Tag Archives: oil price hikes

Oil deregulation

A billion pesos daily in extra profits, taxes for oil firms, BBM

Image from The Manila Times

The oil companies and the Marcos administration are earning almost a billion pesos per day in extra profits and taxes due to unreasonable weekly changes in pump prices. 

As the public grapple with high prices, it appears that the oil firms and the government are making a killing from the perverse and speculative adjustments in the prices of petroleum products.

Making a killing

For diesel and gasoline alone, they are collecting an additional income of around ₱966.33 million per day. Of the said amount, the oil companies take some ₱850.37 million per day in extra profits while the government collects about ₱115.96 million daily in additional value-added tax (VAT) revenues.

The amounts are based on the estimated overcharge that oil firms implement weekly. As of the Oct 18 price adjustments, diesel price changes are around ₱25.48 per liter higher than what is supposedly warranted by movements in international benchmark prices and the foreign exchange. For the same period, the estimates for gasoline are pegged at ₱12.27 per liter. The estimates used the benchmark Mean of Platts Singapore (MOPS), which the Department of Energy (DOE) says is the reference for determining local pump price movements. 

The estimated overcharge from the weekly price fluctuations is compared to the country’s diesel and gasoline consumption to reckon how much the oil firms and the government potentially make in additional profits and VAT revenues. In 2021, the demand for diesel was 10,590 million liters (ML), while it was marked at 6,757 ML for gasoline, according to the Oil Industry Management Bureau (OIMB).

Most of the extra profits the oil companies raked in went to the industry’s biggest players, based on their market share as of 2021. Petron, which accounts for 19% of the downstream oil market, cornered about ₱163.02 million daily. With a 15% market share, Shell gained around ₱127.21 million daily. Phoenix (7% share) got some ₱63.35 million, and Chevron (5%) was about ₱45.15 million. 

The additional tax revenues that the government amasses from high prices and unfair price adjustments explain why it wants to keep the Oil Deregulation Law despite energy officials recognizing that global price fluctuations are mainly speculative.

Excessive global prices

What we see as apparent price manipulation in the weekly price movements of petroleum products does not fully capture the extent of excessive oil pricing. To illustrate this, one can look at the reported production cost of a barrel of crude oil and compare it with the international benchmark prices. In 2016, for instance, the production cost of crude oil in Saudi Arabia, Iraq, and Iran ranged from just $9 to 11 per barrel. During the same year, Dubai crude averaged $41.47 per barrel – or a difference of $30.47 to 32.47 a barrel.   

Asian countries, including the Philippines, use Dubai crude prices to determine the cost of crude oil (and MOPS for refined petroleum products). In 2021, more than 60% of the country’s crude oil imports came from Saudi Arabia.

Oil importing nations refer to Dubai, MOPS, and other international benchmark prices to determine domestic pump prices and price changes. These benchmark prices reflect the price in the oil spot market – i.e., “on-the-spot purchases of a single shipment for prompt delivery at the current market price,” as defined by the US Energy Information Administration (EIA).

However, these volatile spot prices, prone to speculative assaults, do not accurately reflect the price of oil stored and sold in the local market. Long-term supply contracts, not spot prices, cover most of the physically traded oil and are retailed in refilling stations. Some estimates say the spot market accounts for 35-40% of physical crude oil sales.

In the Philippines, because of a deregulated and privatized downstream oil industry, policymakers and consumers are blind to how much of the oil in the market is covered by spot transactions and long-term supply contracts. We can assume, nonetheless, that the major players with ties to the transnational oil companies operate under the terms of supply contracts and not the spot market.  

Financialization and speculation

Meanwhile, the greater financialization of the global oil futures market since the early 2000s paved the way for increased speculation in oil commodities that impact spot prices. According to the EIA, the futures market is where futures contracts (i.e., a standard agreement to buy or sell a specific commodity of standardized quality, such as crude oil, at a certain date in the future) are bought and sold. 

The EIA explains, ” If oil producers want to sell oil in the future, they can lock in their desired price by selling a futures contract today. Alternatively, if consumers need to buy crude oil in the future, they can guarantee the price they will pay at a future date by buying a futures contract.”

But increasingly, under a highly financialized global economy, participants in the futures market are not only those with an actual commercial interest in buying and selling physical oil. They now include financial players who merely want to profit from the rise and fall in oil prices. 

