Oil firms overpriced gasoline by Php3.48 per liter in 2018; diesel by Php1.48

(Featured image from Novinite.com)

After a series of oil price cuts that started from mid-October 2018 up to the first week of the new year, domestic pump prices have begun to climb up again. The recent increases are due to the combined impact of rising global oil prices and of the second tranche of additional excise tax on oil products under the Tax Reform for Acceleration and Inclusion (TRAIN) Law.

For consumers, it is bad enough that they are made to shoulder a heavier tax burden from a commodity as vital as oil. It is even greater injustice that they are forced to pay for overpriced oil and for even bigger fuel taxes due to such overpricing.

As oil firms are wont to do in a deregulated regime, they implemented price adjustments in 2018 that were higher than what were justified (at least based on Department of Energy or DOE standards) by the weekly changes in global benchmark prices as well as foreign exchange rates.

For 2018, oil companies overpriced gasoline by an estimated Php3.48 per liter and diesel by about Php1.48 per liter. (See Table 1)

tab 1 summary of overpricing 2018

The figures were based on the estimated impact on local pump prices of the weekly adjustments in the Mean of Platts Singapore (MOPS) prices of gasoline and diesel, as well as of the peso-US dollar exchange rates. The results were then compared to the actual price adjustments implemented by the oil companies. According to the DOE, the Philippines uses the MOPS prices as benchmark for pricing finished petroleum products that are retailed in the country.

Put another way, oil firms were implementing higher price hikes when global prices were rising and lower price rollbacks when global prices were falling. This means that consumers were still being abused by the oil companies even as they were rolling back prices in the last three months of 2018. In fact, looking at Table 1, the oil firms overpriced more during the successive weeks of price rollbacks in October to December.

The Oil Deregulation Law (Republic Act 8479 or the “Downstream Oil Industry Deregulation Act of 1998”) and its regime of price adjustments without public consultations created the environment for such abuse to be committed with impunity.

These allowed the oil firms to rake in around Php33.93 billion in extra profits last year on top of their regular income, and the Duterte administration to collect some Php4.63 billion in additional revenues from the 12% value added tax (VAT). Apparently, it is not in the interest of the government to regulate oil price adjustments because of the tax windfall that high and overpriced oil generates. (See Table 2)

tab 2 summary extra profits & vat 2018

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.

Oil price unbundling

During the height of unabated oil price hikes at the start of 2018, the DOE initiated its proposal to unbundle the prices of petroleum products. The latest is that the DOE is already finalizing a circular to implement the proposed unbundling meant to put more teeth in monitoring oil prices and protect the consumers. Industry players and energy officials have already agreed on seven out of the eight major components of the unbundled price.

Understandably, the remaining contentious item in the planned unbundling is the “industry take”, which indicates the profit margin and operation cost of the oil companies. Nonetheless, the DOE expects to finally issue the circular by the first quarter.

While unbundling could make the cost breakdown per liter of fuel products seem more transparent, it will still not guarantee fair price setting. Adjustments in prices will remain deregulated and oil firms, especially the largest ones, can continue to abuse the weekly price adjustments and overprice their products. This is similar to the unbundling of electricity rates in the privatized and deregulated power industry, which did not stop the abusive pricing practices of the big power monopolies.

Besides, real transparency in prices requires that all oil companies disclose their term contracts with their suppliers, detailing key information such as the specific source/supplier of imported oil, the actual negotiated import price, volume of oil imports, etc.

Impact of the TRAIN Law on oil prices

Compounding the overpricing by the oil companies is the additional fuel tax imposed by the Duterte administration. The TRAIN Law (or Republic Act 10963) will add another Php2 per liter in excise tax to the pump prices of gasoline and diesel; Php1 per liter for kerosene; and Php1 per kilogram (kg) for liquefied petroleum gas (LPG). Including the 12% value added tax (VAT), the second round of tax hike under the TRAIN Law will increase the price of gasoline and diesel by Php2.24 per liter; kerosene by Php1.12 per liter; and LPG by Php1.12 per kg.

