14

43.41

May*

49.17

48.56

45.86

44.12

41.54

573.61

44.68

* As of 7 May

Source: Department of Energy

Domestic pump prices have increased much more rapidly this year than in the previous years. Table 3 shows that the prevailing price of diesel in NCR as 7 May, for example, has already exceeded the Bagong Alyansang Makabayan’s (New Patriotic Alliance or Bayan) simulated monthly price for May 2008 based on the monthly average growth rate for 1996-2007 (deregulation period) and for 2005-2007. Note that the said prevailing price does not yet reflect the latest round (as of this writing) of P1 a liter oil price hike (OPH) implemented by the oil firms last 10 May. Five days before the said OPH round, Shell has warned that oil firms allegedly still need to recover P6-7 per liter more in the coming weeks.

Table 3. Actual pump price movement vs Bayan’s simulated prices for diesel, 2008 (in P per liter)

Month

Actual diesel pump price

Based on 1996-2007 growth rate

Based on 2005-2007 growth rate

Jan

38.45

38.50

38.76

Feb

37.03

39.00

39.39

Mar

38.31

39.50

40.03

Apr

40.28

40.01

40.69

May*

41.54

40.53

41.35

*Actual diesel pump price for May as of 7 May only

Source of basic data: DOE

Unmitigated price increases allowed under Republic Act (RA) 8479 or the Oil Deregulation Law of 1998 has only worsened the fundamental problem of transfer pricing by the global oil cartel and the speculative attacks by transnational banks and other giant financial firms that further artificially push oil prices up in the international market and taken advantage by the local Big 3 cartel (local units of the global cartel).

Massive speculation, and not physical supply and demand balance, continues to account for recent global oil price surges with the Goldman Sachs predicting in May that prices could rise as high as $200 a barrel over the next six months to two years. One estimate claims that speculation now comprises as much as 60% of current global oil prices.

Token measures

Note that there was a general decline in domestic pump prices in February in spite of an uptrend in Dubai crude and MOPS spot prices apparently due to the Arroyo government’s efforts to gain political points for the Energy Summit it organized from 29-31 January and 5 February. It was also the period that the clamor to scrap the 12% value added tax (VAT) on oil products to immediately lower pump prices started to gain ground.

To fend off criticisms that the Energy Summit does not offer anything concrete that could bring down pump prices as well as to derail the campaign to scrap the oil VAT, GMA rehashed the oil tariff adjustment mechanism through Executive Order (EO) 691. Under this system, tariffs on imported crude oil and petroleum products will be reduced or waived based on certain trigger prices. For February, GMA ordered a tariff cut of one percentage point.

Taking their cue from Malacañang, the biggest oil companies Petron and Shell implemented an oil price rollback of as much as P1 per liter starting 29 January and the other players followed suit. But it has been a steep climb for domestic pump prices since then, starting with the 50 centavo a liter hike implemented by the oil firms on 1 March.

Overall, oil companies have implemented 10 rounds of oil price hikes that increased the pump prices of gasoline, kerosene and diesel by P6 per liter between 1 March and 10 May, or an average of one OPH round per week. The biggest increases were implemented on 3 May and 10 May, when pump prices were raised by P1 per liter in each round from the usual 50 centavos a liter in the previous weekly increases.

The price increases since March has exposed the worthlessness of the oil tariff cut mechanism in lowering pump prices. For instance, the trigger price set by the Department of Finance (DOF) to reduce oil tariff from 3% to 0% for MOPS-based diesel is $115.2 per barrel and $103.25 per barrel for Dubai crude. Table 4 shows that since March, MOPS-based diesel price has already breached the DOF trigger price and Dubai crude, since April. This means that the government is no longer collecting oil tariffs to supposedly mitigate domestic pump price increases but such intervention has not been felt at all.

Table 4. Oil tariff cut trigger prices vs actual global prices, March-May 2008 (in $ per bbl)

Benchmark

Trigger price to reduce tariff to 2%

Trigger price to reduce tariff to 1%

Trigger price to waive tariff

March monthly ave

April monthly ave

1-7 May monthly ave

MOPS diesel

105.00

110.00

115.70

128.00

141.98

146.34

Dubai crude

83.37

92.41

103.25

96.76

103.41

110.72

Sources of basic data: DOF, DOE & MOPS

In the face of more and bigger price hikes in the coming weeks, the Department of Energy (DOE) asked the oil firms to justify the increases but then later retreated to its usual helpless mode of pleading the oil companies to implement staggered increases. In response, Petron announced that it will revert to 50 centavo weekly price hikes until July to recover its supposed losses. But note also that Petron made the announcement on the same day that the nationwide transport strike and people’s protest against the oil VAT and the Oil Deregulation Law was held. Thus the announcement was an obvious, albeit meaningless, effort to appease the public.

