Oil deregulation, SONA 2011

SONA 2011: 27 rounds of diesel price hikes, oil profiteering highlight Aquino’s failure

Amid 27 rounds of diesel price hikes since becoming President and unabated profiteering by oil firms, Aquino displays a helpless and defeatist attitude

Less than a week before the second State of the Nation Address (SONA) of President Benigno S. Aquino III, oil firms again jacked up their pump prices. On Monday (July 18), oil companies hiked the price of diesel by P1.10 a liter; kerosene, P1; regular gasoline, P0.60; and unleaded gasoline, P0.30.

This is the second consecutive round of oil price hikes in the weeks leading to Aquino’s second SONA. Last July 12, oil firms raised the pump price of unleaded gasoline by a whopping P2 per liter and diesel, P0.80.

The Aquino administration can, of course, pin the blame on rising global oil prices and claim that it is beyond its control. But precisely because of this helpless and defeatist attitude that oil companies are able to aggravate the plight of the people as they continue to profiteer from rising oil prices.

Total price hikes

All in all, there have already been 27 rounds of diesel price hikes since Aquino was sworn in as President last June 30, 2010, 16 rounds of which happened this year. Similarly, there have been 28 rounds of unleaded gasoline price hikes during the same period, 17 of which happened in 2011.

The common price of diesel in Metro Manila is now pegged at P45.60 per liter from P34.25 when Aquino was inaugurated, or a total increase of P11.35 per liter. The common price of unleaded gasoline, meanwhile, went up from P44 per liter to P56.95 today, or an increase of P12.95 per liter. (See Chart)

Aquino’s liability

Local oil prices, of course, have already been rising rapidly even before Aquino became President especially since the downstream oil industry was deregulated in the late 1990s. Aquino, however, refused to support the demand by various sectors to repeal Republic Act (RA) 8479 or the Oil Deregulation Law. In this regard, Aquino is liable to the people.

RA 8479 allowed oil firms to adjust pump prices automatically based supposedly on price changes in the world market. Because the industry is dominated by the international oil cartel of American and European firms, the law merely gave the big oil players more room to pad the true cost of oil products in the country. Aside from monopoly pricing, oil prices in the world market are also artificially bloated by speculation. All this is fully passed on to consumers making oil prices excessively high.

Profiteering

Due to deregulation, oil companies in the Philippines are also able to rake in additional profits by implementing weekly price adjustments that are beyond what supposed international price benchmarks warrant.

From January to July 12 this year, for instance, the pump price of diesel should have only gone up by an estimated P5.45 per liter based on the movement of benchmark Dubai crude as well as the foreign exchange (forex). During the period, the monthly average of Dubai jumped from $92.19 per barrel in January to around $109.5 in the first two weeks of July. Forex, on the other hand, improved from P44.17 per US dollar to about P42.71. (See Table)

But actual change in diesel’s common price in Metro Manila reached P7.10, indicating an over-recovery of P1.65. The same thing could be observed in the pump price of unleaded gasoline which increased by P7.95 per liter, for an estimated over-recovery of P2.50. Since the oil price crisis in 2008, the accumulated profiteering by local oil firms has now reached about P8.37 to P9.22 per liter.

No real reforms

Instead of marshaling his allies in Congress to work for the repeal of RA 8479 and support proposals like House Bill (HB) 4355 filed by the progressive bloc of partylist groups at the House of Representatives, Aquino implemented the Pantawid Pasada. Not only is this seriously lacking as a relief measure, it also underscores Aquino’s lack of interest in implementing fundamental reforms in the economy to address longstanding problems like exorbitant oil prices, energy insecurity, and abusive practices by foreign cartels.

Oil price hikes could have been mitigated by cancelling the Arroyo-era 12% value-added tax (VAT) on petroleum. But even this was rejected by Aquino because it might turn off the foreign creditors and credit rating agencies. The Aquino administration today is collecting a VAT of around P5.47 a liter on diesel and around P6.83 on unleaded gasoline. When Arroyo stepped down, the VAT on diesel then was only about P4.11 per liter and unleaded gasoline, P5.28.

Urgency

Aquino’s supporters often dismiss critics of the administration as simply impatient. It has only been one year, they point out. Change is not an overnight process, they say. To be sure, no one’s asking the President to change the country in one year. But it must be also recognized that the problems facing our people are urgent, requiring immediate and decisive action from Aquino.

