“We ought to regard the movement of pump prices the way we look at the weather – as something that we cannot control.”
by Ducky Paredes
Our real problem with pump prices of oil products is not that the oil companies are raking it in while all of us suffer. That is simply not true.
Our real problem with oil is that the Philippine dependence on imported oil as a percentage of our GDP is at 22.0% in 2004. This was only 7.7% in 1995.) Compare this to China’s 2.2% and the US total energy imports/GDP at 6.0% .
Because we import practically all our requirements and our total production of oil is a fraction of what we consume, any spike in the world market price of immediately translates to higher pump prices.
While the oil companies are making lots of money, what they make is below what they are allowed (8% Return on Rate Base– RORB). Shell made just three percent RORB, 1998-2004; Petron was even lower; Total lost $2 billion while Thai firm PTT lost $5 billion.
The problem is not with the players but with our politicians.
Yet, they were the ones that killed the golden goose which was a perfectly working Oil Price Stabilization Fund (OPSF). This was a mechanism set up by President Ferdinand Marcos to impact on the movement of oil prices at the pump. As stated in Presidential Decree 1956, the OPSF was set up for the purpose “of minimizing frequent price changes brought about by exchange rate adjustments and/or changes in the world market prices of crude oil and imported petroleum products.”
This worked. Slight changes in the world price of oil or the exchange rate did not affect pump prices. This made it easier for everyone to budget their fuel expenses. When prices should have gone higher, the OPSF paid the oil companies; when prices should have gone down, the pump price remained the same but the oil companies paid the OPSF the difference. With Marcos gone, the OPSF was then used for other purposes – such as relief work after Mr. Pinatubo erupted and increasing the capital base of the National Power Corporation – to the point where the OPSF was on the road to becoming bankrupt. The government, then, in its wisdom, passed the Downstream Oil Industry Deregulation Act of 1998.
Now, the pump price follows every little movement of both the world market price of oil and the exchange rate. This cannot be helped. We ought to regard the movement of pump prices the way we look at the weather – as something that we cannot control.
(Thailand copied our OPSF and continues to use it. China is thinking about putting in their own; so is Venezuela and a lot of other countries. In our case, going back to an OPSF may not be too acceptable.
The OPSF was officially wiped out in 1990 due to large jumps in crude costs during the Kuwait invasion by Iraq. The government subsidy amounted to P15 billion at that time. Restoring OPSF today would cost close to P18 billion if diesel were pegged at current LTFRB fares.
Cartels do not exist in the domestic market; price movements follow market forces. Market share goals dominate the thinking or oil firms, rather than profits.
AIM President Roberto F. de Ocampo says that reviving the Oil Price Stabilization Fund is the wrong solution for many reasons: the amount of subsidy needed to answer the pubic needs and the wrong notion that the poor will not eventually pay for this – since taxes that maybe raised for the subsidies are eventually passed on to consumers of taxed goods.
He stressed that the Clean Air Act imposed standards more stringent than those of developed countries (effectively banning incineration for energy co-generation). De Ocampo also lamented the Supreme Court decision against the tariff differential for energy firms on finished products (refined) versus crude. This SC decision effectively prevents the setting up of more refineries in the Philippines since it is cheaper to bring in refined products.
Thus, the flak being directed at the Department of Energy led by Secretary Angelo T. Reyes are hitting the wrong target. If oil prices are presently unregulated, blame the Oil Deregulation Law and the lawmakers who passed it.
Is the solution the repeal of the Downstream Oil Industry Deregulation Act of 1998? Not if one has not better ideas on how to control oil prices. The noise made by Senators and frustrated Senator Ralph Recto, who now heads the National Economic Development Authority (NEDA) that oil products are overpriced is only political noise.
Even deregulated, the oil companies, as utilities, have to live within what they are allowed – not to exceed 8% RORB. There are limit to hw much these companies can make.
The Department of Energy (DOE) is also powerless. It cannot influence pump prices. The DOE has no say at all on the pricing of oil products in the local market.
Angelo Reyes in reaction to the NEDA Chief’s statement on the overpricing of oil products invited Recto to a conference with the oil players so he can present his calculations. Recto has not yet accepted the invitation.
But, Recto is clearly only politicking. The University of Asia and the Pacific, in coordination with SGV, did a study on whether the local prices of oil products are reasonable. Culling price data from January 2005 to January 2008, UA&P-SGV discovered that local pump prices have not gone up as fast as the price of crude abroad.
Pump prices increase because of two factors – the exchange rate and the price of oil in the world market. Any increase in the price of crude abroad results to increases in the local prices of gasoline, diesel, aviation fuel and liquefied petroleum gas, crude being the raw material for the so-mentioned refined products.
In fact, according to this study, the share of local players in the pump price may even be shrinking because the bulk of the increase at the pump goes to the international supplier of crude oil and foreign suppliers of refined oil products shipped to the Philippines and distributed by local oil players.
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hvp 04.26.09)
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