VAT cancellation

Meanwhile, the Arroyo government continues to ignore the demand to cancel the VAT on oil products as a doable measure to immediately bring down pump prices. The latest statement came from the DOF which argued that the “VAT on oil should be collected to fund the 2008 budget.” Instead of oil VAT cancellation, the DOF is proposing to “use the revenues (from VAT) for targeted expenditures to cushion the impact of oil price hikes on the poorest of the poor.”

However, scrapping the VAT on oil remains the most immediately doable policy option which can significantly lower pump prices and provide relief to the consumers. Table 5 shows that based on the prevailing prices in NCR as of 7 May, VAT cancellation can immediately bring down pump prices of unleaded gasoline by P5.83 per liter; kerosene, P5.29; diesel, P4.98; and liquefied petroleum gas (LPG), P68.83 per 11-kilogram cylinder tank.

Table 5. Comparative pump prices, with VAT & without VAT, as of 7 May 2008

Product

With VAT

Without VAT

Difference

Premium plus

50.26

44.23

6.03

Premium

49.17

43.27

5.90

Unleaded

48.56

42.73

5.83

Regular

45.86

40.36

5.50

AV turbo

48.17

42.39

5.78

Kerosene

44.12

38.83

5.29

Diesel

41.54

36.56

4.98

Fuel oil

31.57

27.78

3.79

LPG*

29.15

25.65

3.50

* LPG prices equivalent to P573.61 per 11-kg tank with VAT & P504.78 w/o VAT

Source of basic data: DOE

In justifying the oil VAT, the DOF said that scrapping the said regressive tax will “bring minimal benefits to the lowest income groups.” But Bayan has already pointed out the concrete and direct benefits that the poor will reap from the oil VAT cancellation, including the jeepney and tricycle drivers, small fishers, and poor households using kerosene and LPG, as summarized in Table 6.

Table 6. Estimated benefits of oil VAT cancellation based on 7 May 2008 prevailing prices in NCR

Sector

How much do they spend on oil?

How much will they save without the oil VAT?

How many will benefit? (nationwide)

With VAT

Without VAT

Jeepney drivers using 30 liters of diesel per daily trip

P1,246.20 per daily trip

P1,096.66 per daily trip

P149.54 per daily trip

426,572 jeepney drivers

Tricycle drivers using 4 liters of unleaded gasoline per daily trip

P194.24 per daily trip

P170.93 per daily trip

P23.21 per daily trip

581,578 tricycle drivers

Small fishers using motorized bancas with 10 liters of regular gasoline per fishing trip

P458.60 per fishing trip

P403.57 per fishing trip

P55.03 per fishing trip

708,000 small fishers

Households using 11-kg LPG tank

P573.61 per tank

P504.78 per tank

P68.63 per tank

8.6 million households

Households using 4.2 liters of kerosene per month for lighting & cooking

P185.30 per month

P163.07 per month

P22.24 per month

9.4 million households

Sources of basic data: DOE, LTO, IMF, NSO, Piston, Pamalakaya, interviews

The real reason behind Malacañang’s persistent refusal to scrap the oil VAT is its impact on the national budget deficit that could affect the regime’s foreign borrowings. The oil VAT provides a steady stream of revenues for the government, especially amidst high oil prices, which is favorable for the country’s credit worthiness. The DOF estimated that removing the VAT on oil products will result in P54 billion annual revenue losses for the national government. Table 7 also shows that the oil VAT accounted for 56.2% of total VAT revenues raised by the GMA regime from 2006 to the first half of 2007.

Table 7. VAT collections, 2006 & 1st sem 2007 (in P billion)

Period

Oil VAT

Others

Total VAT

Jan-Dec 2006

49.20

27.70

76.90

Jan-Jul 2007

18.60

25.10

43.70

Total

67.80

52.80

120.60

Source: DOF

Higher oil prices mean more revenues for the GMA regime that will assure its foreign creditors of debt repayments. In 2006, for example, Bayan estimates show that the government collected an average of P4.34 per liter in VAT for all petroleum products. This year, it is collecting 72 centavos per liter more in oil VAT due to unabated price increases. (See Chart 7)

Table 7. Annual average retail price of all petroleum products & VAT collections (in P per liter)

Year

Ave retail price

VAT collection

2006

36.17

4.34

2007

36.48

4.38

2008*

42.16

5.06

*Jan-7 May only

Source of basic data: DOF

The regime’s so-called fiscal health should take a backseat to the more pressing problem of the ordinary people on high and increasing oil prices. In the first place, the government is raising revenues to supposedly help ease the people’s burden – a responsibility that it has not been fulfilling as most revenues go to debt servicing and lost to corruption. Cancelling the oil VAT thus simply means returning back the people’s money which will translate to actual, immediate and direct benefits (in the form of lower oil prices and improved incomes) instead of entrusting that money to a corrupt and anti-poor regime through the oil VAT.

