Tag Archives: Chevron

Consumer issues, Oil deregulation

Why are oil prices rising, and what we can we do about it?

Photo from SunStar

Since the start of the year, local pump prices have increased significantly. The government, as always, explains this as the operation of global market forces. Remember that the government deregulated the oil industry, and the country imports almost all its petroleum needs. As such, local price adjustments merely reflect the movement of international oil prices and fluctuations in the peso-dollar exchange rates. At least, that is what government and the oil firms want us to believe.

₱4-5 overpricing at the pump this year

But this explanation is not as straightforward as it appears to be. Pump price adjustments do not reflect global price movements. As of the first week of October, the price of gasoline in the Mean of Platts Singapore (MOPS) gone up by about ₱11.49 per liter. Meanwhile, the pump price of gasoline as of Oct. 5 has jumped by ₱16.55 per liter – ₱5.06 higher than MOPS. The same thing is true with diesel. MOPS diesel increased by around ₱10.86 per liter while the pump price of diesel surged by ₱15.00 – a difference of ₱4.14 per liter.

MOPS is the benchmark that the country uses for local petroleum products, according to the Department of Energy (DOE). It is “the daily average of all trading transactions of diesel and gasoline as assessed and summarized by Standard and Poor’s Platts, a Singapore-based market wire service.”

The difference between the adjustments in MOPS and actual price changes at the pump is a form of overpricing that has thrived under the Oil Deregulation Law. This 25-year-old law allows oil companies to implement automatic price adjustments based on global price movements. 

By implementing higher price hikes or lower rollbacks than international price adjustments, oil firms and the government can collect billions of pesos in extra profits and taxes. Overpriced gasoline and diesel, for instance, gave them an estimated ₱38.47 billion in additional income, of which ₱4.62 billion went to the government as value-added tax (VAT). This exploitation of the consumers by the oil companies and government becomes even more reprehensible amid the pandemic that has massively wiped away jobs and incomes.

In other words, regardless of whether oil prices are up or down, deregulation allows oil companies to earn additional profits. But the situation for the consumers becomes doubly burdensome when oil prices are rising. There have been 32 rounds of oil price hikes for gasoline and 31 for diesel already this year, including the past seven straight weeks. Diesel, at one point, saw its pump price go up for 14 consecutive weeks between April and July.

The direct cause and effect relationship between higher oil prices and faster inflation means more significant distress for most people battered by COVID-19 and the economic crisis. This year, the prices of essential goods and services are moving nearly twice as fast compared to the first year of the pandemic. The inflation rate from January to August averaged 4.4%; during the same period last year, it was at 2.5 percent.

Rising global prices amid speculation

Global oil prices are much higher this year than in 2020, which most analysts credit to the rebound in demand amid tight supply. Economies are recovering from the impacts of pandemic lockdowns, and they need more oil for increased production, estimated at an extra 450,000 barrels per day (BPD) through the rest of the year. There were calls to boost global output by as high as 800,000 BPD amid pressure from the world’s largest oil consumers like the US, accounting for more than 20% of global oil consumption. 

But members of the Organization of the Petroleum Exporting Countries (OPEC) and their partners (collectively, the OPEC+) are only increasing output by 400,000 BPD. OPEC+, led by Saudi Arabia and Russia, earlier tightened oil supply when global prices collapsed due to the pandemic last year. 

Looking at commodity prices compiled by the International Monetary Fund (IMF), the July price index of the world’s three major spot prices for crude oil (i.e., Brent, West Texas Intermediate or WTI, and Dubai) was its highest monthly average since November 2018. From January to August this year, the average spot prices ($65.14 per barrel) for crude oil are 61% higher than during the same period last year ($40.47 per barrel). More updated weekly data quoted in news reports say that Brent spot prices reached a three-year high of $83.47, and WTI reached a seven-year high of $79.35.

However, as usual in neoliberalism, much of the price increases in the global oil markets are driven by speculation and not by the actual supply and demand. This speculation is being fueled this time by how the global health crisis could further develop. OPEC+ members are reluctant to supply the market with more oil out of fear that demand and prices could weaken again all of a sudden due to another wave of COVID-19 infections. The opposite side of this is the bullish outlook that global economic recovery from the pandemic will remain faster than expected, with speculators from Goldman Sachs and the Bank of America projecting oil prices to climb further up to $90 to $100 per barrel. The last time global spot prices averaged more than a hundred dollars was August 2014. Meanwhile, traders, especially those in the futures markets, also speculate that demand could further increase due to the colder than anticipated winter season amid the climate crisis.

The Philippines is especially vulnerable to global supply and demand speculation because the country is a heavy consumer and big importer of petroleum. Out of 214 countries worldwide, the Philippines ranks top 36 in terms of oil consumption. In the first half of 2021, the country imported 10.03 billion liters of finished petroleum products and 1.21 billion liters of crude oil to meet the domestic demand of 67.70 million liters per day. The oil import bill went up by 55.9%, from $3.07 billion in the first half of 2020 to $4.79 billion in the same period this year due to higher import volume and rising global prices.