“In addition to oil producers and consumers, futures contracts are also bought and sold by market participants or speculators who do not produce or consume crude oil. These types of traders buy and sell futures contracts in anticipation of price changes, hoping to make a profit from those changes,” the EIA says.  

Beyond fuel taxes

Economic fundamentals cannot explain the erratic behavior of oil prices in the past two decades. Global prices move based on the unregulated betting of big financial players on whether prices will go up or down in the future, taking a cue from emerging global events in geopolitics, economy, and even climate, among others. At one point this year, the pump price of diesel ballooned by ₱13.15 per liter, then fell by ₱11.45 the following week. Supply and demand do not account for these extreme price swings.  

The overpricing that the oil firms impose from the weekly price adjustments alone – on top of what they overcharge on the actual costs of oil, especially by the big global players, and the impact of speculation – makes calls to reduce, suspend or remove oil taxes ultimately inadequate. Removing the VAT and excise tax will provide immediate relief, but they are not enough in the context of escalating prices and price manipulation. Such demands should complement the primary call to end the Oil Deregulation Law, regulate oil prices, and curb manipulation and speculation as an immediate people’s demand. ###

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Oil deregulation

Diesel adjustments overcharged consumers by ₱24, gasoline, ₱12

After five straight weeks of rollbacks, local pump prices are rising again this week with hefty increases. Based on reports, diesel will go up by ₱6.85 per liter; gasoline by ₱1.20; and kerosene by ₱3.50.

These latest adjustments will bring the total price hikes in the pump price of diesel to ₱35.80 per liter after 23 weeks of price increases and 18 weeks of rollbacks. Gasoline pump price will have a net gain of ₱15.65 a liter (23 weeks of hikes and 16 weeks of rollbacks), while kerosene, ₱26.75 (23 weeks of hikes and 18 weeks of rollbacks).

Oil prices have generally been moving downwards since the year’s second half. Between Jul 5 and the latest adjustments (Oct 10), prices declined in 12 of the 15 weeks. But the rollbacks are not enough to offset the massive price hikes at the start of the year, resulting in net increases.

What’s more, the adjustments are too little compared to what international benchmark prices and foreign exchange say the rollbacks should be (or too high in case of price hikes). For the year, the price adjustments the oil firms implemented up to Oct 4 overcharged consumers by as much as ₱24 per liter. For gasoline, the overprice is around ₱12 per liter.

As usual, speculation in the global market drove the oil price hikes this week, not the actual supply and demand. The Department of Energy (DOE) cited the Organization of Petroleum Exporting Countries (OPEC) plan to reduce production by two million barrels per day. If it is only a plan, why do oil prices have to go up now?

Overpricing through the weekly price adjustments and speculation – on top of the big transnational oil companies’ monopoly pricing in the global market – oppress the people because of oil deregulation. The lack of policy tools that will curb the abusive pricing of oil firms forces ordinary motorists, public transport drivers, commuters, farmers, fishers, small eateries, and households to pay for excessively priced oil.  

Neoliberal policies like the Oil Deregulation Law only line the oil companies and corrupt bureaucrats’ (through the petroleum taxes they collect) pockets at our expense. This oppression must stop. ###

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Oil deregulation

Record oil price hikes: People must rage vs neoliberalism

Photo from BusinessMirror

Nearly three decades ago, neoliberal apologists, multilateral creditors, and the big oil companies peddled the lie of the Oil Deregulation Law that the so-called free market will ensure reasonable pump prices for the benefit of all. Today, that free market is telling the jeepney drivers, farmers and fishers, ordinary motorists, and households to endure the most significant oil price hikes in the country’s history. 

As the oil firms, economic managers, and energy officials have been telling the public for the past 26 years, these price adjustments are warranted. The crisis in Ukraine jolted world oil prices that have already been on a steady upswing since last year. A month before the conflict, crude oil prices as measured by the International Monetary Fund’s (IMF) index for global benchmark spot prices were 62% higher already than its level a year ago. 

Market forces

Oil price hikes in the first ten weeks of 2022 already surpassed the price increases in diesel and kerosene in the whole year of 2021. But we are told that it is only natural that the local pump prices are moving the way they do, given that the Philippines imports practically all its oil requirements. As always, under the Great Free Market, the price of oil will eventually find its proper place once the dust of uncertainties stirred by the inter-imperialist competition in Ukraine, the COVID-19 pandemic, etc., has settled. All of us just need to hang on tight and allow the forces of the free market to do their thing. In the meantime, policymakers hope that the most vulnerable sectors can get by the price shock through targeted cash assistance. 

