Oil deregulation

No hope for fair prices under oil deregulation

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

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

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

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

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

Puzzled

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

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

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

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

Reviewing RA 8479

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

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

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

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

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

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

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

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

Pro-cartel, by design

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

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

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

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

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

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

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

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

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Oil deregulation

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

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

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

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

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

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

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

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Oil deregulation

LPG issues

(Photo from AFP)

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

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

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

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

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

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

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

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

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Oil deregulation

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sources

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