THE CASE AGAINST OIL DEREGULATION – Mar Tecson’s Comment #3
THE CASE AGAINST OIL DEREGULATION – Mar Tecson’s Comment #3
[This is Mar Tecson's comment to Marcial Ocampo's response / comment #3 also. Please add your own comments and suggestions to our ideas. Cheers. Marcial]
Marcial Ocampo’s response may be found in these links:
From: Marcelo Tecson <martecson@yahoo.com>
Subject: PER LITER MARGIN is Gateway to PERCENT RETURN on CAPITAL… Re: DEREGULATION AFFECTS MARGIN ONLY… Re: THE TEST OF DEREGULATION IS ON PER LITER MARGIN… Fw: Re: For CEBU C… THE CASE AGAINST OIL
Hi Marcial,
We use the peso margin per liter as an easy way of projecting the annual net income of oil companies. If we know their margin per liter, their market shares and sales volumes, then we can already calculate in rough approximation their ANNUAL NET INCOME.
This method is quite applicable and possible in the oil industry because, as I pointed out in an earlier email, three cost accounts alone that are readily determinable accurately–cost of imported oil, direct labor, and taxes--already constitute roughly 90 percent of total cost, so if we estimate the remaining 10 percent on a very conservative or high basis, our calculations would be substantially correct.
Thereafter, we will relate their annual net income to their capital or stockholders’ equity and determine their PERCENT RETURN ON CAPITAL, which is the true and ultimate TEST in determining any overpricing or profiteering by oil companies.
Under the foregoing procedure, provided updated information and statistics are available in the data base, within ONE HOUR, even on a manual basis, we can calculate and determine whether oil companies are taking advantage of their customers or not–and WE DO NOT NEED COA AUDIT of oil company books to be able to do so.
What I am telling you know was what we have been actually doing in the past when I headed the budget and planning group of a multinational oil company subsidiary.
Please note that the use of PERCENT RETURN on CAPITAL as measure of profitability of companies is a well settled issue. Under the law, public service monopolies are allowed a specified PERCENT RETURN ON ASSETS EMPLOYED–meaning, percent return on ASSETS or money invested (Balance Sheet item), not percent return on DPLC or sales (Income Statement item). This is just a slight variation or evolution of PERCENT RETURN ON CAPITAL, which has to be done because monopolies usually have a large part of their assets sourced from borrowing, so the percent return is based on assets acquired through the use of funds or capital invested by both stockholders and creditors.
The most basic measure, though, is percent return on capital, which is the one most applicable to oil companies. Your measure of percent return on DPLC (duty paid landed cost) is just an intermediate or transition measurement prior to the final determination of return on capital. You still have to ultimately measure the oil companies’ earnings in terms of PERCENT RETURN ON CAPITAL, and using the peso per liter margin is the shortcut and fastest way of doing it on a reasonably accurate basis.
In your example of lending investor company, please note that your percent margin on receivables is practically your measure of percent return on capital, because your receivable normally came purely from your capital.
The same is not the case for DPLC of imported oil. It is not the measure of CAPITAL in the oil industry, especially in the case of oil companies with capital intensive oil refinery and elaborate distribution and marketing facilities.
Mar
Leave a Reply