Neoliberalism makes us believe that all we can do as hapless consumers is to try to survive the market’s wrath. This is what the fuel subsidy aims to achieve – a life jacket in a tumultuous and stormy sea of runaway prices. There is no guarantee of survival.

But who or what exactly are these market forces anyway? Neoliberal fundamentalists will tell us that they are the “supply and demand”. They do not say that supply and demand, and ultimately the determination of prices, are decided by people with vested commercial interests. They are not supernatural beings; they are just super-rich – the monopoly capitalists in the oil industry, the finance oligarchs, the OPEC+ cartel, and the local compradors. They are motivated by earning the most enormous profits in the fastest way possible. 

Paper barrels

The US ban on Russian oil triggered the latest surge in prices as Washington sought to widen the economic sanctions against its imperialist rival. The way that prices are behaving, it is as though a tenth of the global oil supply (the Russian production) has been wiped out from the market overnight, which is not the case. In addition, the US is only importing 8% of its crude oil and petroleum products needs from Russia, which it can easily offset from its domestic production or other oil-producing countries. 

According to the Organization of Petroleum Exporting Countries (OPEC), there is “no physical shortage” of oil. So, what is happening then? As in the case of major oil price volatilities this century, excessive speculation in the oil derivatives markets is pushing up prices, not the disruptions in oil’s actual or physical trading. 

Reports say that the volume of speculative trading in oil has surged since the Ukraine crisis erupted. In the US’s CME (the world’s largest financial derivatives exchange), the volume of buying and selling crude oil options or bets in oil’s future price has almost doubled from 126,000 daily in the first week of February to 240,000 contracts in the first week of March. These are all paper transactions, not actual, physical trading of oil, by financial players who profit from the volatility of oil prices. 

As OPEC said, futures markets are “paper barrels”, but in the physical market, supplies are guaranteed. And not only supplies are guaranteed in the physical market, but the prices also are covered by long-term supply contracts. In other words, the actual costs of physical oil – the diesel that a jeepney driver put in his tank – are not as volatile as the daily market reports make them appear.

The Philippines is not importing oil from Russia, whether crude or refined. Most of our crude oil imports come from Saudi Arabia (45%) and UAE (34%), while finished petroleum mainly comes from refineries in China (37%) and Singapore (18%). The Energy department said that there is no actual supply shortage in the country and that oil inventories or reserves can last for more than 40 days. 

Real impacts

But neoliberalism and deregulation exposed Filipino consumers to speculative paper barrels, resulting in weekly oil price hikes not justified by actual costs in production and trade. Worse, oil companies are exploiting the unregulated weekly price adjustments for profiteering. Based on this author’s estimates, the oil companies overpriced gasoline by around ₱6.58 per liter in 2021 by simply imposing higher oil price hikes or smaller rollbacks than they are supposed to implement based on regional price benchmarks. For diesel, the estimated overpricing is ₱4.74 per liter. In the first two months of 2022, gasoline is overpriced by ₱0.24 a liter and diesel by ₱2.22.

While prices are speculative, the impacts of the actual increases in pump prices are very much real and felt on the ground. The series of oil price hikes last year, for instance, potentially eroded a jeepney driver’s income to the tune of a month’s worth of his family’s rice consumption. The central bank fears that inflation could accelerate to as high as 4.7% in a worst-case scenario of $120-140 per barrel in global oil prices. At those levels, the average pump price of diesel and gasoline could be more than ₱69 and ₱78 per liter, respectively. Given the amount of speculation and the continued implementation of deregulation, it is not implausible. According to IBON Foundation, inflation has already eroded the minimum wage to just half of the family living wage in the capital region. Overall, the oil price crisis could wipe out around ₱330 billion of the domestic economy, and the Philippines is projected to have the sharpest drop in economic growth in Asia.

The people must rage against neoliberalism and deregulation. We can no longer allow being at the mercy of financial speculators, the profiteering oil companies, and the unaccountable global market. We can no longer afford to be content with cash aid and temporary relief while oil monopolies and finance oligarchs rake billions at the expense of our livelihoods. There are very concrete and doable steps that government can take to end the madness of the free market and truly protect the people and economy. ### 

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Oil deregulation

Beyond fuel taxes, regulate and nationalize the oil industry

Photo from Anakpawis

Exactly how much are jeepney drivers losing because of the unabated oil price hikes?

