Energy Technology Expert

THE CASE AGAINST OIL DEREGULATION:

IT PROVOKED HIGHER PRICES

[Editor's Note:  This is the first article on this series that is meant to elicit discussion among our readers on how best we could address the issue of oil pricing under a deregulated environment.  Are we better off today with a deregulated oil industry or should we revert back to a regulated oil industry?   Has deregulation brought the country benefits or allowed the oil companies to increase their prices beyond what is reasonable?  Please feel free to comment and share your views so we could draw up a consensus on a better approach to oil industry regulation.  Cheers.  Marcial]

From: Marcelo Tecson <martecson@yahoo.com>

Subject: THE CASE AGAINST OIL DEREGULATION:  IT PROVOKED HIGHER PRICES

For:  Concerned GOVERNMENT OFFICIALS and CITIZENS

Economic solutions should be condition-oriented, meaning, principles of economics learned from the academe cannot be applied uniformly and consistently to contrasting economic situations that developed over time. The solutions must adapt to the prevailing specific economic conditions. Let me say then that my herein comments and conclusions are based on peculiar oil-industry conditions that rendered oil deregulation unsuitable in the economy. Economists and other experts concerned might have overlooked these conditions when they steadfastly advocated and affirmed oil deregulation in the past.

Regulation of business maybe bad, but lack of regulation can be worse because if unbridled, free market operates much like the law of the jungle, where the strongest and most ferocious lion reigns supreme over weak and defenseless animals. In the same fashion, under untrammeled free market, powerful and oligopolistic companies acting in concert–or in cartel under the direction and guidance of their industry associations–may hold captive customers in the palms of their hands.

Free market satisfactorily works in numerous relatively low-capital small and medium enterprises, where collusion is impractical and anybody with some means can join the competition once high selling prices make the business too profitable, so that an automatic  price-control mechanism operates, as in the case of hardware stores which we see everywhere, or in mineral-water supply where growing competition has brought prices significantly down. This is not necessarily true, however, in capital-intensive oligopolistic industries controlled by just a few sellers, like the oil industry where not just anybody can put up an oil company even if business is made too good by high prices–therefore there is no automatic price-control system under which new competition from the ranks of onlookers (lured by potential high profits from high prices) will emerge to unwittingly dampen profiteering prices. This condition, plus some  peculiarities or unique characteristics of the local oil industry, rendered deregulation incapable of producing the desired result—lower petroleum product prices.

On the contrary, oil-industry deregulation spawned higher prices, as explained in the herein position paper, presented for the information and consideration of concerned government officials and citizens.  

MARCELO  L. TECSON

A Concerned Citizen,

martecson@yahoo.com,

martecson@gmail.com,

San Miguel, Bulacan

9-30-09, 10-13-09

POSITION PAPER: by Mar Tecson

THE CASE AGAINST OIL DEREGULATION:

IT PROVOKED HIGHER—NOT LOWER—PRICES

BECAUSE OF PECULIARITIES IN THE OIL INDUSTRY

With the Department of Energy (DOE) unable to erase the doubts of the public on suspected oil-industry overpricing, the issue of oil regulation vs. deregulation has cropped up. Objections to re-regulation has centered on the aversion to the revival of its implementation tool—the perceived subsidy-scheme Oil Price Stabilization Fund (OPSF).

I.  TO BE TRULY PRO FREE MARKET

MEANS INTERVENING IN THE MARKET

WHENEVER THERE ARE MANIPULATIONS

AND EXCESSES BY MISBEHAVING

ECONOMIC PLAYERS

Under government regulation, price control may render unprofitable the production and marketing of goods, thereby discouraging production and causing short supply in the market, to the detriment of the buying public. Therefore, free-market adherents, including non-performing economic managers afraid to disturb the market lest they be blamed for any disastrous results, want to let market forces—or sellers and buyers by themselves—come up with the right prices enough to maintain supply and demand for products.

However, if regulation of business is bad, lack of regulation is not necessarily good either. Economic players—sellers and buyers, creditor-banks and entrepreneur-borrowers, employers and workers, etc.—have conflicting interests, hence the government cannot abdicate its powers, do nothing, and simply “delegate” to one party like sellers the protection of the other party. Usually united, powerful, oligopolistic, or cartelized sellers may take advantage of weak and unorganized buyers–through overpricing and profiteering.