Oil prices, as mentioned, have risen by P11 to 12 a liter via 27 to 28 rounds of oil price hikes in just a year while oil firms continue to overprice their products. In just one year, jeepney drivers saw their income being eroded by more than P340 a day due to unabated oil price increases. The same thing is true for millions of farmers, fishers, households, etc that rely on petroleum products on a daily basis.

Some transport groups have used the latest surge in petroleum prices to again press for another round of fare hike. At the start of year, the minimum fare for jeepneys has been raised by P1 due to unabated increases in the price of diesel. Just four months ago, the minimum fare for buses has also been increased by P1. Driven by escalating fuel prices, inflation last month reached 4.6 percent – the highest since April 2009.

Issues like these need immediate attention. The people have every right to be impatient. Aquino does not enjoy the luxury of time.

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Oil deregulation

Overpricing amid speculative oil price spikes, not supply, is more urgent concern

(This article was first published by the Philippine Online Chronicles)

On Tuesday (Mar. 8), oil firms implemented the eighth round of oil price hikes this year and the third round in one week. All in all, the pump price of diesel has already increased by P6.75 per liter since January; kerosene, P6.50; and gasoline, P6. The retail price of liquefied petroleum gas (LPG), on the other hand, posted a net decrease of P1.90 per kilogram (kg). But recent trends show an uptrend in the LPG international contract price, consequently hiking the local retail price by P2.50 per kg since March 1. (See Table 1)

Alarming pace

The pace with which pump prices are increasing is very alarming. This year, the price of diesel at the pump is rising by almost 68 centavos a liter per week and those of gasoline and kerosene by 65 centavos and 60 centavos, respectively. Just to give you an idea how bad the situation is, note that during the 2008 oil price crisis, the retail price rose by just 57 centavos a liter per week. This, of course, is just an average. At its peak (June and July), the 2008 crisis jacked up local pump prices by P1.42 a liter per week. Unfortunately, we all have no idea if the current surge in prices has already peaked or at least nearing the summit. As we speak, tension continues to build up in the Middle East, with protests now spreading to Saudi Arabia. Meanwhile, the US is planning to intervene militarily in the Libyan civil war. These fuel more speculations, driving wild spikes in prices like in 2008. But unlike in 2008, the oil rich regions are today embroiled in serious volatility that may actually disrupt supply which means more bad news for importing countries like ours.

No shortage

Certainly, there is no actual shortage yet with most members of the Organization of Petroleum Exporting Countries (OPEC) pumping more oil than their individual quotas even before the unrest in Libya. The spare capacity of OPEC is pegged by the International Energy Agency (IEA) at 4.9 million barrels a day or about three times Libya’s output. Spare capacity means capacity levels that can be achieved in 30 days and sustained for 90 days. Oil inventories of the world’s largest economies under the Organization for Economic Cooperation and Development (OECD) also exceed the normal 52-54 days with 57.5 days in December. Nevertheless, taking early measures to prepare for a possible supply disruption is a prudent decision on the part of President Aquino who created an Inter-Agency Contingency Committee (IACC). The Department of Energy (DOE) has also imposed a minimum inventory of 30 days for refiners and 15 days for importers of finished products.

Real problem

However, the real problem right now is not supply but the skyrocketing costs of oil and its impact on the people, especially the poor. Although much of the increases in the global oil prices are speculative (there is no actual shortage, only fears of shortage), Filipino consumers bear the full brunt of soaring prices because of the Oil Deregulation Law or Republic Act (RA) 8479. Worse, oil companies have been taking advantage of the deregulated downstream oil industry to overprice their products. In a deregulated environment, oil firms simply “text” someone in the DOE that they are increasing prices, as a matter of FYI. This system obviously creates a lot of room for abuses. To illustrate, from 2008 to January this year, oil firms have implemented price hikes that were bigger than what changes in global prices and foreign exchange warrant. Similarly, they also implemented smaller rollbacks. The net result is an overpricing of around P7.50 per liter.