The pump price of diesel has already increased by ₱18.45 per liter (including the latest adjustments on Oct. 26) this year. That is equivalent to two passengers paying the minimum fare of ₱9. Considering that jeepneys are only allowed a maximum of 50% passenger capacity, the impact on a driver’s income is tremendous. A 20-passenger jeepney can carry only ten passengers. With the rise in diesel prices this year, jeepneys practically take a maximum of just eight passengers paying the minimum fare.

A month’s worth of rice

Let us look at the UP Diliman to SM North Edsa route, for instance. This entire route is about 13.25 kilometers roundtrip. Based on one study, a jeepney consumes around one liter of diesel per seven kilometers. So, the UP-SM roundtrip uses up about two liters of diesel. Meaning, a driver loses ₱36.90 per roundtrip due to the price hikes. That amount is almost equivalent to the lowest rice price per kilo (₱38) in NCR. 

A 20-passenger jeepney usually has a full tank capacity of 60 liters, which means that the driver is spending ₱1,107 more to fill up his tank. That is equivalent to about 29 kilos of rice – or two weeks’ worth of the regular consumption of a 5-6-member household. 

For the UP-SM driver, his full tank will last for around 30 roundtrips. Assuming he makes ten roundtrips per day, it means that he must refill every three days – or twice in one week. He thus spends ₱2,214 more on diesel due to the price hikes. That is equivalent to a month’s worth of his household’s rice consumption.

However, raising the minimum fare will only shift the burden of the oil price increases from the drivers to the commuters. Like the jeepney drivers, commuters are also working-class people whom the pandemic severely battered and barely make a living. 

What about the proposal to revive the Gloria Arroyo-era Pantawid Pasada program? For one, the cash aid like during Arroyo’s time will likely be too small to make a dent in runaway oil prices. The proposed subsidy cited in media reports, for instance, is between ₱1,700 to 2,000 per month. As mentioned, the UP-SM driver is already spending an additional ₱2,214 per week. But the amount of cash subsidy is a secondary issue. The primary point is that the Pantawid Pasada merely shifts the burden of the oil price hikes to the taxpayers, including the drivers themselves. 

Making oil firms, government accountable

Meanwhile, the oil companies that profit immensely from high prices and unreasonable price hikes are left off the hook. Policy interventions should primarily target them. One is through effective price regulation to stop their profiteering when they adjust prices every week.

Like the oil companies, we must hold the government accountable as well. The people should press the policymakers to abolish the regressive and exorbitant fuel taxes, such as the 12% value-added tax (VAT). This move can immediately bring down pump prices and provide much-needed relief for the jeepney drivers and the public.

At 12%, the Philippines charges the highest rate in Southeast Asia for VAT or VAT-like impositions. Cambodia, Indonesia, Laos, Malaysia, Thailand, and Vietnam charge 10%, while Singapore charges 7%. We also charge a higher rate than some of the most prosperous countries in the Asia Pacific like Australia, Japan, and South Korea that all charge 10%, and Taiwan, which charges just 5 percent.

While it is not the Philippine government that sets the price or the price adjustments in the global oil market, it should nonetheless drop its defeatist attitude and cries of imagined helplessness as Filipinos suffer from rising prices.  The government can directly and immediately reform its tax policy on petroleum products and reduce the cost not just for jeepney drivers and their households but for the entire economy.

Regulation and nationalization

Beyond abolishing oppressive fuel taxes, the government can and must repeal Republic Act (RA) 8479 or the Oil Deregulation Law to protect the public and the country from excessive prices and unreasonable price increases. In its place, policymakers must develop and implement a comprehensive program for regulating the downstream oil industry. 

This program, which Congress can legislate, should contain the following essential components: (1) Centralized procurement of imported crude oil and refined petroleum products; (2) Buffer fund, which can be financed through the operations of the centralized procurement to cushion the impacts of sudden surges in global prices; (3) Transparent determination of pump prices, including through full public disclosure of pricing scheme and inventory of the oil firms; (4) Democratic public consultations or hearings to justify oil price adjustments; and (5) State participation in refining and distribution of petroleum products.

Seldom discussed is that the issue of high oil prices and allegations of price manipulation is just a consequence of the fundamental problem of the Philippine oil industry, which is foreign monopoly control through their direct investments and strategic partnerships with the local compradors. The country must seriously pursue a long-term nationalization program that would end the domination of transnational companies and their local agents. The initial reforms cited earlier to regulate the downstream activities of the oil companies are a positive step towards nationalization. 