Therefore, to be truly pro free market does not always mean doing nothing and letting the price seek its own level, that happens only in textbooks–it cannot happen in a captive or cartelized market. In the real world, there can be price manipulation, cartel, hoarding, intentional cutback in production, and other unfair practices that vitiate free market. Under any of these economic-sabotage conditions that hamper the free operation of the economic law of supply and demand, the government has to intervene to preserve, not destroy, free market. [Marcelo L. Tecson, Sr., Puzzlers: Economic Sting, ( Makati City : Raiders of the Lost Gold Publication, 2005), pp.12-13, 141, 227]

To begin with, what kind of market do we want? The choice between deregulation and re-regulation should depend on the kind of oil market we need and want. In this case, I suppose we need a market that provides reliable or stable supply of quality petroleum products at the cheapest or most advantageous prices to the buying public.

II.   OIL DEREGULATION VS. REGULATION—

WHICH OPTION PRODUCES THE

DESIRED MARKET?

1. On the Provision of Stable Supply

It is assumed under the dominant–though under criticism because of the present global economic meltdown–free market economic ideology that lack of price regulation, or deregulation, is conducive to the provision of stable oil supply. The question then is whether the alternative option, regulation, can provide the same stability in supply. Stated differently, will price regulation discourage continuing oil supply in the market?

In the more than two decades I worked in the energy sector, the most part of which was spent in the oil industry, except for one instance provoked by prolonged delay in approval of oil industry price-increase petition before martial law, I am not aware of any threat of supply cut-off that was provoked by price regulation. The oil companies had accepted for years the then scheme of having them earn a specified peso margin per liter of product under government-approved selling prices. Thereafter, to take care of subsequent crude oil price increases, the selling prices were adjusted upwards on a purely cost-recovery basis. That way, the prevailing margin per liter of product is indefinitely maintained.

How did the unwritten fixed-margin arrangement become acceptable to the oil industry?

The oil companies did not complain for as long as they could raise prices even on  cost-recovery basis only. This situation stemmed from the need by multinational oil companies with integrated global operations to maintain regular crude oil sales outlets worldwide—rather than rely on selling to the erratic spot market—so that even if they made just marginal profits out of their Philippine refining and marketing operations, it was still economical for them. Moreover, with limited number of competitors in the local market, they compensated through HIGH sales volume their LOW incremental margin.

2.  On Affording the Public the Cheapest or Most Advantageous Prices

a.    Since years ago, deregulation has promoted practically doubled margin per liter in the oil industry

Paradoxically, deregulation, instituted in 1998, instead of promoting reduced profit margin in the oil industry as a result of competition from new and independent players, practically doubled the regulated margin by 2005 or perhaps even earlier. Worse, by 2009, it seems the Department of Energy (DOE) cannot even say how much the existing peso per liter margin is.

In the case of gasoline, as reported in front-page news story by the Philippine Daily Inquirer on August 22, 2005, the P2.67 per liter margin (out of P11.62 per liter pump price) under the past regulated regime rose to P5.00 per liter (out of P31.18 per liter pump price) under deregulation, or a whopping increase of P2.33 per liter.

Please note that way back in the 1970′s when annual national oil consumption was smaller, ONE CENTAVO average industry price increase per liter meant ONE HUNDRED MILLION PESOS (P100 million) annual increase in sales to the oil industry. As updated, based on our present national fuel consumption of 12 BILLION liters per year (Conrado R. Banal III, “Keep off the gas,” Philippine Daily Inquirer, September 17, 2009, page B6), the ONE CENTAVO per liter average price increase would rise to ONE HUNDRED TWENTY MILLION PESOS (P120 million) annual sales increment to oil companies.

If ONE CENTAVO price increase per liter is substantial in terms of absolute amount, how much more if it is in PESOS, as in the case of the P5.00 per liter margin in gasoline sales way back 2005 or earlier. It goes without saying that the people have to know this very crucial information.

So, how much is the average per liter margin today? Will DOE officials please ascertain this critical information–which may make or break regulation–and tell the people through media?

The newspaper also reported that “Oil firms earn billions of pesos amid crisis.” (Philippine Daily Inquirer, August 30, 2005). This suggests that what the old oil companies lost to the new market players in terms of market share or sales volume, they recovered from the public through increase in selling prices in excess of actual cost increases—which price increases are similarly enjoyed by the new players—an everybody-happy solution for all of them.

b.    Past regulation afforded the public much lower oil-company margin per liter

Under the past regulated regime, the big three oil companies had the entire market for themselves. This explains why they could afford to accept relatively low margin per liter of product. What they lacked through LOW MARGIN, they made up for through HIGH SALES VOLUME.