In 2018, the controversial tax scheme of the Duterte administration already added Php2.80 to the price of diesel; Php2.97 for gasoline; Php3.36 for kerosene; and Php1.12 per kg for LPG, representing the additional excise tax and the corresponding VAT. Adding to this year’s adjustments, the TRAIN Law’s total price impact as of 2019 would be an increase in the pump price per liter of diesel by Php4.80; gasoline by Php5.21; and kerosene by Php4.42. For LPG, the total price hike is Php2.24 per kg or a total of Php24.64 for the usual 11-kg cylinder tank that households use.

The bad news is that there remains still another tranche of excise tax increases next year under the TRAIN Law. The scheduled increases for 2020, including the VAT, are: diesel, Php1.68 per liter; gasoline and kerosene, Php1.12 per liter; and LPG, Php1.12 per kg. Table 3 summarizes the impact of the TRAIN Law on oil prices.

tab 3 train impact on oil prices

As of the latest price adjustments (i.e., Jan 15, 2019) and including the second tranche of fuel excise tax under the TRAIN Law, the pump price of diesel is more than Php12 per liter higher than its level before the Duterte administration took over; gasoline is almost Php9 higher. Of the said price increases, the additional tax burden (i.e., excise and VAT) imposed by the TRAIN Law accounted for Php5.04 per liter for diesel (41% of the total price increase in diesel under Duterte) and Php5.21 per liter for gasoline (59% of the total increase in the price of gasoline). (See Table 4)

tab 4 oil price before & under duterte jan 2019

If policy makers were to truly address the problem of high oil prices, they should look at both the TRAIN Law and the Oil Deregulation Law. Removing the unnecessary fuel tax burden and making oil taxation more progressive will immediately bring down the price of oil for sure. But oil prices will remain exorbitant and price adjustments will remain unjustified as long as the oil industry is deregulated. ###

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How to bring down oil prices by as much as Php10 per liter and why it is justifiable

The Duterte administration can afford to forego additional windfall oil tax revenues, if only to protect the public from further taking a hit from escalating cost of living.

(Photo from ABS-CBN News)

Suspending the imposition and collection of the 12% value-added tax (VAT) and the additional excise taxes under the TRAIN (Tax Reform for Acceleration and Inclusion) Law could immediately bring down the prices of oil products by more than Php8 to as much as Php10 per liter. This is urgent as oil prices continue to soar, and with inflation further accelerating to a fresh nine-year high at 6.7% in September.

While the Bangko Sentral ng Pilipinas (BSP) claims that inflation may have already peaked last month, projections such as that of the US-based Energy Information (EIA) peg even higher global oil prices in the fourth quarter of 2018 due to lingering supply concerns.

Removing oil taxes now is also justifiable and fair, considering that apparently in just nine months (Jan to Sep 2018) the government may have already almost equaled their full year 2017 collections from the VAT on diesel and gasoline, based on estimates. Total revenues from excise taxes on oil products in the first six months of the year, on the other hand, are 181% higher than what was collected during the same period last year according to an official Department of Finance (DOF) preliminary report. All these mean that government can afford to forego additional windfall oil tax revenues, if only to protect the public from further taking a hit from escalating cost of living.

Unabated price hikes

Oil firms advised that starting Oct 9, the price of diesel will again go up by Php1.45 per liter; gasoline, Php1.00; and kerosene, Php1.35. These upward adjustments will bring the total increases for the year at Php14.95 per liter for diesel; Php14.37 for gasoline; and Php14.00 for kerosene. The latest increases are the ninth straight round of oil price hikes (OPH) in as many weeks, and the twenty-ninth for the year.

With the recent OPH, the common price of diesel in Metro Manila is now at almost fifty peso per liter (Php49.75) while gasoline (RON 95) is already the approaching sixty-two-peso mark (Php61.50). At these levels, oil prices are now at their highest in nominal terms in the past decade.