Furthermore, even if the oil VAT is removed, there are other measures that government can do to raise revenues. Tax effort, for instance is dismal – in 2007, tax effort was only 10.3%, a significant drop from 2006’s 14.3 percent. Certainly, improving efficiency in tax collections will result in billions of pesos in additional revenues. Addressing bureaucratic corruption can raise revenues as well as an estimated P30 billion in public funds are lost annually due anomalous contracts alone such as the NBN-ZTE scam. Tax perks and fiscal incentives to big foreign corporations and the liberalization of trade have also resulted in billions of pesos in foregone revenues and these policies must be reversed.

At present, there are two bills pending at the Senate that seek to suspend or scrap the oil VAT. Senate Bill (SB) 1962 filed by Senator Mar Roxas proposes to suspend the imposition of the oil VAT for six months. SB 1977 of Senator Miguel Zubiri, on the other hand, offers to exempt petroleum products (as well as electricity) from the VAT. SB 1962 and SB 1977 have been pending at the ways and means committee of the Senate since December 2007. At the House of Representatives, the Bayan Muna (People First) party-list has filed House Bill (HB) 3442 to cancel the VAT on petroleum products but has yet to be scheduled for first reading.

But while the VAT removal could provide immediate relief, such respite is only temporary. It can be wiped out in the coming months as oil prices continue to escalate. Thus, the call to scrap the VAT on oil must be complemented by price control and repeal of the ODL with the direction towards the nationalization of the Philippine oil industry. This is the only way that we can protect our people and the economy from the merciless attacks of speculation and price manipulation by transnational corporations.

Sources and notes

P6-7 fuel price increase seen, Philippine Daily Inquirer online, 6 May 2008

RA 8479 is actually the second Oil Deregulation Law. The first, RA 8180, was passed in 1996 but was declared unconstitutional by the Supreme Court in 1997

For further discussion, please refer to Hinggil sa pagtaas ng presyo ng langis, Bayan’s powerpoint presentation downloadable from its website < http://www.bayan.ph/>

Democrats: close speculation loophole, CNNMoney.com, 8 May 2008

Perhaps 60% of today’s oil is pure speculation by F. William Engdahl, Financial Sense Editorials, 2 May 2008

EO 691 was signed by GMA on 10 January 2008

Palace: no cut in VAT on oil, Philippine Daily Inquirer online, 15 January 2008

(2nd update) Oil firms to cut prices by P1/liter, ABS-CBN news online, 29 January 2008

Oil firms decide week not complete without price hike, Philippine Daily Inquirer online, 10 May 2008

Major oil firm to revert fuel price hikes P0.50, Business World online, 13 May 2008

DOF counts cost of suspending VAT on oil, Business World online, 13 May 2008

ibid

Sen. Roxas, on the other hand, claims that net yearly revenue losses if the oil VAT is removed is only around P30 billion because the amount saved by consumers from the VAT removal can be translated to increased consumption of other VAT-able goods and services.

There is no available data yet on full-year VAT collections for 2007 showing revenues from the oil VAT. Latest data from the Bureau of Treasury peg total VAT revenues at P69.47 billion from January to September 2007.

Corruption, inefficiency cost govt P30B yearly, Manila Times internet edition, 4 April 2008

Addressing the oil price increase, Senate Economic Planning Office policy brief, January 2008

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On Gloria’s Food Summit speech

The National Food Summit, like other summits launched by the government in the past to supposedly address emergency situations, has been reduced to a self-serving publicity stunt, making the false impression that the rice crisis is being addressed as well as to justify current policies.

Similar to Gloria Arroyo’s speech at the Energy Summit last January which failed to address the urgent issue of high and increasing petroleum prices, her speech at the Food Summit held today did not mention anything about the need to control the soaring retail prices of rice in the local market. With Gloria Arroyo’s empty rhetoric on food security, the people gained nothing concrete from the summit. Worse, the measures announced by Arroyo will lead the country to more food crises in the future.