Consequently, small independent players could not compete with them at the time as the small players, given their low sales volume, could not live with low margin

3. Regulation Has Built-in Disincentive to Oil Smuggling, Thereby Avoiding Smuggling and its Concomitant Problems of Reduced Tax Collection and Ballooning Budget Deficit Under Deregulation

Rampant oil smuggling, to become feasible, has to hurdle two obstacles: first, market for the smuggled oil, and, second, evasion of apprehension by the AFP (navy, coast guard) and PNP.

Under the past oil regulation, the oil market was controlled by the big three oil companies, which could live with LOW MARGIN owing to their HIGH SALES VOLUME. With their prospective LOW SALES VOLUME, independent players could not enter the oil market because they could not survive under the then prevailing LOW MARGIN for the industry. With the market in the firm hands of the three oil majors, it was, therefore, difficult to find regular market for significant volumes of smuggled oil. Smugglers could not regularly sell in noticeable volumes to service station dealers because it would be in violation of dealership contracts with the big three to buy from other sources. Smugglers could not also sell regularly to major direct consumers because the latter have standing purchase contracts with the big three. Any disruption in purchase pattern can be readily noticed, with smuggling as cause easily discovered and reported to authorities. Consequently, with the first hurdle alone difficult to overcome, the system had built-in DISINCENTIVE to OIL SMUGGLING and the smugglers themselves would not attempt to do it.

Under oil deregulation, it is easy to hide smuggled oil because there are many independent players. The authorities could wittingly or unwittingly fail to pin down actual cases of smuggling because there are many legitimate oil importations by the independents, and smuggled oil can be injected and assimilated into the system.  Therefore, the SMUGGLERS could pass the first hurdle–market. They have to contend only with the second HURDLE, the military and the police. As can be observed, they have not been effective in curbing smuggling.

4.  Under Deregulation, Whenever there is Oil Cost Increase, Prices are Raised Even Before Exhaustion of Low-Cost Inventory;  However, Whenever there is Oil Cost Decrease, Prices are Reduced After Exhaustion of High-Cost Inventory—a Practice Suggestive of Cartel, not Free Market Competition

Under deregulation, to recover cost increase in oil importations, the oil industry raises oil prices even before its low-cost inventory is exhausted. In the process, it overcharges its customers on low-cost inventory sold at higher prices intended for subsequent high-cost oil purchases.

In a reverse situation, whenever there is drop in purchase costs of imported oil, the oil industry exhausts first its high-cost inventory before implementing price reduction. Thus, the oil industry has something to gain and nothing to lose—at the expense of the people.

In comparison, under regulation, the government allows price increase after the estimated exhaustion of low-cost inventory. Usually, the combined inventory of crude oil and petroleum products was equivalent then to about 45-day sales volume. This meant that unlike the present prompt raising of deregulated prices whenever there is price increase in oil imports, under the past oil regulation, price increase would be allowed only after 45 days when the low-cost inventory is deemed exhausted.

5.  In Competent Hands,  the Implementation Tool of Oil Regulation–Oil Price Stabilization Fund (OPSF)–Will Not Entail Subsidy, as was Already Done for Years Before EDSA I

a. The rationale for OPSF

Oil companies do not start to suffer cost increases at the same exact time. For example, one oil company’s first shipment of imported oil at newly increased purchase price has already arrived while those for other oil companies will arrive some weeks later. In this case, the particular oil company will need to raise its prices ahead of the other companies, but it cannot do so because its products will not sell if the other companies have not yet raised their prices. It cannot stop selling its oil products either while waiting for industry-wide price increase, because it will disrupt its regular oil supply to its traditional customers, with dire consequences.

On the other hand, as their high-priced importations arrived later and are not yet in the market, the other oil companies could not yet raise their prices without being accused of overpricing and profiteering. Under the circumstances, to do justice to the particular oil company without being unfair to the buying public through premature industry-wide price increase, the OPSF can be used to reimburse the particular company for its cost increase already incurred—a case of addressing phased or uneven but material industry cost increases in needed precision and tailor-made fashion.