Nationalization requires the reorientation and restructuring of the oil industry to uphold the people’s welfare and advance the national interest. For example, with a nationalized oil industry, the people and economy would genuinely benefit from undertakings like the Malampaya instead of foreign capital and local cronies and oligarchs exploiting such projects for their narrow private interests.It is hard to nationalize the oil industry if the government would not shift from its current neoliberal development paradigm, which permits the unbridled operation of so-called market forces and relies too much on imported commodities and foreign capital. The nationalization of the oil industry can only be successful within a national industrialization program where internal sources of growth are promoted and protected. ###

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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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Consumer issues, Oil deregulation

Amid Saudi attacks, no need for oil price hikes

Amid a looming oil crisis precipitated by the attacks on Saudi Arabian plants that effectively shut down 6% of global oil supply, oil companies in the Philippines can still afford not to raise prices. This is because they have overpriced domestic petroleum products to the tune of Php4.38 per liter for gasoline and Php1.80 for diesel from January 2018 up to the first week of September 2019.

This “overpricing” is the result of the oil firms implementing price adjustments that do not properly reflect movements in global price benchmarks, in particular the Mean of Platts Singapore (MOPS) for diesel and gasoline, as well as fluctuations in the US and peso foreign exchange (forex) rates. To illustrate, the net price adjustment for diesel in 2018 based on MOPS and forex was a rollback of Php2.08 per liter. But the actual price adjustment was a rollback of only Php0.60, or a difference (overpricing) of Php1.48 per liter. For 2019, up to the first week of September, the actual price hike for diesel was Php3.15 per liter when the adjustments should have only been Php2.83, or a difference of Php0.32 per liter.

Similarly, there should have been a net rollback of Php5.83 per liter for gasoline in 2018, but the actual reduction was only Php2.35 or a difference of Php3.48 per liter. For 2019, as of the first week of September, the total adjustment in gasoline prices should have only been Php3.25 per liter, but actual price hikes have reached Php4.15 per liter at that point, or a difference of Php0.90 per liter.

So-called global price benchmarks like MOPS, of course, do not show the actual price of oil, which tends to be artificially high because of global oil monopolies that dictate supply and prices. With or without an oil price hike, prices are bloated because of global monopoly control by the oil giants like Shell and Chevron. But on top of this monopoly price, oil firms even profit more by taking advantage of lack of government control on domestic prices and supply. Under oil deregulation, oil firms hike or roll back local pump prices by much higher (in case of price hikes) or lower (in case of rollbacks) than the movements in global benchmark prices and forex.

Can Duterte curb this abusive practice of the oil companies? Not under Oil Deregulation Law, which took away government’s capacity to regulate and ensure fair domestic prices and price adjustments. Will Duterte stop local oil overpricing? Not if his government is raking in about Php7.72 million every day in additional VAT (value added tax) revenues on overpriced diesel and gasoline.

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Consumer issues, Oil deregulation

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

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(Photo: 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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Economy, Fiscal issues, Oil deregulation

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

20180521-oil-price-hike-protest-jc
(Photo: 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. ###

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Economy, Oil deregulation

Another “record” for Duterte: Oil prices highest in 10 years

Today’s oil price hikes (OPH) bring the nominal prices of diesel and gasoline to their highest levels in a decade. Oil firms announced that they will increase the price of diesel by Php1.35 per liter today and gasoline by Php1.00.

With these upward adjustments, the common price of diesel in Metro Manila is now pegged at Php48.30 per liter. The last time the prevailing pump price of diesel was higher was on Oct 1, 2008 when diesel in Metro Manila was retailing at a range of Php46.95 to Php49.09 per liter.

On the other hand, the common price of gasoline (RON 95) in Metro Manila is now at Php60.50 per liter. The last time that the prevailing pump price of gasoline in the capital region breached the Php60-mark was on Jul 21, 2008 when unleaded gasoline was retailing at a range of Php59.20 to Php61.07 per liter.

The announced OPH today is the eighth straight in as many weeks and the 28th overall. Total price increases for the year is Php13.50 per liter for diesel and Php13.37 for gasoline. The increases include the impact of Pres. Duterte’s TRAIN (Tax Reform for Acceleration and Inclusion) Law that added Php2.80 per liter in the pump price of diesel and Php2.97 for gasoline.