In her speech, Arroyo outlined her agenda to address the crisis and used the acronym FIELDS for fertilizer, irrigation and infrastructure, education and extension services, loans, dryers and post-harvest facilities, and seeds supposedly to make food abundant and accessible. But the FIELDS actually forms part of Arroyo’s existing medium-term development plan on agriculture which puts heavy emphasis on agribusiness development and not genuine agrarian reform and self-sufficient food production.

It is condemnable that the Arroyo regime is using the current rice crisis to justify and further implement the same flawed agricultural policies that helped worsen the country’s food insecurity. The emphasis on agribusiness development is a further setback to genuine agrarian reform and will worsen landlessness in the countryside. Note that the farmers’ displacement from the means of agricultural production especially land, lack of incentive and support to produce for domestic consumption, and restructuring to serve the global market have combined to perpetrate the permanent and worsening crisis of food insecurity that the country has been facing.

Arroyo’s renewed push for the farm as collateral policy, for instance, shows Arroyo’s bias for the market and lack of intention to implement a genuine agrarian reform program. This will only strengthen the monopoly control of agribusiness corporations, including foreign firms, as well as local landlords and capitalists on the country’s agriculture and farm lands at the expense of small Filipino farmers. It will only further make local agricultural production serve the needs of foreign markets at the expense of domestic food production, including rice, for domestic consumption. It will also make the consumers more vulnerable to supply and price manipulation by unscrupulous private traders.

Clearly, the Arroyo regime does not have the policies to effectively deal with the problem of skyrocketing rice prices and insecurity in the country’s food supply. Worse, the set of policy measures that the government is proposing threatens to further aggravate these problems.

The immediate state intervention needed today is to impose price controls on rice, dismantle the rice cartel, and strengthen the role of the National Food Authority (NFA) in the whole rice sector.

Meanwhile, the only sustainable long-term solution to the rice crisis is the reversal of globalization policies on agriculture and the implementation of a genuine agrarian reform program that will allow our farmers to produce food for Filipinos as well as other needs of the economy for its industrialization.

Real story for 2008: more hardships, more unrest

Gloria Arroyo’s distorted version of reality shows how detached her regime is from the people who face worsening poverty and hunger. But empty propaganda about economic growth will not quell the deteriorating political crisis that engulfs the country today.

Arroyo proclaimed Thursday (March 27) that the “real story for 2008” is that the economy grew by 7.3 percent last year, the fastest in three decades, and that the Philippines is on track to become a First World country. She attributed such milestone to “tough” decisions she made including increasing and expanding the taxes that people pay like the 12 percent value added tax (VAT). But she assured the people that the benefits of a robust economy will soon “trickle down” on them. Arroyo also dismissed the raging political crisis as “noise” that does not need to interfere with economic progress and reform.

The statement was issued by Arroyo immediately after the Supreme Court (SC) issued its 9 – 6 decision upholding the argument of former National Economic and Development Authority (NEDA) secretary Romulo Neri that his conversations with Arroyo on the anomalous broadband scandal is covered by executive privilege. With this victory in the SC, Arroyo now goes on a propaganda offensive anchored on her supposed achievements in turning the economy around.

Meaningless economic growth

What Arroyo refers to is the growth of the aggregate production of the various economic sectors. Economics is not only about the creation of wealth but more importantly, how such wealth is equitably distributed. Equitable wealth distribution is ensured through the generation of sufficient and productive jobs in the domestic economy, decent wages and income, and availability of reliable social services, among others. These must be carried out through programs and projects by the government because without them, economic growth becomes meaningless to most people, in particular the poor. Yet, domestic job creation, decent wages and income, and reliable social services have been neglected and compromised by the Arroyo regime.

Job scarcity remains alarming and has been described by the think tank IBON Foundation as the worst in the country’s history. The January 2008 Labor Force Survey (LFS) of the National Statistics Office (NSO) shows that around 9.6 million Filipinos are either jobless or underemployed. The number of unemployed is much higher than official figures because of flawed methodology and distorted employment definition that the NSO uses in the LFS.

Meanwhile, those who managed to land a job are not assured of a decent and sufficient income. In Metro Manila, for instance, the daily cost of living per family is pegged at P806 as of December 2007 based on data from the National Wages and Productivity Commission (NWPC). But an ordinary worker receives only P325 to P362 per day. This means that most families with one wage earner can only fulfill 40 to 45 percent of the amount needed to meet their daily food and non-food needs.

No wonder that amid a supposedly vibrant economy, poverty continues to worsen in the Philippines. The number of poor Filipinos has increased by 3.8 million between 2003 and 2006, data from the National Statistical Coordination Board (NSCB) show. Again, such poverty figure, while already high by any standard, is grossly understated. For the government, a person with around P41 per day is not considered poor.