P7.50 per liter in overpricing

Thus, on top of the speculative increases, consumers also shoulder the cost of overpriced oil which is an enormous burden for ordinary folks. Consider, for instance, a lowly tsuper who uses 30 liters of diesel for his jeepney in a one day. Through overpricing, oil firms are robbing each of the more than 400,000 jeepney drivers nationwide and their families around P225 per day. About 8.6 million households that use LPG are being robbed of some P147.58 per month. More than 700,000 fishers, who are the poorest sector in this country (50% of them try to survive on just P41 a day), shell out P75 per fishing trip to cover the cost of overpriced gasoline. The poorest Filipino households use kerosene for lighting and cooking and even they are being squeezed dry by the oil companies. (See Table 2)

From the burden of these poor sectors and the rest of consumers, oil companies squeeze P369.65 million everyday in extra profits from overpricing. Of this amount, Petron accounts for P124.59 million, followed by Shell with P91.41 million; Chevron, P40.66 million; Total, P14.31 million; and other players, P54.32 million. Even the Aquino administration gets its share from the profiteering of the oil companies through the 12% value added tax (VAT) imposed on oil to the tune of P44.36 million daily. (See Chart)

Regulate prices now

The Aquino administration at first refused to engage the issue of skyrocketing prices, as it has done on the general increase in prices of basic goods and services. (Read “A regime of high prices: Aquino’s apathy towards the poor”). But as the oil price hikes rage on and escalating people’s protests over high prices loom, government is now at least showing a semblance of concern. The Department of Finance (DOF) is reportedly considering subsidizing oil products consumed by the poor and reducing the VAT on petroleum. These measures are apparently the most “drastic” proposals that government is ready to make.

While any measure that can immediately bring down the price of oil (especially the scrapping of the 12% oil VAT) to provide much needed relief is welcome, we need a truly drastic reform. Overpricing must be addressed because even during times of low prices, consumers are still being exploited by the oil companies. Of course, there is a task force composed of the DOE and the Department of Justice (DOJ) that the Oil Deregulation Law created to look into the abuses of the oil players. But in the 13 years that this task force has existed, not a single oil company has ever been penalized for overpricing. Not even when the Director General of the National Economic and Development Authority (NEDA) himself is saying that they are overpricing (remember now Sen. Ralph Recto’s allegation in 2009 that oil products were overpriced by P8 a liter?).

The excuse for this is simple. As argued by the late Angelo Reyes, who as the then DOE chief lambasted Recto’s claim, there is no such thing as overpricing or a standard formula under deregulation. Every price adjustment is justified as a business decision in the name of competition and driven by the world market. But we all know that this is hogwash. More than eight out of every 10 liters of oil sold in the domestic market are from just four companies (Petron, Shell, Chevron, and Total) with tight links to the global oil cartel. They set the price adjustment and everyone else just follows. Government should stop using the world market as an excuse for being helpless. Otherwise, there is no more need for a government. At the very minimum and as an immediate policy reform, we need to regulate the price adjustments through a system of credible, democratic, and transparent public hearing. Hindi pwedeng “text-text” lang ang oil price hikes. (end)

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Consumer issues, Power industry, Privatization

Meralco’s insulting attempt at pa-pogi

Meralco bill (Image from ofwnow.com)

On Tuesday (March 9), the Manila Electric Co. (Meralco) asked the Energy Regulatory Commission (ERC) to allow it to “reduce” and spread over several months the whopping P1.83 per kilowatt-hour (kWh) hike in this month’s generation charge.

This is clearly a case of an insulting attempt at pa-pogi. Meralco wants to make it appear that consumers should have utang na loob for the firm’s voluntary offer to mitigate the impact of a drastic rate hike when in reality, the rate increase is unreasonable and Meralco has billions of unpaid debts to its close to 5 million customers.

Lower rate hike

In its petition, Meralco said that instead of a one-time hike of P1.8298 per kWh in generation charge for March, the ERC approve a rate hike of just P1.3852. The remaining balance of 44.46 centavos shall be collected from April to September to ease the impact of the increase on its customers.

Under the Electric Power Industry Reform Act (Epira) of 2001, distribution utilities like Meralco can implement automatic generation rate adjustment. This means that they can automatically pass on to consumers increases in the cost of power generation.

Overcharging probe

Meralco’s move comes amid an ongoing probe on fresh allegations that the power firm overcharged its customers. In a December 2009 report, but released to the public only last month by the ERC, the Commission on Audit (COA) accused Meralco of overcharging its customers by as much as P7.29 billion.