The VAT is equivalent to Php5.97 per liter for diesel and Php7.38 per liter for gasoline (or 12% of their respective common price). The TRAIN Law’s additional excise taxes, meanwhile, is at Php2.50 per liter for diesel and Php2.65 for gasoline for this year. Thus, removing both from the current common price will translate to an immediate reduction of Php8.47 per liter for diesel and Php10.03 for gasoline. (See Table)

Oil prices, TRAIN excise & VAT as of Oct 9

Suspending the oil VAT and excise taxes under the TRAIN Law should be doable for the government since doing so would no longer adversely impact its revenue generation from petroleum products. Economic managers projected international crude oil prices to be at just between US$45 to 60 per barrel and the foreign exchange (forex) rate at just Php48 to 51 per US dollar for 2018. Actual Dubai crude prices for the year, however, have ranged between US$60 to 80 per barrel while the forex rate is averaging Php52.48 per US dollar so far this year.

Windfall revenues

In other words, the Duterte administration has been collecting windfall revenues from the 12% VAT on oil products due to incessantly increasing prices as a result of higher than anticipated Dubai crude prices and a weaker peso. The DOF reported that overall VAT collections in the first semester of 2018 have reached Php179.95 billion, or about Php1.51 billion higher than what was raised during the same period last year.

While the DOF also said that VAT collections in the first half were 19% short of the government target for the period, this was not due to lower revenues raised from the oil VAT, which as mentioned have certainly skyrocketed due to higher pump prices. Apparently, small and medium enterprises (SMEs) and self-employed individuals that used to remit the VAT before the TRAIN Law became effective are now using other tax options under the new law. But that VAT collections in the first semester are still slightly higher than last year’s first half total is indicative of how much windfall the government has raised from rising oil prices.

There is no publicly available data on how much revenues that government has raised so far from the oil VAT. But using the average common price in Metro Manila for 2018 and based on domestic oil consumption data as of 2017 (as monitored and reported by the Department of Energy or DOE), VAT revenues from diesel and gasoline can be estimated. At a Php43-per liter average common price and daily consumption of almost 29.91 million liters, diesel generated about Php42.29 billion in VAT revenues from Jan to Sep 2018. At a Php55-average common price and daily consumption of almost 17.02 million liters, gasoline generated around Php30.78 billion in VAT revenues during the same period.

That’s about Php73.06 billion in VAT revenues from diesel and gasoline. For comparison, at an average common price of Php32 per liter in 2017 for diesel and Php46 for gasoline, total VAT collections from the two oil products for full year 2017 may have reached an estimated Php76.21 billion.

Removing onerous taxes

These are, of course, just estimates and actual collection figures may differ, perhaps even widely. But there should be no significant disparity between the comparison of oil VAT revenues between 2017 and 2018, whether estimates or actual collection data. The point is that government can decide to stop collecting more oil taxes now to immediately ease the burden of the public, even simply based on the fact that they have already collected enough.

Meanwhile, excise taxes collected from all petroleum products reached Php18.03 billion in the first six months of 2018, or almost thrice of the excise taxes collected from oil products in the same period last year, according to initial DOF data. That should be more than enough given how inflation has rapidly accelerated this year with increasing oil prices under the TRAIN Law as one of the primary culprits.

The whole point of raising taxes is to send back the generated resources to the people in the form of key economic and social services as well as programs and projects that benefit them and the country. But if the taxes are so onerous especially for the poor such as the VAT and excise taxes on petroleum products, they become an unnecessary burden and are oppressive. They negate whatever supposed benefits the people expect to get from the government. For the government to insist on collecting such taxes is unacceptable.

Imagine, for instance, a jeepney driver or small fisher whose income has been substantially eroded by increasing diesel and gasoline prices. Public education or health services, even new roads and bridges funded by their taxes are meaningless amid high prices that deprive them of decent living. Then there is the question of whether these tax resources are actually used for public interest and welfare given how corruption remains rampant in the bureaucracy not to mention that many programs and projects funded by these resources are anti-poor by design.

On the contrary, removing the VAT and excise taxes on oil now will have an immediate favorable impact on household budgets. ###