Poor and jobless, the people rely on social services that the government provides such as health care, education, housing, etc. But social services are lacking as well in spite of the increased taxes that the people are forced to shoulder. Since the RVAT (reformed VAT, which raised the tax from 10 to 12 percent and further expanded to include oil and power, among others) was implemented in 2005, tax revenues have jumped by an average of 18 percent in 2006 and 2007 or more than P159 million per year. However, this did not translate to better social services as debt servicing continues to eat up a huge portion of the country’s resources. In 2006, for instance, IBON noted that payments for interest and principal were equivalent to around 87 percent of total revenues, an all-time high.

Worse, these debts include odious and illegitimate debts like the botched national broadband network (NBN), Northrail and Southrail projects, the cyber education project, and others that have been hugely bloated by kickback and commissions of corrupt government officials.

More hardships

The SC decision may have seemed to bolster the earlier claim of national security adviser Norberto Gonzales that the worst of the political crisis is over and that Arroyo has survived the $329-million NBN corruption scandal. But the battle in the SC is not yet over, as various sectors now prepare to question the decision. At an initial vote of 9 versus 6, and with the strong dissenting opinions led by SC chief justice Reynato Puno, there is reason to hope that the SC decision may still be reversed and compel Neri to expose Arroyo’s involvement in the broadband scam.

And unfortunately for Arroyo, the worsening economic hardship, intensifying, repression and persistent corruption allegations will continue to feed social unrest and fan political instability. The worst is yet to come for the embattled regime.

Already, the rice crisis is stimulating more instability as rice prices shoot up to unprecedented levels in March and are projected to increase further to around P40 a kilo in the coming months as supply becomes tighter. In the last five weeks, the pump prices of oil products have jumped by P2.50 per liter, forcing transport groups to ask for a fare hike. Bayan has projected that petroleum prices could reach as much as P50 per liter and LPG, more than P700 per cylinder tank, by yearend if no price intervention is done by the government. Meanwhile, Meralco is asking for another round of increases in its power rates.

Trends indicate that the worsening economic hardship will persist and intensify in the coming months. Unprecedented oil price increases, almost simultaneous hikes in the prices rice and other basic food items, utilities, etc will continue to erode wages and income. At the global level, the looming US recession has yet to take its full impact on the local economy. But once it does, expect a serious production slowdown that could mean higher unemployment and poverty.

There are also no signs that Arroyo will depart from her current pro-market and anti-people economic policies. She could not afford, for example, to let go of the regressive VAT. While the VAT contributes to high prices of basic goods and services, it is also the most reliable source of revenues for the bankrupt regime. On the other hand, Arroyo is pushing for more liberalization and privatization of rice importation in the country. If implemented, this could further worsen the rice crisis as local production is further discouraged and private traders jack up retail prices.

More unrest

Meanwhile, the repression of the Arroyo regime of legitimate protests for economic and political reforms is becoming more vicious. The brutal dispersal of protesting workers in front of the Labor department on March 6 shows the readiness of the regime to use more violence to preserve itself. But this only fuels the people’s outrage and determination to fight for justice and reforms.

Furthermore, the public perception that corruption under the Arroyo regime is chronic remains pervasive and will continue to hound Arroyo. A Pulse Asia survey in October 2007 shows that Arroyo is perceived by most Filipinos to be the most corrupt president. This has been confirmed by a recent survey conducted by the Hong Kong-based Political and Economic Risk Consultancy (PERC) that ranked the Philippines as the most corrupt country in Asia.

The combination of worsening poverty, increasing repression, and continuing efforts to cover up corruption provides the condition for the lingering unrest and more protests.

The people will not remain passive amid the current political turmoil. They will take action once they realize that their plight is being aggravated by the wrong economic policies, repression, and corruption of the Arroyo regime. This will further strengthen the growing movement calling for a change in the national leadership and for meaningful political and economic reforms.

Notes on the rice crisis

  1. The current rice crisis is a manifestation of the permanent crisis of Philippine agriculture and the economy in general. This permanent crisis is characterized mainly by backward production and intense concentration of the means of agricultural production, most especially land, in the hands of compradors and landlords.

  1. Such backwardness and lack of genuine agrarian reform have been aggravated by the neoliberal restructuring of agriculture, which has been most intense since the 1990s. They include the WTO-AOA (Agreement on Agriculture), rice trade liberalization, privatization of the NFA (National Food Authority), land use and crop conversion that prioritized production of high value crops for export instead of food including rice for domestic consumption, among others.