According to the COA report, Meralco illegally passed on to consumers operating expenses such as P2.36 billion worth of employees’ pensions and benefits. Consumers were also made to shoulder the costs of property and equipment that COA said are questionable including the construction of a P526.2-million creek and a P156-million parking lot.

The ERC is expected to conduct public hearings this month to determine if the power firm needs to refund or implement a rate reduction to offset its over collections. Or it can also uphold Meralco’s claim of innocence.

Propensity for abuse

But this is not the first time that Meralco has been accused of overcharging. In 2003,  the Supreme Court (SC) affirmed COA’s findings that Meralco illegally collected P30.2 billion from its customers from 1994 to 2002. COA discovered that Meralco included income taxes in its RORB (return on rate base) calculations resulting in bloated electricity bills for consumers. Until today, the power distributor has yet to fully comply with the refund order of the SC.

Far from the image of a considerate and responsible company it desperately hopes to portray, Meralco has shown its unmistakable propensity for abuse. Its pattern of overcollections in the past couple of years clearly attests to this. Aside from the P30.2 billion, Meralco was also ordered by the ERC to return P2.88 billion in meter deposits as well as P3.92 billion in over-recovery of currency adjustments.

Upholding public interest

The power distributor could not claim that its generation charge is simply a pass on cost. Remember that Meralco sources its electricity from its own independent power producers (IPPs) and sister firms. Even in the Wholesale Electricity Spot Market (WESM), which Meralco is citing for the sudden and drastic hike in this month’s generation charges, Meralco’s sister companies and IPPs allow Meralco to account for as much as 40 percent of generated capacity.

Thus, consumers have nothing to thank Meralco for. We do not owe Meralco a single centavo, and it is Meralco that still has to return billions of pesos it illegally collected from us.

In light of the latest COA report accusing Meralco of again overcharging the consumers, the ERC should disallow any petition for a rate hike by the power distributor. Allowing it to jack up its rates would mean continuing injustice to consumers.

An immediate rate reduction is also justifiable considering that the latest COA report questioned the cost assumptions that the ERC used in approving Meralco’s huge 41-centavo hike in its distribution rates last year, which  allowed Meralco to post a 114 percent increase in its 2009 profits.

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Oil deregulation

Petron, Shell lying about “losses” due to EO 839

Oil cartoon

IBON cartoon

Pilipinas Shell today (Nov. 12) claimed that because of EO 839, it has incurred losses of as much as ₱80.9 million in just six days (or about ₱13.48 million daily). Also today, Petron Corporation reported a net income of ₱3.38 billion from Jan. to Sep. but quickly warned that if EO 839 is not lifted until yearend, it will suffer over ₱1 billion in losses in the fourth quarter.

Kung ganyan, bakit hindi na lang sila magsara? And then the State can just take over as proposed recently by senior senators.

Because the truth is they are not losing money and on the contrary have been raking billions of pesos in extra profits (i.e. on top of their regular profits) due to overpricing, which has become more intense and unbridled under the current DOE and Arroyo administration.

When EO 839 was issued on Oct. 20, petroleum products nationwide were overpriced, on the average, by ₱5.48 per liter, according to Bayan. Consequently, oil firms are earning extra profits of about ₱212.38 million daily. Due to overpricing, Petron is earning extra profits of around ₱82.19 million daily; Shell ₱63.5 million; Chevron, ₱29.94 million; Total, ₱9.56 million; and other players, ₱27.18 million.

If they could afford to reduce their prices and still earn, why do oil firms, in particular the big foreign players, oppose EO 839? The reason is more political than economic. While it is supposed to be based on RA 8479, EO 839 in effect puts into question the wisdom of oil deregulation and affirms the argument that for public interest, the market should not be left to itself.

What is at stake in the debate on EO 839 is not the profitability or viability of the industry. The bigger issue is that EO 839, despite its inherent limitations in terms of truly protecting in a sustainable manner the interests of oil consumers, has provided a glimpse of what the state can do if it is serious enough and has the needed political will to stand for public welfare.

EO 839 itself, because it was pursued in the framework of deregulation, did not protect consumers but simply increased the burden of consumers in the Visayas and Mindanao, where oil prices have been raised to offset the supposed losses of the oil firms due to the Malacañang order and where pump prices  have been historically higher than Luzon’s. 

