Revisiting the Oil Deregulation Law: Baguio fuel prices in focus

By SHERWIN DE VERA
www.nordis.net

SECOND OF THREE PARTS

Championing the need for a globalized economy, the Ramos administration paved way for the full deregulation of the oil industry. Like other policy undertaken towards liberation, the influence exerted by the International Monetary Fund was undeniable in the enactment of the law. Department Circular No. 98-03-004, the implementing rules and regulation of the RA 8479, was signed on March 11, 1998, the same day the government made the Memorandum of Economic and Financial Policies for the funding institution.

Besides attracting foreign and local businessmen to invest in the oil trade, the passage of the law also secured financial assistance from the IMF. The memorandum outlining key economic policy undertakings submitted to the IMF is connected with the funding request of the Ramos administration.

The government hype on consumers’ benefits from the deregulated industry. Statements from agencies like the National Economic Development Authority and Department of Finance told the public that with the opening of the fuel market to new players, fuel prices will be stable and reasonable.

Incidental result

However, deep scrutiny of the law reveals the government never took into consideration public interest. Section 2 of RA 8479 sums up its intention — “ensure a truly competitive market under a regime of fair price” and “promote and encourage the entry of new participants.”

No less than the Department of Energy (DoE), one of the offices that pushed for the accelerated deregulation of the industry, admitted that fuel price reduction is not the purpose of the law, whilst indirectly, with the explanation on the pricing formula posted in the agency’s website.

“Consistent with the regime of deregulation, the Oil Deregulation Law did not prescribe a specific formula. The market is expected to set the prices (emphasis supplied).”

Atty. Rino Abad, director of the Oil Industry Management Bureau (OIMB) under DoE also laid it clearly, “the problem with deregulated oil industry is it is hard to define the reasonable price. Wala sa batas yan and there is no agency tasked to set that.”

Thus, more than the consumers’ interest, the intention of the law was to attract more investment in the industry and let key players in the market set the price for the paying public to ensure their profits.

Wrong assumption

Besides taking the public interest for granted, the government’s framework of depending on market forces and competition is flawed. The industry is not dependent on the traditional notion of supply and demand.

A work by William Engdahl, a world-renown economic researcher and journalist, published by the Centre for Research on Globalization explained that “about 60% of today’s crude oil price is pure speculation driven by large trader banks and hedge funds.”

Engdahl also cited in his article a US Senate Permanent Subcommittee on Investigations report in June 2006 on “The Role of Market Speculation in rising oil and gas prices,” that says, “…there is substantial evidence supporting the conclusion that the large amount of speculation in the current market has significantly increased prices.”

The Executive Intelligence Review in 2004 in article noted that the amount of oil produced has no connection with the pricing. Trading institutions, International Petroleum Exchange and the New York Mercantile Exchange set oil prices said the article.

Besides these factors, “free and fair” competition is a mere slogan both in the domestic and international oil market. A virtual cartel exists among banks and stock traders, and oil companies. The world’s oil supply is controlled by three blocs — the Organization of Petroleum Exporting Countries, US-based oil companies and state-owned oil corporation in Russia.

In the Philippines, the Big Three (Chevron-Caltex, Pilipinas Shell and Petron Corp.) control 55% of petroleum products based on the 2017 DoE records. Two of them, Shell and Petron own and operates the only local refinery, also cornered 47.6 percent of the total market demand. These companies, while having higher pump prices than local independent players, continue to dictate and dominate the domestic oil industry.

Case in point

Baguio city topped other cities in Northern Luzon, even Metro Manila in terms of industry take. Figures from OIMB show retailers in the city add P8.00-P10.00 from the base cost of fuels. According to OIMB, Metro Manila prices are theoretically the “tamang presyo”.

Currently, industry take for gasoline accounts for 28% and 20% for diesel while the tax and tariff automatically imposed by the state covers 22% and 19% respectively in the country’s summer capital. While there is a 10% margin for gasoline and 9% for diesel between the pine city’s rate compared to the City of San Fernando and Metro Manila.

Applying the concept of supply and demand interplay, the difference between fuel prices in Baguio City and other provinces in Northern Luzon becomes more dubious. The whole Cordillera region accounts for only 1.9% of fuel demand. On the other hand, its proximity to La Union, Baguio is ensured of sufficient petroleum supply with an added transport cost of only P0.188/liter.

Average pump prices in San Fernando, La Union in May, where the petroleum depot is located, are P56.78 and P43.54 for gasoline and diesel respectively. In the same period, end users are paying P65.95 for gasoline and P49.70 for diesel in Baguio.

Even with the recent P2.00 and P5.00 roll back for diesel and gasoline respectively, that the local Shell retailers initiated last June 7, followed by Petron and Caltex the next day, prices are still P3.00-P5.00 higher in the city.

No accountability

According to the retailers in Baguio representing the Big Three, the suggested retail price (SRP) comes from the central office, but failed to explain the P8.00-P10.00 difference.

“We have contracts to follow, we cannot go beyond or under,” The representative of Caltex said during the June 14 dialogue.

However, Director Abad of OIMB said that during the Congressional inquiry, oil corporations explained that they provide the SRP from Bataan (refinery) to destination in Poro Point, San Fernando.

“By implication of the statement made by oil companies, it is the retailers in Baguio City that decides the price,” the OIMB head said.

Members of the city council who attended the talks tend to believe said implication. Councilor Benny Bomogao said that if prices are set by the central office, then retailers should have the same increase. The lawmaker sees the significant gap between retailers in nearby La Union as undeniable proof that certain group controls fuel prices in Baguio.

Asked if there is overpricing and the possibility to prosecute those who are accountable, Abad answered:

“Unfortunately, sa deregulated industry ay hindi klaro ang kaso ng profiteering. In the light of this scenario, mahirap na i-accuse ng profiteering ang oil players under the legal process that is why we are appealing to their moral obligations.” # nordis.net

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