To generate cash balance for OPSF, a separate oil-company price increase earmarked for this purpose is authorized by the Energy Regulatory Commission. Whenever the motoring and consuming public buy oil products, their purchase prices include the OPSF levy. Oil companies receive the OPSF impost as part of their daily sales collection from customers. On a monthly basis, they remit the collected OPSF impost to the Land Bank trust account designated by the Department of Finance. As can be seen, part of the public which does not buy oil products does not contribute to the OPSF, therefore it will not entail subsidy from the non-buying public provided the OPSF is properly managed and does not develop any deficit.

Proper OPSF management includes the government’s prompt authorization of industry-wide price increase once all the oil companies have received oil imports at newly increased costs, then started selling the same in the market–which will result in oil companies getting their cost recovery from the newly increased selling prices, no longer from the OPSF, thereby stopping avoidable further claims from the OPSF. However, the OPSF impost on oil product sales will continue even if claims from it will temporarily stop, resulting in continuing build-up of the fund until it is used again in the next round of oil import cost increases.

The problem of one oil company receiving and selling high-priced oil imports ahead of other oil companies will be encountered alternately by all of them, hence it is a potential common problem to them. We can assume that oil-industry members have tackled this problem in their industry meetings under the auspices of the Petroleum Institute of Philippines (PIP), or whatever its new name maybe. In most probability, their agreed upon solution is premature industry-wide price increase. This maybe discerned from their sometimes weekly price adjustments, as well as their waiting for further price developments abroad, which suggests that any price increase abroad is followed by corresponding prompt price increase in the Philippines, something needed by purely marketing oil companies with minimal product inventory and without any crude oil inventory, because they do not have oil refining facilities in the Philippines.

b. As was done for years in the past before the OPSF became discredited in the hands of new government officials–who unwittingly converted the Fund into a subsidy scheme for populist reasons–the OPSF can be successfully operated without entailing subsidy from the general public

The usual OBJECTION to oil-industry REGULATION is that it will entail SUBSIDY from the general public through its implementation tool, the OPSF. The subsidy will arise if owing to delay in price increase, oil-industry cost recovery will continue to be sourced from the OPSF, which will then suffer a DEFICIT, with the deficit being satisfied through replenishment from TAXES paid for by taxpayers, many of whom do not buy oil products. The net result—the non-buying public (like the super-poor without cars), which pays value added tax through its purchases of non-oil products but do not buy gasoline, will subsidize the buying public (like the super-rich with Mercedes Benzes and BMW’s).  Economists and other experts who look at things this way will certainly object to OPSF, and because OPSF is part of oil regulation, they will likewise object to regulation.

The objection is unwarranted, for it is premised on the automatic assumption that the government will mismanage once again the OPSF as was the case some years after EDSA I. The mismanagement was in the form of prolonged delay in oil price increases due to populist reasons. The delay caused MULTI-BILLION-PESO OPSF deficit. This monumental error need not be repeated in re-regulation. All that has to be done is to institute prompt price increases as warranted. These prompt price increases will even be SLOWER than the present FAST price-increase initiative by the oil industry, which immediately raises product prices even if the existing low-cost inventory is not yet exhausted.

The OPSF scheme started in mid-1979. As of mid-1984, total fund utilization amounted to more than ELEVEN BILLION PESOS (P11 BILLION). By December 31, 1985, as shown in a printed report submitted to Malacanang, it had a cash balance of P1.4 BILLION, temporarily invested in Treasury bills while still unused. By December 1986, some P600 MILLION OPSF collection was invested likewise in Treasury bills. Thus, for seven and a half (7 ½) long years of operation as of end 1986, the OPSF generally functioned smoothly and did not entail any subsidy from the non-buying public.

Therefore, it is not right to say that the OPSF cannot be operated without accompanying subsidy from taxpayers. It was done for years in the past when then PNOC Senior Vice President Antonio V. del Rosario was Undersecretary of Energy, when Petron Corporation Vice President Orlando L. Galang was Director of the Bureau of Energy Utilization, and when I was in the Finance and Management Service of the now Department of Energy, where I had to oversee the processing (especially documentation and checking of calculations) of the cited more than ELEVEN-BILLION-PESO oil-company reimbursement claims from the OPSF.

6.  Under Regulation, Price Increases and OPSF Reimbursements Were Based on Cheapest International Prices at which the Imported Crude Oil Could be Purchased

In the regulated set up, the oil companies could not invoke price increases based on their documented purchase prices of imported crude oil. Even if their actual purchase costs were higher, the government-authorized price increases and OPSF reimbursements were limited to the allowable ceiling or benchmark prices–the most advantageous posted prices for crude oil offered for sale in the international market. This safety net protected the buying public against any attempted upward manipulation in crude oil prices. It also constrained the oil companies to procure crude oil from the cheapest sources, or make their prices competitive with the cheapest prices.