To a certain degree, however, it questioned the lies long peddled by the oil companies and staunch defenders of neoliberalism about neoliberal free market economics. If left unchallenged, EO 839 could become a precedent in policy making – that the government, in the name of public good and welfare, could take decisive action against abusive corporations.

Recent pronouncements by several policy makers about taking over the industry and state-led oil importation must be welcomed. They affirm what opponents of oil deregulation have been saying all along.

Now it remains to be seen if these will translate to actual policy reforms.

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Oil deregulation

Oil firms and Malacañang unjustly squeeze P329 M every day from consumers

poverty-ibonPump prices continued its downtrend, with three rounds of rollbacks announced by the oil firms in the first week of March. On Monday (March 2), the so-called Big Three (Petron Corporation, Pilipinas Shell, and Chevron Philippines) slashed the price of their diesel and kerosene by P1 per liter and gasoline by 50 centavos. It was followed by two rounds of price cuts in liquefied petroleum gas (LPG) by members of the LPG Marketers’ Association (LPGMA) on Wednesday (March 4) and Friday (March 6), which brought down the price of an 11-kilogram (kg) cylinder tank by a total of P22. It matched the earlier rollback in LPG prices by the major oil players.

The reductions have come at a time when public officials have all but admitted that Republic Act (RA) 8479 or the Oil Deregulation Law have been ineffective in curbing manipulations in the industry. Under public pressure to get tough on abusive oil companies, Secretary Angelo Reyes of the Department of Energy (DOE) said that while the government’s role is to protect public interest, it will “have to follow what the law dictates”. And the law (i.e., RA 8479), Reyes added rather candidly, does not say that government takes “more aggressive action versus the oil companies”.

But with the recent price cuts, proponents of deregulation will surely argue that there is no need for such state intervention. Market forces such as competition will supposedly impose discipline on the oil companies. The problem is despite these rollbacks, the unfortunate consumers are still burdened with overpriced petroleum and the profiteering of the oil companies, especially the major players, remains vicious.

Due to overpricing, oil companies in the country are earning extra profits of around P289.51 million daily, according to the latest estimates of the multisectoral group Bagong Alyansang Makabayan (Bayan). Petron Corporation accounted for the lion’s share of the daily extra profits cornering an estimated P112.04 million; followed by Pilipinas Shell, P86.56 million; Chevron Philippines, P40.82 million; and Total Philippines, P13.03 million. Other oil players posted an estimated collective share of P37.06 million.

The huge amounts of extra profits that oil companies collect from overpricing make the series of price cuts that they have implemented in the past two weeks meaningless. The price rollbacks are much smaller than what oil firms should reflect in pump stations to offset their overpricing. Bayan earlier said that as of mid-February, oil products in the country remain overpriced. Diesel is overpriced by around P2.94 per liter; kerosene, P6.42; unleaded gasoline, P2.31; and 11-kg LPG cylinder, P125.35.

The group’s overpricing estimates looked at the monthly movement of Dubai crude and the US dollar – peso exchange rate and their combined impact on pump prices. The results were then compared with the actual price changes as monitored by the DOE.

The extra profits were computed using the latest available (i.e. first half of 2008) figures on local oil demand of around 286.6 thousand barrels per day (MBD) and the market share of each player. As of first half 2008, Petron controls almost 39% of the market, followed by Shell, 30%; Chevron, 14%; and Total, 4%. The rest of the market, 12.8%, is divided among the smaller oil players. Furthermore, the overpricing and profiteering belie claims of losses by oil companies such as Petron’s reported P3.9-billion net loss last year due to “extreme volatility” of global oil prices. The commanding position that Petron enjoys in the local market and the automatic price adjustments under the Oil Deregulation Law allow it to squeeze billions of profits from hapless consumers.

But are Malacañang and its allies in Congress willing to pass a law, or amend RA 8479, that will allow aggressive government intervention against the abuses of the oil industry? Consider that the national government is collecting an additional P39.48 million everyday in value added tax (VAT) imposed on overpriced oil products.

Such amount is on top of Malacañang’s regular collections from the 12% VAT on oil, which the Department of Finance (DOF) described as the “biggest tax measure since the birth of the republic”. Why will government kill its own milking cow? Obviously, the additional VAT collections of government from overpriced oil make it disinterested in calls to regulate the industry and repeal the Oil Deregulation Law.