  1. The direct impact of these neoliberal reforms is the substantial erosion of the country’s self-sufficiency and self-reliance in food production. Farm area for palay contracted by 86,606 hectares between 1991 and 2002 as a result of land use conversion, based on the 2002 Census of Agriculture (CA) of the NSO (National Statistics Office). Corn, which like palay is also a staple crop, saw its farm area contract by 298,064 hectares during the same period.

  1. Overall, the country has become a net food importer after decades of surplus food production. From a yearly surplus of $667.5 million in food trade from 1980 to 1994, the Philippines recorded an annual average of $724.6 million in food trade deficit from 1995 to 2006.

  1. Thus, the current rice crisis can be summed up as the country’s incapacity, because of years of neoliberal agricultural restructuring, to meet domestic requirements through local production amid a situation of tightening global supply of rice. At present, the global supply is pegged at 323.3 million metric tons (MT) while demand is already 323.2 million MT.

  1. In the past years, the share of rice imports to the gross domestic supply of rice has been significantly increasing. BAS (Bureau of Agricultural Statistics) data show that from 1990 to 2000, imports comprised an average of 5.9% of the country’s annual gross supply of rice. The figure has jumped to 9.7% for the period 2001-2006. In 2005 and 2006, the import ratio was 13%.

  1. For 2008, Bayan maintains that imports could account for as much as 20% of the country’s rice consumption. This is much higher than the government claim of an 8%-share of rice imports to national rice requirements. Media reports in March quote the Department of Agriculture (DA) as saying that rice imports this year could reach as high as 2.4 million MT. This volume is equivalent to almost 20% of the country’s average annual rice consumption of around 11.9 million MT.

  1. With such a high level of dependence on rice imports, the country is definitely facing a serious insecurity in rice supply given the tight situation in the global supply-demand balance for rice. Worse, Vietnam, which in 2006 supplied more than 85% of our rice imports, is itself facing grave concerns on its own supply security.

  1. Vietnam needs to secure its own rice supply as it faces rapid contraction in its farmlands due to land use conversion, losing 125,000 hectares of rice fields in 2007 alone. It projects rice exportation to fall by one million MT per year and considers totally stopping exportation to protect its own food security.

  1. The Philippines is already feeling the impact of these developments in Vietnam. Out of the 1.5 million MT in rice imports that the country asked from Vietnam for 2008, Vietnam committed only one million MT. With a volatile situation in the global rice market – and other factors that contribute to this volatility such as extreme weather changes, US recession, energy/oil insecurity, etc – there is no assurance that Vietnam and the country’s other sources like Thailand can deliver. Note also that China, which used to export rice to the Philippines, is now a net rice importer.

  1. Because of tightening global supply, combined with uncertainties in the US economy that encourage massive speculation in commodities including rice, the price of rice has been soaring. Rice from Thailand and Vietnam, for instance, is already at the range of $600-700 per ton from only $320-340 per ton in 2007. As a consequence, local retail prices have been increasing rapidly. As of the second week of March, the retail price of fancy rice is pegged at P33.17 per kilo from an average of P30.76 per kilo in 2007; premium rice, from P26.93 to P28.91; special rice, from P24.72 to 26.91; and ordinary rice, from P22.39 to P24.58. Under the Arroyo government, the price of rice has increased by an average of around P7 a kilo.

  1. The NFA has been ineffective in stabilizing rice prices, which is one of its mandates, as it has been substantially weakened by commercialization and privatization efforts of past and present governments. While the government intends to keep NFA rice at P18.25 per kilo, NFA’s limited participation in the local rice market (only 5% according to IBON), which continues to be dominated by a cartel, do not make a dent on overall increases in rice retail prices.

  1. Tight supply and high prices will hurt the poor most. The rich have extra money to buy a big volume of rice, even at unusually high prices, that could meet their families’ need for a couple of months. For most families, however, they buy rice to meet a day’s need, or in many cases, a meal’s need. (Aside from those who could not afford a meal at all.)

  1. The urgency of drastic reforms, both in the short and long terms, is highlighted by the fact that the various reasons behind the tightening global supply of rice – climate change, energy insecurity, US recession and the crisis of monopoly capitalism in general – are far too complex to be resolved very soon. On the other hand, indicators show that they will continue to worsen in the coming years, and thus put even greater pressure on the country’s food security. Changing weather patterns, for instance, will significantly reduce production and yield in the generally backward agricultural systems of the world’s rice producing countries, including the Philippines. The mad rush to biofuels to meet growing energy needs, in particular in the First World, will continue to undermine food production, especially in the colonial and neocolonial countries.