Ending oil deregulation is a must

Deregulation fully exposed the country to the price impacts of speculative activities by oil producers, traders, investment firms, and other financial institutions that exploit the uncertainties in the world market. As mentioned, oil companies can automatically implement price adjustments based on international price fluctuations under a deregulated regime.

The continued domination of monopoly corporations in the oil industry, which can dictate how much local pump prices would move, further exacerbated such vulnerability. Only four companies (Petron, Shell, Phoenix, and Chevron) control 47.2% of the domestic oil market, and just one (Petron) retain 100% of the country’s crude oil refining capacity. These companies are tied to the transnational corporations in oil and finance through investments, long-term supply contracts, and other strategic partnerships.

With deregulation, the government abandoned its mandate to guarantee oil supply security and protect the economy and people from excessive petroleum prices. Policy tools to regulate prices and safeguard supply are always necessary but are even more crucial today as the country tries to get back on its feet from the impacts of the pandemic. 

Reminding oil companies to ensure the country’s oil supply which is the only “intervention” that the DOE has done amid surging prices, is extremely not enough. The government itself must play the leading role in stockpiling fuel supply through, for instance, a system of centralized procurement of imported oil. Under this system, oil companies will have to buy from the state-owned Philippine National Oil Co. (PNOC). Oil firms thus will have to sell it at a price based on PNOC’s cost of importation, which is cheaper than commercial deals as the government can explore various ways to get discounted prices or even waive taxes. In addition, the government can quickly determine if the oil firms are profiteering or selling at a price that is outrageously higher than the cost of buying from the PNOC.There are numerous policy options and possibilities, but it must start at ending the oil deregulation regime. ###

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Oil deregulation

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

(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. #

 

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Consumer issues, Oil deregulation

14 years of oil deregulation is enough! (Last part)

After 14 years of deregulation, the dominant position of the Big Three remains intact, if not stronger, while consumers are forced to bear exorbitant and steadily soaring oil prices

Read part 1 here

When the ever controversial and IMF-pushed ODL was still being deliberated in Congress, its ardent proponents peddled it as the policy that will end the domination of the Big Three oil companies, namely Petron Corporation, Pilipinas Shell, and Chevron Philippines (formerly Caltex), over the local downstream industry. By encouraging “free competition”, deregulation is supposed to promote competitive petroleum prices that will benefit the consumers and the economy. Alas, after 14 years of deregulation, the dominant position of the Big Three remains intact, if not stronger, while consumers are forced to bear exorbitant and steadily soaring oil prices.

Exorbitant oil prices

Instead of competitive prices, the past 14 years saw steep, unabated, and questionable increases in petroleum prices. To illustrate, in February 1998, the month the current ODL was enacted, the pump price of diesel was just P8.33 per liter; unleaded gasoline, P12.62; and LPG, P140 per 11-kilogram tank. Today, diesel is about P46.79 per liter or almost 462% higher than its price when the law was enacted; unleaded gasoline, P56.83 (350% higher); and LPG, almost P800 (about 471%). To have an idea of how steep the increases were, we can compare them to price adjustments during the 14-year period prior to the enactment of the ODL (1984 to 1998). During this period, the pump price of diesel increased by just 36%; gasoline, around 61%; and LPG, about 28 percent.

The impact of these increases on the livelihood of the people is tremendous. A jeepney driver, for instance, used to spend P250 per daily trip for diesel; today, he needs to shell out more than P1,400 (based on the average daily trip consumption of 30 liters) under oil deregulation. A small fisher used to spend less than P117 per fishing trip for gasoline; today, that has gone up to almost P570 (based on the average consumption of 10 liters per fishing trip). A tricycle driver used to spend just P50 per daily trip for gasoline (based on the average consumption of 4 liters per daily trip); today, that amount would not be enough to get even one liter. Aside from the direct impact of oil price hikes on the people’s livelihood, there is also the domino effect that pushes up the overall cost of living.

Deregulation and its provision on automatic price adjustment aggravated the global monopoly pricing imposed by the biggest oil transnational corporations (TNCs) in the US and Europe. The tight control over the global industry of these oil companies which include TNCs that have local units in the Philippines like Royal Dutch Shell, Chevron, and Total makes oil prices artificially high whether oil price hikes are implemented or not.