The oil companies and Malacañang together squeeze about P328.98 million in unjust collections everyday from the Filipino consumers. This brazen act of exploitation is downright condemnable, especially today that millions of workers face unprecedented job scarcity and poverty.

The Oil Deregulation Law should be repealed to ensure reasonable pump prices. The VAT on oil must be cancelled to immediately bring down the prices of petroleum products. These urgent measures can go a long way in easing the impact of the global financial and economic crisis on ordinary Filipino consumers. (END)

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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

Oil products still hugely overpriced

Despite the continued rapid decline in global oil prices last month, petroleum products in the country remain hugely overpriced as oil firms refused to implement substantial rollbacks in domestic pump prices.

gas-station1Latest estimates by the Bagong Alyansang Makabayan (Bayan) show that as of December 2008, diesel is still overpriced by P9.56 per liter; kerosene, P12.60; unleaded gasoline, P3.57; and liquefied petroleum gas (LPG), P60.81 per 11-kilogram (kg) cylinder tank.

The December average of Dubai crude, the country’s benchmark in pricing oil products, further declined to $40.53 per barrel (bbl), down 18.7% from its November average and 69.1% lower from its peak level in July. Overall, the price of Dubai crude fell by 5.1% a month last year, with steep cuts in the second half offsetting the huge increases posted in the first half of 2008.

On the other hand, the peso weakened against the US dollar last year. It started the year at P40.90 in January, showed slight appreciation in February before depreciating progressively for the rest of 2008. By December, the foreign exchange (forex) rate was pegged at a monthly average of P47.98 per US dollar.

Actual monthly changes in the pump prices of diesel last year have resulted in a net impact of a reduction of P3.17 per liter; kerosene, 13 centavos; unleaded, P9.16; and LPG, P189.70 per 11-kg cylinder tank. These actual adjustments are much lower than the estimated “ideal” adjustment of P12.73 per liter (or P250.50 per 11-kg LPG tank) in rollback, thus resulting in overpricing.

Bayan’s overpricing estimates looked at the monthly averages of Dubai crude and forex and their combined impact on domestic pump prices. The results (“ideal” adjustment) were then compared with actual monthly price changes at the retail stations as monitored by the Department of Energy (DOE). The impact on domestic prices of Dubai crude and forex adjustments varies depending on the levels of these variables. In December 2008, for instance, a $1 per bbl adjustment in the price of Dubai crude translated to a 34 centavo per liter adjustment in domestic pump prices. Meanwhile, a P1 adjustment in the forex rate translated to a 29 centavo per liter adjustment in domestic pump prices.

But it must be emphasized that such “overpricing” estimates simply refer to the disparity between the adjustments in domestic pump prices and global oil prices. It does not reflect the much bigger overpricing that the oil transnational corporations (TNCs) impose on the market through their monopoly control of the upstream and downstream global oil industry.

Global trends

The year 2008 saw a roller coaster ride in prices of crude oil and petroleum products. In the first week of January, global crude oil price breached what analysts called the “psychological barrier” of $100 per barrel mark for the first time. At one point in July, crude oil traded at an all-time peak of more than $147 per barrel in the world market. Then a month later began the steep decline in oil prices and by December, crude oil was trading at under $33 per barrel. From an earlier forecast of global crude oil price reaching as high as $250 per barrel “very soon”, one estimate now predicts prices to fall to as low as $30 per barrel in first quarter next year. Thus, said one analyst, “2008 will go down as one of the most volatile and difficult years ever for oil. It was a year that started with runaway prices and all the makings of the worst inflation in nearly three decades. It is ending with imploding deflation and worst recession in seven decades”.

Some analysts have identified the “combination of the slowdown in the global economy, which is damp oil demand, and higher production from the Organization of Petroleum Exporting Countries (OPEC)” as the major reason for the reductions in world oil prices since July. OPEC, for its part, listed “lower demand especially in the developed countries, increased oil supply, the strengthening of the US dollar and easing of geopolitical tensions” as the factors behind the decline in global prices.

But an independent report released last year by the US Senate pointed to speculators as responsible behind the rapid rise and subsequent steep fall in oil prices this year. The report said that from January to May, index traders poured $60 billion into commodity markets causing a big spike in oil prices. But when the US Congress held hearings in May to July to curb speculation, traders pulled $39 billion from the market. One of the authors of the report summed up their findings, to wit: “The bottom line here is with regard to commodities, money going in pushes prices up, money going out pushes prices down”.