  1. To ensure food security, the country needs to be self-reliant and self-sufficient in its food production, especially of staples such as rice.

  1. Medium to long-term reforms must include the implementation of genuine agrarian reform (land distribution, substantial and reliable state support/subsidy, etc) to encourage farmers to be more productive; reversal of agriculture liberalization (stop WTO-AOA, rice tariffication, etc); strengthen the mandate of the NFA in ensuring sufficient and accessible supply at affordable prices of food crops including rice and reverse its privatization and commercialization; dismantle the rice cartel; and stop land use and crop conversion and expand domestic food/rice production to levels of self-sufficiency (including a reliable buffer supply), among others. These policy reforms must start now.

  1. Immediate interventions (GMA must stop downplaying the crisis and recognize the urgent need for significant State intervention): Centralized procurement of imported rice of the NFA (cancel import licenses of private traders), increased presence of NFA distribution/retail outlets particularly in areas where poor families are concentrated (urban and rural); emergency fund that will directly go to rice farmers to subsidize production cost; price control (under RA 7581 or the Price Act, government can impose a price ceiling during times of calamity, disaster, or emergency).

Jpepa faces tough constitutional issues as Senate vote nears

Part 1 of a two-part series

The Japan-Philippines Economic Partnership Agreement (Jpepa) is on top of the agenda of the Philippine Senate when it resumes from its Holy Week break on April 28. Senator Miriam Santiago, chair of the Senate committee on foreign relations, said she will release a full report endorsing “conditional concurrence” with the treaty.

Originally, the upper chamber was supposed to ratify the Jpepa before the Lenten break. But the Senate schedule on the treaty has been derailed by the alleged $329-million broadband corruption scandal. Since February, senators have been preoccupied with the inquiry on the anomalous broadband contract that caused renewed calls for Pres. Gloria Arroyo’s resignation or ouster.

Nonetheless, Filipino trade officials have been quietly but aggressively promoting the Jpepa through the media. The Japanese embassy has also become more insistent in its lobbying efforts for Jpepa’s ratification. But as the Senate vote on the treaty draws near, many fundamental issues remain unresolved. In fact, the proposed conditional concurrence of Santiago underscores the failure of the Jpepa to pass crucial constitutional issues.

If ratified, the Jpepa sets a dangerous precedent wherein treaties could be approved in spite of clear constitutional flaws. Worse, Jpepa ratification ignores the legitimate concerns brought up by fishers, workers, nurses, environmentalists, nationalists, and other cause-oriented groups. Beyond the constitutionality of the Jpepa, the bigger issues involve the treaty’s lasting impact on the livelihood of marginalized groups and the country’s economic sovereignty.

National treatment

Retired Supreme Court (SC) justice Florentino Feliciano raised several constitutional questions in one of the Senate’s hearings on the Jpepa last year. He pointed out that the Jpepa’s provisions granting national treatment to Japanese investors and prohibiting performance requirements violate the 1987 Constitution.

National treatment, which is contained in Article 89, means that Japanese investors and their investments will be treated like their Filipino counterparts. But this provision contradicts the ownership limits set by the Constitution. “It is common knowledge that entry into certain sectors of economic activity in our country is constitutionally restricted to Filipinos or to juridical persons at least 60% owned by Filipinos”, Feliciano said.

Government negotiators actually had the chance to hurdle such legal challenge. Article 94 of the treaty gives the Philippines an option to list all constitutional and legal provisions that do not conform to Article 89. But while the negotiators did exercise this option, they failed to provide a full account of such provisions. “The most dramatic example of omission”, observed Feliciano “is relating to the operation of public utilities”.

Article XII Section 11 of the Constitution requires a minimum of 60% Filipino ownership in public utilities. “If the Jpepa comes into effect, Japanese investors would be entitled to own more than 40% of a public utility. This would be a direct contravention of our Constitution”, Feliciano maintained.

There are other similar constitutional restrictions that were not listed by the negotiators in Article 94. They include limits relating to the practice of certain professions; ownership and administration of educational institutions; mass media; and advertising.

Performance requirements and future measures

Article 93, meanwhile, limits the authority of government to impose certain requirements on Japanese investments in the country. Government could not oblige Japanese investors to transfer technology, use a particular amount of local inputs in their production, and to hire Filipinos in certain positions, among others.

Feliciano cited Article XII Section 13 of the Constitution as inconsistent with Jpepa’s Article 93. This provision mandates the State to “promote the preferential use of Filipino labor, domestic materials and locally produced goods, and adopt measures to make them competitive”.