Speculation in the futures market especially in recent years exacerbates the unjust and exorbitant oil prices in the world and in the Philippines. Speculators, which include investment banks and other financial institutions that do not have any role in the oil industry other than to profit from speculating on prices in futures markets, are behind the steep adjustments in global prices. The rise of oil speculation further detached global oil prices from so-called market fundamentals, and thereby further oppressing the people around the world with exorbitant oil prices. Filipinos directly bear the brunt of speculation and monopoly pricing because of deregulation, which allows oil firms to automatically adjust their prices based on movements in global price benchmarks such as Dubai crude (for crude oil) and Mean of Platts Singapore (MOPS, for refined oil). In 2008, for example, MOPS diesel jumped from $108 per barrel in January to $168 in July then fell to $62 in December. Dubai crude followed a similar trend from $87 per barrel (January) to $131 (July) and $41 (December). Meanwhile, data from the International Energy Agency (IEA) show that the supply and demand balance in 2008 was very stable. In the first quarter of 2008, global demand was 86.9 million barrels per day (mbd) versus available supply of 87.1 mbd. In the second quarter, supply fell to 86.8 mbd but so was demand which declined to 85.7 mbd. Thus, there was an even bigger surplus (supply minus demand) in the second quarter of 1.1 mbd versus 0.2 mbd in the first quarter.

Because the increases are automatic under the Oil Deregulation Law, the excessive and oppressive global prices are fully imposed on the people. Worse, the public has no way of knowing whether the price adjustments are reasonable or not even based on the supposed factors that affect local prices, namely global oil prices and the rate of foreign exchange. The people are forced to take hook, line, and sinker whatever explanation the oil firms and the Department of Energy (DOE) give for the price increases. This setup has paved the way for further abuses by the local oil companies at the expense of the people. One way is by implementing higher price hikes or lower rollbacks relative to global prices and the foreign exchange, or what is called as local overpricing. (Read here)

Global monopoly

Indeed, the biggest flaw of the deregulation policy is that it assumes that there exists a free competition among oil players in the global and local markets. As such, removing state regulation on pricing and other activities in the downstream oil sector is supposed to result to more reasonable prices that are determined by so-called market fundamentals. Automatic price adjustments supposedly quickly reflect the true price of oil based on global and local competition, with the end-consumers ultimately benefiting. But these assumptions are false.

Throughout its history, the global oil industry has always been under the domination of a few American and European transnational corporations that dictate the price of oil. These TNCs have remained in control despite the nationalization of oil supplies, the rise of national oil companies (NOCs), and the establishment of the Organization of Petroleum Exporting Countries (OPEC). They have maintained such control and domination because even though the NOCs hold the largest oil reserves, the TNCs still have the stronger financial muscle and access to capital, the more advanced technological capacity and know-how, and the much wider and more sophisticated infrastructure and network worldwide. In fact, the NOCs are still compelled to partner with the TNCs for their crude oil to be refined and reach the market. To illustrate, Saudi Aramco, the world’s largest NOC and owns the biggest oil reserves at 259.4 billion barrels, have refining and marketing deals with ExxonMobil, the world’s largest oil TNC. State-owned PetroChina also has partnerships with British Petroleum, Total, and Shell. The units and partners of these giant TNCs are also the dominant oil players in the Philippines.

Consequently, removing state regulation on the downstream oil industry actually further strengthened these local units of the oil TNCs. Deregulation gave them more freedom to arbitrarily impose their artificially high global monopoly price on the hapless domestic market. The Philippines is especially vulnerable because while we have one of the most oil intensive economies in the Asia, we are also one of the most import-dependent for petroleum.

Continuing monopoly control

From the onset, such global control and domination by American and European TNCs have been felt in the Philippine oil industry. As early as the 1800s, the US was already exporting petroleum products to the country. In the early 1900s, American oil giants Esso, Mobil, Texaco, and Chevron (Esso and Mobil are today’s ExxonMobil while Texaco is now part of Chevron) as well as the British/Dutch Shell had set up facilities in the Philippines. These foreign companies built the first oil station and depot in 1914 and the first oil refinery in 1951. There were attempts by some Filipino firms to build oil facilities in the late 1950s and 1960s. But these efforts fizzled out due to lack of access to technology and crude oil, which the TNCs control. Aside from the downstream, foreign companies also dominated the upstream oil industry. The first recorded domestic oil exploration was in 1896 by an American company while the first commercial oil field was developed by an Australian firm in 1977.

By the time the first Oil Deregulation Law (RA 8180) was enacted in 1996, three oil firms – all foreign-owned and part of the global network of the world’s largest oil TNCs – are dominating the downstream oil industry. They are Petron Corp., which then was 40%-owned by Saudi Aramco (Before it was nationalized in 1980, Saudi Aramco was owned by ExxonMobil and Chevron. But even after nationalization, it maintained strategic deals on refining and retailing with the oil TNCs.); Pilipinas Shell, local unit of Royal Dutch Shell; and Caltex Philippines, local unit of Chevron. One of the major objectives of deregulation was to dismantle this domination by the so-called Big Three by enticing more investors or new players to participate in the downstream oil industry.

The Oil Deregulation Law did pave the way for the entry of new players in the downstream oil industry. Latest data from the DOE show that there are now around 601 new oil players, of which 506 firms are involved in retail marketing; 66 firms in liquid fuel bulk marketing; 16 in bunkering; 9 in LPG bulk marketing; and 4 in terminalling. In 1998, there were only 22 new players that entered the downstream oil industry. This means that while the share of the Big Three fell from 95.7% in 1998 to 76.4% in 2010 (Petron, 37.8%, Shell, 27.4%; and Chevron, 11.9%) the concentration of their control over the market remained stable given the very large number of new players that account for the remaining 23.6% share. Note also that of the portion of the market controlled by the new players, more than half is accounted for by just three companies – Total (4.1%), PTT (3.5%), and Liquigaz (3.4%).