Overall, since Pres. Duterte took over, the common price of diesel in Metro Manila has already ballooned by Php20.35 per liter and gasoline by Php19.35.

Taking advantage of automatic weekly price adjustments under the Oil Deregulation Law, oil firms also appear to be implementing much higher price changes than what global price movement and forex fluctuations supposedly warrant. This simple profiteering has allowed oil firms to pocket about Php1.41 per liter in additional profits from diesel, and around Php2.53 per liter from gasoline.

Meanwhile, liquefied petroleum gas (LPG), according to the Energy department, is also now retailing in Metro Manila at Php705 to Php866 per 11-kilogram (kg) cylinder tank after oil firms increased LPG prices again yesterday (the eighth time this year). Before Pres. Duterte took over, the price range was only Php400 to Php650. Put another way, the most expensive LPG before Duterte became President in 2016 is still much cheaper than the “cheapest” LPG under him today. ###

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Economy, Oil deregulation, Privatization

“Red October” Day 1: What’s destabilizing the Duterte regime?

(Photo from AP/Bullit Marquez/The Philippine Star)

It’s “Red October” Day 1. Who or what is destabilizing the Duterte government today?

The oil companies. Oil firms announced that they will be implementing another round of oil price hikes starting Oct 1. Pilipinas Shell is hiking its LPG (liquefied petroleum gas) price by about Php2.36 per kilogram (kg) while Petron Corp. will also increase by Php2.35. These translate to an increase of almost Php26 for an 11-kg cylinder tank usually used by households. Including the previous increases since Pres. Duterte took over, LPG prices have already ballooned by an estimated Php216 to Php246. Further, starting Oct 2, oil firms will also implement a big-time price hike for diesel, gasoline and kerosene. Oil companies already announced that they will hike the price of diesel by Php1.35 per liter; gasoline, Php1.00; and kerosene, Php1.10. This will be the eighth straight week of unabated oil price hikes and would be the 28th overall for the year. Since Duterte became President, the price of diesel has already soared by more than Php20 per liter (Php13.50 this year alone) and gasoline by more than Php19 per liter (Php13.37 this year). (Read more on the latest oil price hikes here.)

The private water concessionaires of the MWSS (Metropolitan Waterworks and Sewerage System). Starting Oct 1, Maynilad Water Services Inc. will be billing its customers an additional Php0.90 per cubic meter for its basic charge under its rebased rates approved by the MWSS-Regulatory Office. This is on top of the Php0.11 per cubic meter increase due to the quarterly foreign currency differential adjustment (FCDA). Manila Water Corp.’s basic rates will likewise increase by Php1.46 per cubic meter due to rate rebasing while it will charge an extra Php0.02 per cubic meter due to the FCDA. Both rate rebasing and FCDA are mechanisms created under the privatization of MWSS that allow the private water concessionaires to adjust rates in order to pass on to the consumers all the costs of running the water services system and at the same time guarantee their profits. The rate hikes this “Red October” under the rate rebasing are just the first in four installments of increases with the three others to be implemented in Jan 2020, Jan 2021 and Jan 2022 – the second half of the Duterte presidency (that is if he is still in power).

Earlier, the Department of Economic Research of the Bangko Sentral ng Pilipinas (BSP) has estimated that inflation for September could reach 6.8%, with a range of 6.3% and as high as 7.1 percent. If the central bank’s forecast happens, this would be the ninth straight month of accelerated inflation and will be the highest in nine years. Pres. Duterte’s economic managers have repeatedly assured the public that inflation will ease in the latter part of 2018. But with the continued climb in oil prices, water rates, food prices (made worse by the impact of typhoon Ompong that destroyed almost Php27 billion worth of crops) and other basic goods and services, this appears to be a very optimistic forecast.

Rising prices and the inability or outright refusal of the Duterte administration to reverse current policies that allow unabated price hikes such as oil deregulation and water privatization, as well as its continued insistence on additional taxes under the TRAIN (Tax Reform for Acceleration and Inclusion) that further bloat prices are fueling social unrest and instability. The latest Pulse Asia survey showed that rising prices are the most urgent concern of Filipinos along with other economic concerns such as increasing workers’ pay, reducing poverty and creating more jobs.

As it hunts for “Red October”, the Duterte administration should look at itself instead, and not at the communists and their supposed co-plotters. Apparently, its own economic policies – together with its repressive schemes – are the ones destabilizing and isolating the regime. ###

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