7.  There is Nothing Wrong in Government Intervening in Monopolies, Oligopolies, and Strategic Industries Providing Public Services or Sensitive Products, like the Oil Industry Where any Significant Price Increase Triggers Inflation

Logically, for as long as a profit- and service-oriented government corporation is efficiently managed and profitable, it is better owned by 92 million benefiting Filipinos than by a few thousand benefiting  private stockholders—and I suppose the reason is obvious. However, some economists (as well as other experts for that matter) beholden to free market cannot see it that way. They make no distinction between profitable and losing government corporations. They could not see the crucial role of government corporations in public-service and sensitive industries, where the government should maintain presence as safety net in the protection of free market and public interests. Thus, Petron Corporation, as well as other government corporations, were privatized because it seemed some of our economists in public and private sectors hate to see the 92 million Filipinos–the true owners of government corporations–given preferential treatment (in the enjoyment of profits from these corporations) over a few thousand private stockholders, who could not care less about the public being overcharged for their products, for as long as the MARKET CAN BEAR their exorbitant selling prices.

Chinese government officials, the administrators of the world’s giant economy—reported to be with the biggest dollar reserves—see things differently and more logically. Instead of entrusting key industries totally in the hands of private stockholders, they have GOVERNMENT corporations HANDLING their growing EXPORTS. For instance, when PNOC imported Shengli crude oil from China years ago, it had to transact with a Chinese government corporation.

This is not to say that no government corporation should be privatized. What I am saying is that while the government has abandoned its presence in the oil industry through privatization of the government-owned Petron Corporation, the government should not totally abdicate the protection of the buying public through 100% deregulation of the oil industry. As it is a very complex and sensitive industry—price increases in its products provoke inflation—the government should at the very least ensure that oil products are priced fairly and equitably.

8.  Under Present Deregulation, Captive-Market Pricing can be Done even in an Urban Center,  which was Never Done in Past Regulated Regime

Under existing deregulation, supposed “market forces” have produced CAPTIVE-MARKET PRICING—not free-market pricing—of oil products in Cebu, the nation’s populous and vote-rich Queen City in the south, and not even its representatives in Congress could do something about it. Under regulation, there was no such exploitative captive-market pricing over NO-CHOICE customers, especially in Cebu which is not a far-flung area.  In the past, the local oil majors prepared WHOLESALE POSTED PRICES (WPP’s) for different locations nationwide, with price variations accounted for mainly by differences in transshipment cost.

The seeming captive-market pricing in Cebu is presented in an email I received. The selected quotes from the article of an apparently aggrieved Cebuano is shown below. For the puzzling overprice, the article exhausted all possible reasons, none of which sensibly justified the higher price of up to P8.00 per liter solely in Cebu. By process of elimination, arbitrary captive-market pricing remains as the possible culprit. If so, is this not a case of misbehaving economic players in a vitiated free market that calls for government intervention?

From: cepolitics <cepolitics@yahoo.com>
To: CePol@yahoogroups.com
Sent: Tuesday, September 29, 2009 10:57:07 AM
Subject: Don’t take Cebuanos for fools

AS IT APPEARS

By Lorenzo Paradiang Jr.

(The Freeman)

Updated September 29, 2009 12:00 AM

SELECTED QUOTES FROM THE ARTICLE:

“It’s a stinging pain of adding insult to injury, as in putting salt to the wound, that the “Big 3″ oil firms–Shell, Petron, and Caltex-Chevron–are recklessly taking Cebuanos for fools.

“Long have the Cebuano oil consumers been unreasonably slapped with a P5.00 to P8.00 per liter higher pump price compared to any other elsewhere nationwide…. The over-abused excuse is the recycled so-called “market forces”,  or a bigger term “economic fundamentals”,  or “things uncontrollable”,  or the “law of supply and demand” factor.

“Starting with alleged “competition” factor as causing the pump price discrepancy.… If there’s competition among the petroleum suppliers, then the end-result would have been similar low prices in Cebu as in Manila and elsewhere in the country. Given the oil suppliers nationwide are the same–even including small/medium stakeholders–does it mean that they have agreed to gang up on Cebu, while being competitive in other local markets? Or, if stiff competition dictates the Manila cheaper pump price, what about in Mindanao and elsewhere, except Cebu?