These leading new players are also some of the world’s largest oil companies – Total Philippines is the local unit of Total of France; Liquigaz is the local unit of SHV Netherlands, which is the largest LPG company in Europe; and PTT is Thailand’s national oil company. Among the new players that are Filipino-owned, the largest in terms of market share are Phoenix (2.1%) and Seaoil (1.9%). This means that 596 new players account for the remaining 7.9% of the downstream market.

Another indicator of the continuing domination of the Big Three is the number of pump stations. DOE data say that as of 2010, there are 4,114 pump stations in the country. Separate reports of the oil companies, meanwhile, show that Petron has more than 1,500 stations; Shell, more than 960; and Chevron, 850. Based on these data, the Big Three controls more than 80% of all pump stations in the Philippines.

Aside from the refilling stations, the big oil firms also control other strategic storage facilities of petroleum products and crude oil. Based on DOE figures, more than 81% of the country’s storage capacity including the depots, import/export terminals, and refineries are controlled by Petron, Shell, and Chevron. Furthermore, two companies – Petron and Shell – control 100% of the country’s refining capacity (about 64 million barrels in 2010).

Clearly, fourteen years of the Oil Deregulation Law is enough. There are pending proposals in Congress to repeal RA 8479 and replace it with a regime of effective state control over the downstream oil industry such as House Bill (HB) 4355 filed by Bayan Muna and other progressive partylist groups. Even lawmakers from various traditional political parties both in the House of Representatives (HoR) and the Senate have filed bills and resolutions calling for the repeal of RA 8479 or at least amend it. More on these proposals later. #

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Oil deregulation

Oil firms, government earned P75 B in extra profits, VAT from overpriced diesel, unleaded gasoline

Because of unregulated price adjustment under the Oil Deregulation Law, oil firms have more space to abuse consumers such as through local overpricing. (Photo by Nino Jesus Orbeta)

Transport groups, led by the progressive Pinagkaisang Samahan ng mga Tsuper at Opereytor Nationwide (PISTON), are staging a transport strike today (Sep. 19) in selected routes in Metro Manila as well as in various regions around the country. PISTON and its allies are pushing through with the strike and people’s protest despite the last-minute turnaround of other transport groups following their dialog with President Aquino last week.

Aquino, who promised to be the total opposite of Mrs. Gloria Arroyo, is employing the same tactic of his predecessor when faced with the threat of a transport strike – intimidate the jeepney operators with a cancellation of their franchise. But PISTON members are unfazed and they have every right and reason to go on with the strike even after Aquino ordered a review of the Oil Deregulation Law. The strike should send a strong message to Aquino and the oil companies that the grave abuse they inflict on the public transport sector and the people must stop.

Overpriced oil

Unabated oil price hikes since the start of year have already eroded the daily income of jeepney drivers by about P158 (based on the P5.25-total diesel price hike since January and the 30-liter a day average consumption of a jeepney driver). This is reason compelling enough for drivers to strike. But worse, the increases are unjustified despite the repeated claims of the oil firms, echoed by Energy officials, that they are simply reflecting the movement in global prices and foreign exchange (forex).

Because of unregulated price adjustment under the Oil Deregulation Law, oil firms have more space to abuse consumers such as through local overpricing, or imposing domestic pump price adjustments that are much higher than what global prices and forex warrant. It must be pointed out though that global oil prices are already artificially high due to monopoly pricing and speculation. But local overpricing certainly worsens the impact of exorbitant global prices on the people.

Allegations of overpricing come not only from activists. Senator Ralph Recto, when he was still the Director General of the National Economic and Development Authority (NEDA), for instance, accused the oil firms of overpricing the public by P8 per liter. Our own estimate is that diesel is overpriced by about P7.60 per liter and unleaded gasoline by around P9.85. These figures represent accumulated monthly overpricing from January 2008 to August 2011.

The process detailing how we arrived at these estimates is discussed here.

Extra profits

By selling overpriced diesel and unleaded gasoline, the oil companies raked a total estimated extra profits (on top of their regular profits) of P66.19 billion from January 2008 to August 2011. Meanwhile, the government also has its share of the loot through the 12% value-added tax (VAT) imposed on overpriced diesel and unleaded gasoline to the tune of P9.03 billion. Thus, a total of P75.23 billion has been over-collected from jeepney drivers and other consumers since 2008. Of this amount, P45.05 billion came from diesel and P30.18 billion from unleaded gasoline.