Wild spikes in the global price of crude oil experienced last year underscore the depth of speculation in the oil market. The prices quoted above actually refer to those of so-called “crude oil futures” as traded in the New York Mercantile Exchange (NYMEX) and the London ICE Futures. Futures market does not involve the physical trading of crude oil but are engaged in by giant investment banks and other financial companies and the oil majors to earn huge profits from speculating on the future price of oil. When oil prices were posting record high numbers in the first half of the year, speculation was estimated to account for as much as 60% of global oil prices.

Indeed, the extreme price swings of oil in 2008 further strengthened the claim that speculation, not actual supply and demand, is behind the world oil price movement. Between January and July, the monthly average prices of crude oil increased by 41% (WTI crude) to 50% (Dubai crude). But between July and December, prices declined by 68% (Dubai and Brent crudes) to 69% (WTI crude). Meanwhile, global oil demand in fourth quarter 2008 was pegged at 85.6 million barrels per day (mb/d), down by only less than 1.4% from its first quarter level. Supply, on the other hand, was recorded at 86.5 mb/d in December, down by only less than 1% from its January average. The figures indicate that there are no very significant changes in the supply-demand balance of crude oil last year that could fully explain the very sharp rise and fall in prices.

2009 prospects

The US recession and the global economic crunch are expected to deteriorate in the coming months. The Philippines is already starting to feel the direct impact as trade and investments slowed down. More overseas Filipino workers (OFWs) face the imminent threat of displacement while the domestic labor market further contracts. All this is only mitigated by easing inflation, mainly due to lower oil prices. But even this “mitigating” factor is offset by unabated oil price manipulation under the ODL.

In addition, the global oil market remains vulnerable to speculation and as such local pump prices could again steeply climb in the coming months primarily due to renewed speculative attacks. The volatile financial market, which in one week saw the demise of two of the US’s mightiest investment banks triggered fresh rounds of speculation. Trading of crude oil futures contracts at the NYMEX for October delivery jumped at one point by $25 per barrel on September 22 – its biggest single-day surge ever – one week after the upheaval at Wall Street. The unusual price hike compelled the Commodity Futures Trading Commission (CFTC) to subpoena trading records from some NYMEX traders to look into possible “illegal manipulation” of prices.  Israel’s intensified military attacks against Gaza in December has triggered fresh rounds of massive speculation that drove oil prices up by 23% in the week connecting 2008 and 2009, the most since August 1986.  Prices of oil futures have been on a steady uptrend since Israel started bombing Gaza and further escalated since the start of the ground assault on January 4.

Furthermore, as the global crisis worsens, oil prices become even more vulnerable to intensified speculative attacks. With the bursting of the housing bubble, more speculators are expected to shift from real estate speculation to speculation in the futures market on commodities including oil. The expected slowdown in real demand as a result of the worsening US recession may not deter traders from speculating on oil since the backdrop for continuing speculation such as the political instability in the Middle East remains. Emerging oil price trends in the light of Israel’s military offensives in Gaza clearly illustrate this.

While Malacañang pretends to run after the oil companies for not implementing substantial price rollbacks, the Arroyo administration’s continued adherence to the ODL and continued imposition of the VAT on oil betray its lack of genuine intentions to lower pump prices. Thus, consumers must rely on their own strength to compel Congress to implement the necessary corrections in oil policies that will truly promote and protect the public and national interests.

2008 was indeed a rollercoaster ride in oil prices – but whether international prices shot up astronomically or steeply declined, Filipino consumers in the end still paid for exorbitantly priced oil. 2009 is certainly even more tumultuous as the recession in the US and other major industrial economies deepens and further aggravate the permanent crisis of the pre-industrial Philippine economy. The country’s already chronic job scarcity is expected to worsen as overseas Filipino workers (OFWs) and those employed in affected local sectors such as exporter manufacturing firms start to feel the pinch of the global economic crunch. The situation could easily deteriorate once prices of basic consumer goods and services again unjustly escalate, which is to be expected as long as government insists on the already discredited principles of free market economics such as the ODL.

Policy makers must now seriously rethink the deregulation policy and put in place a mechanism for effective oil price control to ensure reasonable oil prices and help cushion the impact of the raging global crisis.

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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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