A “more serious” constitutional law aspect of the Jpepa that the negotiators ignored, according to Feliciano, relates to the so-called “future non-conforming measures”. Article 94 of the treaty also gives the Philippines an option to list economic activities that the country may want to exclude from Article 89 in the future. However, what the negotiators listed are not reservations for future measures but existing non-conforming measures.

This could undermine Article XII Section 10 of the Constitution. The said provision mandates Congress to reserve to firms at least 60% owned by Filipinos certain areas of investments. Such investment may not be restricted today but “when the national interest dictates” could be restricted in the future.

On trade liberalization, Feliciano raised his concern on possible conflicts between the executive and legislative branches of government. Article 18 of the Jpepa requires the Philippines to eliminate tariffs on imported Japanese goods. “The power to set and modify tariff rates is fundamentally legislative in nature”, Feliciano said. “Although the Constitution (Article VI Section 28) allows Congress to delegate such authority to the President, it is still subject to limitations and restrictions”, maintained Feliciano.

Conditional concurrence

Other legal stalwarts who were not invited in the Senate hearings echo the observations of Feliciano. But while Feliciano proposes to amend the Jpepa to correct its constitutional flaws, they believe that such an option is not possible. Former SC chief justice Artemio Panganiban said that the treaty can no longer be renegotiated because the Japanese Diet already ratified it in December 2006.

“The best option is ‘conditional’ or ‘qualified’ ratification wherein the Senate ratifies the treaty but expresses reservation that the Constitution is superior over the Jpepa”, Panganiban said.

Santiago apparently took her cue from Feliciano’s analysis of the constitutional aspect of the Jpepa and Panganiban’s opinion on how the treaty can survive constitutional challenge. “It (Jpepa) will be declared unconstitutional by the Supreme Court. That is my humble opinion as a scholar of constitutional law”, Santiago admitted.

Note, however, that before pitching for conditional concurrence, Santiago first floated the idea of “exchange of diplomatic notes”. She called it a “side agreement” between Japan and the Philippines which will state that the Constitution shall prevail over the unconstitutional provisions of the treaty. Santiago initiated informal talks about the side deal with the Japanese embassy in Manila last December.

But three months later, Santiago has yet to produce the supposed side deal. Normally, a copy of such agreement is distributed to senators as in the case of the toxic waste issue. In May last year, the foreign affairs departments of Japan and the Philippines had an exchange of diplomatic notes wherein Japan promised not to export toxic wastes in the country under the Jpepa.

Did Santiago fail to convince the Japanese government to sign a side deal that states it will respect the Philippine Constitution in relation to the Jpepa? In her latest statement on the Jpepa, Santiago did not mention the side agreement.

“The Jpepa committee report will comprise at least four documents: the standard format with the signatures of nearly 23 senators who are members of the two committees; the draft Senate resolution setting out the conditions for concurrence; the report on constitutional and legal issues; and the report on trade and industry issues”, Santiago said when she announced the April 28 schedule on the Jpepa.

Will Japan accept it?

Because there is no bilateral side deal where Japan commits to abide by the Philippine Constitution, Santiago is now pushing for a unilateral conditional concurrence. But will Japan accept it? Santiago herself is uncertain. “I hope Japan will accept the conditions, without resubmitting the Jpepa to the Japanese Diet”, said Santiago.

The constitutional issues cited by Feliciano against the Jpepa’s provisions on national treatment and prohibition of performance requirements are non-negotiable for Japan. It defeats Japan’s primary purpose of using the treaty to further maximize its exploitation of the Philippines’ resources and markets. Considering that the country already has a highly liberalized trade sector, the true value of the Jpepa for the Japanese is the commitment of the Philippines to liberalize more investment areas.

But what is more dangerous is the gambit that Santiago is trying to play. Ratifying the Jpepa at its present unconstitutional form creates the risk that the Philippines will be subjected to legal disputes in international courts and face liability for damages. Under the Vienna Convention on the Law of Treaties, for instance, the Philippines could not invoke unconstitutionality as legal defense for non-performance of its Jpepa obligations.

Why not avoid these future complications and say “no deal!” now because the Jpepa patently violates the Constitution?

Most importantly, these restrictions were imposed by the framers of the Constitution because they protect the national patrimony and sovereignty. Thus, the debate should go beyond constitutionality but on how the Jpepa may undermine the country’s efforts in achieving industrialization and in strengthening its self-determination.

(To be concluded)

Part 2 of the series discusses the deeper issues of Philippine patrimony and sovereignty in relation to the Jpepa.