The estimates were derived from multiplying the estimated annual overpricing in diesel and unleaded by their respective demand from 2008 to 2011. For instance, from January to August 2011, the accumulated overpricing for diesel is 88 centavos per liter. Using 2010 daily demand figures for diesel (2011 data are not yet available) of 19.63 million liters multiplied by 243 days (January to August), the estimated extra profits and VAT collections from overpriced diesel is P4.19 billion. 12% of this amount represents government’s VAT collections and the remainder goes to the oil companies. Using this same process, we estimated the extra profits and VAT revenues from overpriced diesel and unleaded gasoline in 2008, 2009, and 2010.

Furthermore, using the annual distribution of the local market per oil company, we can also estimate how much extra profits due to overpricing are collected by each of the Big Three. Of the P75.23 billion, P26.75 billion went to Petron Corporation; Pilipinas Shell, P19.85 billion; Chevron Philippines, P8.82 billion; and the rest of the oil players, P10.78 billion. The remainder, as mentioned, went to the government as additional VAT revenues.

You may access the Excel files of these computations here.

Join the strike

If you think that these figures are scandalously high, they are actually just peanuts compared to the billions if not trillions of dollars that the investment banks and the global oil giants, who supply the country’s petroleum needs, pocket in superprofits from monopoly pricing and speculation.

You may download a PowerPoint presentation on the global oil industry here.

Direkta at buong-buong pinapasan ng mamamayang Pilipino and lahat ng pang-aabusong ito dahil sa Oil Deregulation Law. At kasabwat pa ang gobyerno sa pang-aabuso sa pamamagitan ng VAT.

Support the striking jeepney drivers and operators. Join the transport strike and people’s protest today. #

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Oil deregulation

No hope for fair prices under oil deregulation

First published by Bulatlat.com (Vol. IX No. 5)

Following fresh charges of overpricing, oil firms have implemented a series of oil price rollbacks last week. The retail price of liquefied petroleum gas (LPG) was slashed by a total of P44 per 11-kilogram (kg) cylinder tank. The pump price of diesel was also cut by P1 per liter (one firm, Seaoil Phil., cut its diesel price by P3).

Multisectoral group Bagong Alyansang Makabayan (Bayan) earlier said that as of mid-February, oil products are still hugely overpriced. LPG is overpriced by as much as P125.35 per 11-kg tank, Bayan said. Diesel, based on the group’s computations, is overpriced by P2.94 a liter; kerosene, P6.42 and; unleaded gasoline, P2.31.

Some lawmakers have revived calls to junk Republic Act (RA) 8479 or the Oil Deregulation Law. Bayan noted that Congress must treat such move as urgent as it warned that global oil prices are again on an uptrend and will be exploited by abusive oil firms. Since December, the spot price of Dubai crude has already jumped by more than 9 percent.

But apparently, Malacañang – despite its noise about probing the oil firms – is not inclined to heed this call, dashing consumers’ hope for reasonable oil prices amid deteriorating economic conditions.

Puzzled

Judge Silvino Pampilo Jr. of the Manila regional trial court Branch 26 said he was puzzled that Justice Secretary Raul Gonzales ordered a task force to probe the oil industry’s Big Three for alleged cartel activities. Pampilo wondered whether Gonzales has “forgotten” that the same task force released a report only last month clearing the oil firms of the said charges. “There’s a conflict now,” the Philippine Daily Inquirer quoted the judge as saying.

Pampilo is presiding over a case accusing Petron Corporation, Pilipinas Shell, and Chevron Philippines of monopoly, cartelization, and predatory pricing. He asked the task force, created under RA 8479, to investigate and submit a report. People from the Department of Energy (DOE) and Department of Justice (DOJ) make up the task force.

Was it a simple case of memory lapse by the aging Justice Secretary? Maybe. But this oversight bares a far more important point. Despite repeated warnings and press statements, government does not intend to go after the oil cartel. Under public pressure, DOE Secretary Angelo Reyes was forced to question the small oil price rollbacks last year. At one point, former Press Secretary Jesus Dureza even warned that government will use its “iron fist” as Gonzales pushed for an “independent” audit.

But all these are hogwash. The policy bias of the Arroyo administration remains on deregulation and free market. Administration officials may issue sound bites somewhat hostile to the oil firms to douse critical public opinion. If they will back their words with concrete actions is another matter. In many instances, in fact, their actions contradict their words. The recent booboo by Gonzales is a case in point.

Reviewing RA 8479

In her 2008 State of the Nation Address (SONA), Mrs. Gloria Arroyo had this to say on oil deregulation:

“The government has persevered, without flip-flops, in its much-criticized but irreplaceable policies, including oil and power VAT and oil deregulation.” (Emphasis added)

But recent events in the oil industry have bolstered the case against Arroyo’s “irreplaceable” deregulation policy. The huge increases in global prices in the first half of 2008 pushed up local pump prices to record levels. This was followed in the second half with steep cuts in world prices that were not reflected in the refilling stations. Oil prices remained high and onerous, and the public blamed the greedy oil companies and lack of state regulation.

Then this year, the reported “shortage” in liquefied petroleum gas (LPG) broke out and probed by the lower House. In the hearings, Reyes all but declared that the DOE is helpless in curbing abuses in the oil industry like hoarding and overpricing. Reyes said:

“We need to review the price act … There’s a listing of commodities there and petroleum products are not included. Now if we want closer monitoring of the LPG industry, let us include it there. And if we really want more government action, let us regulate the industry”. (Emphasis added)

But Reyes later backtracked and instead pushed for an amendment of RA 8479, which is the official Malacañang line. The DOE now wants additional powers to check abuses but still within a deregulated regime. Malacañang said that it will support moves to put RA 8479 under review.

Note that it was only in 2005 that the DOE last reviewed RA 8479. The independent panel set up by government concluded then that “deregulation has the tendency to reduce oil prices”. It also said that “deregulation has increased competition in the downstream oil industry”.

The so-called independent review was staged to justify the continued implementation of RA 8479. In fact, the panel chairperson picked by the DOE was the former head of accounting giant SGV. Its clients include the Big Three and other oil companies. Thus, there is little hope that a review of RA 8479 today, as initiated by Malacañang or its allies in Congress, will lead to an honest review of deregulation. It will only be used as a platform to uphold deregulation and at best introduce token changes.

Pro-cartel, by design

The DOE and self-proclaimed consumer advocate Raul Concepcion argue that effective monitoring will make deregulation work. Concepcion even insists that government is just remiss in implementing RA 8479. According to him, the simple solution is for the DOE-DOJ task force to do its job.

But at the heart of deregulation is free market, where state intervention is taboo. It is where so-called market forces decide everything. But the basic problem is that free market in the oil industry is a myth. Since its birth, the global oil industry has always been under a cartel. This cartel rules in the Philippines through the Big Three.

When the first deregulation law in 1996 was passed, it set the stage for the oil cartel to further dominate. Automatic price adjustments allowed for more overpricing and profiteering.

The “proper” implementation of RA 8479 or even amendments will not address the problem. It does not have any provision on overpricing because deregulation assumes that the market will set the “fair” price. Government could not penalize the oil firms for overpricing because they do not violate any law.

Thus, when Secretary Ralph Recto of the National Economic and Development Authority (NEDA) said last October that diesel should be only around P35 a liter instead of the prevailing price then of P47, Reyes had to warn him not to create “false expectations”.

RA 8479 did create the DOE-DOJ task force to look into “any report of an unreasonable rise in the prices of petroleum products”. But how can it determine an excessive oil price hike? Which yardstick will it use when the only standard on pricing recognized under deregulation are the “business decisions” of “competing” oil firms?

Worse, the public is not even entitled to know the factors behind these “business decisions”. RA 8479 prevents government from disclosing “any trade secret or any commercial or financial information which is privileged and confidential”. Additional powers for the task force will not correct this basic defect. Unless such extra powers will include imposing a standardized pricing formula, it will not be able to curb overpricing.

But then again, it will contradict the very spirit of deregulation. (END)

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Oil deregulation

Firms controlling 92% of LPG market making identical price hikes is clearly dubious

Oil companies have announced identical increases in the retail price of LPG (Photo from Luis Liwanag/AFP/Getty Images)

Something is clearly dubious when four companies that together control almost 92% of the domestic market for liquefied petroleum gas (LPG) implement identical price hikes. Last week, Petron, Shell, Liquigaz, and Total separately announced the same increase of P4 per kilogram in the retail price of their LPG. These same companies have also separately announced identical LPG price hikes of P2 per kg in the second week of January. The rounds of price increases came amid reports of supposed shortage in LPG supply and allegations of overpricing.

Petron controls 37.8% of the domestic LPG market, followed by Liquigaz (24.6%); Shell (20.5%); and Total (8.7%). Only through their collusion can a supposed “shortage” in LPG supply occur and rake in windfall profits from higher retail prices. The greed for profits of these oil companies becomes even more deplorable considering that they have yet to adequately answer allegations of abusive pricing. Bayan, for instance, has earlier estimated that LPG prices should be rolled back by almost P61 per 11-kg cylinder tank to offset the oil firms’ overpricing last year. Even the Department of Energy (DOE) has been saying that LPG retail prices should not exceed P500 per 11-kg tank.

Threats of sanctions from the DOE are apparently not enough to check the abuses of the oil companies, especially the local units of the world’s largest oil transnational corporations (TNCs). Despite “strong warnings” from the DOE and the existence of a DOE-DOJ task force, created under the Oil Deregulation Law to purportedly curb abuses in the industry, not a single oil company has been punished for preying on the consumers. The problem is not simply the proper implementation of the Oil Deregulation Law because this policy by design creates conditions for price abuses to take place.

With thousands of Filipino workers here and abroad being displaced everyday due to the global financial and economic crisis, such abuses, tolerated by the government under the pretext of free market, become increasingly unforgivable. Worldwide, the raging economic crunch, bankruptcies, and economic dislocations have profoundly discredited the so-called free market implemented through policies such as the Oil Deregulation Law. Even the most ardent proponents of free and deregulated markets including the US government are now gradually reining unrestricted economic activities in hope to address what is now widely described as the worst crisis of global monopoly capitalism.

Price control, including effective regulation of oil price adjustments, is among the package of immediate measures that can help mitigate the impact of the global crisis on ordinary Filipinos. As more workers become jobless and underemployed, reasonable prices and affordable cost of living through effective state intervention become more imperative. Indeed, the massive economic dislocation, which even labor officials concede is happening at an alarming pace, further justifies the people’s demand to repeal the Oil Deregulation Law.

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Oil deregulation

LPG issues

(Photo from AFP)

Amid reports of a supposed “shortage” in supply of liquefied petroleum gas (LPG) in the country, the House of Representatives committee on energy chaired by Rep. Mikey Arroyo has scheduled a probe (on Feb 3) on the issue. Meanwhile, the Department of Energy (DOE) has warned LPG dealers that they will be charged with profiteering if they retail their 11-kilogram (kg) cylinder tanks at more than P500.

But these efforts of the House and the DOE are futile in the context of a deregulated downstream oil industry. For one, the de facto “price cap” imposed by the DOE on 11-kg LPG tanks contradicts the spirit of deregulation, which is to allow the so-called market forces to determine the prices of oil products.

Interestingly, a quick check at the price monitoring of the DOE posted at its website will show that several LPG brands are in fact being retailed by more than P500. As of January 21, the Caltex LPG retails by as high as P520 in Metro Manila; Catgas, P525; and Philgas, P520. If the DOE is serious with its threat to penalize profiteering LPG retailers, then it only needs to look at its own price monitoring and punish the guilty firms. Then again, how can the DOE penalize oil firms retailing LPG at more than P500 when they can conveniently argue, as they have done many times in the past, that they have simply considered supply, demand, competition, and other market factors in their pricing?

Secondly, any investigation on the reported “shortage” of LPG supply will only meet a brick wall if the House committee on energy will not recognize how deregulation has only strengthened the monopoly existing in the LPG market. Its apologists claim that because of deregulation, “new players” have significantly cut into the LPG market monopolized by the Big Three (Petron, Shell, and Chevron).

But despite the entry of the so-called “new players” under the deregulation regime, almost 92% of the domestic LPG market is still monopolized by only four companies: Petron accounts for 37.8% of the local LPG market, followed by Liquigaz (24.6%), Shell (20.5%), and Total (8.7%). Petron acquired the LPG retail business of Chevron in June 2007 and now retails the “Caltex LPG”brand. Total, on the other hand, has a 15% stake in Shell Gas Eastern Inc. through a joint venture with Shell. Liquigaz is a local subsidiary of SHV Gas, the world’s largest retailer of LPG based in The Netherlands.

Any issue about “shortage” should be adequately explained by these four companies. Any probe on lack of LPG must start on an investigation of these firms, which overwhelmingly control depots, terminals, and refilling stations and hold the widest network of dealers in the country. But will Rep. Arroyo and DOE secretary Angelo Reyes go after them or will they merely pin the blame on the small retailers such as the members of the LPG Marketers’ Association (LPGMA)? But going after these big companies is tantamount to an admission that deregulation has failed, the same policy that Mrs. Gloria Macapagal-Arroyo has vehemently defended against all odds.

As long the downstream oil industry is deregulated, Filipino consumers will have no security in LPG and oil supply. Worse, consumers will continue to be hapless prey to abusive oil companies that charge overpriced petroleum. As of this writing, the country’s four biggest LPG retailers (Petron, Liquigaz, Shell, and Total) have already implemented an identical P2 per kg hike in LPG prices. They claim that the international (Saudi Aramco) contract price of LPG has jumped from $336.5 per metric ton in December 2008 to $380 this month.

But using the Dubai crude price movement as well as changes in the US dollar-peso exchange rate, oil companies should actually still rollback the retail prices of LPG by P60.81 per 11-kg cylinder tank The amount represents the “overpricing” that the oil firms have implemented for the entire 2008.(END)

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Oil deregulation

How much is a substantial, one-time oil price rollback? At least P7 for diesel

Since August, media reports listed about nine rounds of oil price rollbacks that have pulled down pump prices of gasoline products by P10.50 per liter and kerosene and diesel prices by P8.50. Prior to the series of oil price rollbacks since August, the last monitored round of price reduction was reported on July 21, a week before the annual State of the Nation Address (SONA) of Ms. Gloria Arroyo.

But the rollback covered only the price of diesel and was implemented three days after oil companies implemented a P3 per liter increase, the single biggest fuel price hike recorded. (See Table)

What has caught public attention in the latest rounds of rollbacks is the noticeably larger reductions that small player Unioil has implemented. While its competitors, including the Big Three, have reduced their pump prices by a total of P3 per liter last Sep 11 and 18, Unioil implemented a total rollback of P6 per liter for its gasoline products and P4 for its diesel and kerosene.

The oil firm explained that it “will always reflect true prices based on market forces, supply and world oil prices for the ultimate benefit of the consuming public”. Unioil also said that higher price reductions will also significantly boost its sales.

There is a general consensus that the rollbacks in local pump prices have not been proportionate to the rapid decline in world oil prices with the Big Three taking the brunt of public criticism. Malacañang has not only publicly questioned the obvious gap in global and local price movements but even called for an “independent” audit of the Big Three through the Department of Justice (DOJ).

The audit team shall be headed by the dean of the College of Accountancy of the University of the Philippines (UP) with certified public accountants from the DOJ, Department of Energy (DOE) and Department of Trade and Industry (DTI) as members.

Meanwhile, Senate majority floor leader Francis Pangilinan has asked the public to boycott the Big Three as “one way of sending a message to the big companies to be sensitive to the plight of consumers” and for “their ‘obvious collusion’ to delay the lowering of oil prices”.

However, calling for an independent audit of the oil firms may prove futile. This is not the first time that the government has ordered an audit of the oil companies by an “independent” body. The most recent was a DOE-commissioned study done by Peter Lee U, economics dean of the University of Asia and the Pacific (UA&P).

The audit covered Petron and Shell, which together control some 70% of the local market and was verified by the SGV Co. Conducted amid the weekly oil price hikes in the second quarter of the year, it found out that supposedly “the oil firms have been reasonable in their increases”.

The basic problem with the government-initiated audits of oil firms is that they fail to look at the more important aspects of the industry that could help determine whether oil price levels and adjustments are reasonable or not. This is not simply because the audit teams may be incompetent but because under deregulation, oil firms could not be compelled to disclose certain aspects of their business operation in the spirit of “confidentiality and competition”.

The demand for a substantial rollback that will truly reflect rapidly declining global prices, on the other hand, enjoys wide public support including from the mainstream media. The obviously big disparity in the price levels of local pump prices relative to global prices have put the oil companies on the defensive. As of September 26, the monthly average of Dubai crude is pegged at $96.49 per barrel, which is about the same level of its March average of $96.76.

Meanwhile, as of September 26, the average pump price of unleaded gasoline is about P52.21 per liter while that of diesel is around P51.19. In March, their respective averages were P45.33 and P38.31 or a difference of more than P9 per liter for unleaded gasoline and almost P15 for diesel. But note also that the peso has lost P3.87 of its value against the US dollar between March and September.

Thus, factoring in both the estimated impact of Dubai crude and foreign exchange (forex) adjustments during in March and September, prices should still be rolled back by about P3.10 per liter for unleaded gasoline and P9.10 for diesel for September prices to approximate the price levels in March. (See Table)

However, such approach still does not consider the monthly changes in Dubai crude and foreign exchange in other months from January to September. Oil firms may use this as a justification for their pricing behavior because they may claim under-recoveries in certain months which they say the need to recoup.

Thus, computing the estimated net effect of the monthly movement in Dubai crude and forex on pump prices could be the more accurate approach in estimating the ideal oil price rollback. Simulating the “rule of thumb” used by Petron in determining the impact of monthly changes in Dubai crude and forex on local pump prices and comparing them with the actual price adjustments per month as reported by the DOE, it appears that diesel prices are “overpriced” by P7.21 per liter; kerosene, P8.25; and gasoline products by P2.21 to 2.23.

Based on these estimates, it also appears that oil firms have collected most of their “overpricing” in July and August that offset their “under-recoveries” from February to May. (See Table)

This means that oil companies have implemented oil price hikes than what the adjustments in Dubai crude and forex warrant from January to September. A major limitation of this estimate is that it does not factor in the impact of speculation and monopoly pricing by the oil TNCs and in fact assume that global spot prices reflect the true cost of oil (which in reality is not the case).

Another limitation is that it uses only Dubai crude as benchmark, while oil firms claim that they also use the MOPS as benchmark in computing pump prices for their imported finished petroleum products.

While it does not use the MOPS, it can still be argued that the pump prices of imported finished products is nonetheless traceable to the price of crude oil.

It is unlikely that oil companies will implement another round of rollbacks in September which means that diesel will be overpriced by about P7.21 a liter, etc as of September. (Note that these amounts may vary a little once the full-September average of Dubai crude and forex become available.)

They should be compelled to rollback prices by these amounts if only to offset their “overpricing” from January to September, on top of whatever price adjustments that they will implement in October and beyond.

Sources

  1. “Unioil cuts fuel prices by P2-3/L” by Abigail L. Ho, Philippine Daily Inquirer, September 19, 2008
  2. “DOJ pushes independent audit of oil firms” by Tetch Torres, INQUIRER.net, September 9, 2008
  3. “Pangilinan backs calls to boycott 3 big oil firms” by Edson C. Tandoc Jr., Philippine Daily Inquirer, September 4, 2008; “Boycott of ‘Big 3’ oil firms urged” by Maila Ager, INQUIRER.net, September 18, 2008
  4. “Audit finds nothing wrong in oil firms’ fuel price hikes”, Business World, June 5, 2008
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