“Another weak excuse for the overprice in Cebu, is a vague hint of the peso-dollar exchange rate fluctuations. Again, how does such facet affect only the Cebu pump prices as much steeper than anywhere else? Whether the peso-dollar exchange fluctuation is exclusively applied at source of importation, or continues along in transit up to distribution, then the question again is: Why single out Cebu as lone victim to shoulder the much greater burden? Remember that the price difference is P5.00 to P8.00 per liter, not per barrel, or per ton.

“Then there’s the oft-cited “high cost of production” exponent which mainly goes, most likely, with the refining of crude oil, as well as its incremental overheads. Safely assuming that the refined products (were) shipped from the same refinery plants in the capital region in Luzon to the Visayas and Mindanao, why must Cebu stand out like a sore thumb to get slapped with the lion’s share of the high cost of production?

“The most plausible basis for the price discrepancy could be the cost of transshipment of refined oil from the common refinery to distribution points. But then, again, this factor is unavailing because how come that the oil retail cost in (farther) Mindanao is cheaper than that of (nearer) Cebu, given the comparative transshipment variance in distance from the same source or refinery?

“In recap, Rep. Raul del Mar’s suggestion is logical that the cost of oil per liter in Manila plus transshipment cost ought to be the pump price in Cebu, not more.

“Meantime, DOE Secretary Angelo Reyes appears still hedging on what steps to take… as if biding his time for the controversy to die down on its own….”

III.   CONCLUSION:   THE BEST THAT WE DO NOT

HAVE TODAY UNDER DEREGULATION, WE

HAD IN THE PAST UNDER REGULATION,

SO WHY NOT RE-REGULATE? IF THE

GOVERNMENT ACTUALLY IMPLEMENTED

REGULATION FOR YEARS BEFORE EDSA I

WITHOUT SUBSIDY IN OPSF, WHY CAN’T

IT DO THE SAME TODAY?

The best that Filipinos wish—but do not have–under the present regime of deregulation, they already had in the past under oil regulation. Under the old regulated regime, after allowing oil companies a much lower peso per liter margin, they were authorized to raise their selling prices on a cost recovery basis only. Moreover, they could charge the new rates from the date the industry low-cost inventory is deemed exhausted, not earlier. Equally important, there was no threat in the stability of supply that might be ascribed to price regulation.

In economics, deregulated or free market is the catalyst for sustained product supply at competitive prices. Incredibly, as stated, we already enjoyed this situation under the past oil-industry regulation before the OPSF was transformed into a subsidy scheme some years after EDSA I.

So, what more do we want? What deal or option can we find better than a doable and properly implemented oil regulation?

We already had the best in the past, yet our executive and legislative government officials (including those who fallaciously converted the OPSF into a subsidy scheme due to populist reasons) did not know it. They opted for deregulation on the expectation that new market players would bring about lower prices. Indeed, we initially enjoyed lower prices from the new players, but after gaining their share of the market, they raised their prices to the same levels as those of the old oil companies. This is not surprising because in the oil industry, three non-controllable costs alone—cost of imported oil, direct labor, and taxes—constitute roughly 90 percent of total cost even before crude oil prices  soared last year to unprecedented heights, in the process giving new and smaller players very little elbow room for sustaining greatly reduced prices and margins.

The reason is that unlike in other industries where economic players compete in both the PRODUCTION and MARKETING of goods at the cheapest cost and prices—in the local oil industry, the economic players compete in the MARKETING phase only. They do not compete in the production or extraction from the ground of the oil products that they obtain through purchase from exporters abroad, so they procure their traded products at essentially uniform costs without much room for competition in the procurement process. Add Philippine taxes to cost of imported oil and the resulting total amount comprises at least 85% of total cost of goods sold, as we computed way back in the 1970’s when crude oil price was at way less than $30 per barrel.

The foregoing peculiarities in the local oil industry—which free-market apostles and pro-deregulation economists may have overlooked all this time–means that competition under deregulation instituted in 1998 cannot actually promote significant lowering of oil prices because, first, there was NO prior HIGH MARGIN under deregulation from which the price reduction could be sourced, and, second, the arena for price competition is very limited:  in the MARKETING aspect only, which may just be about 10% or a little more of cost of goods sold, instead of in both production and marketing. To illustrate, in the power industry which has substantially varying costs of electricity produced from hydro, geothermal, coal-fired, bunker-oil-fired, and diesel-fired power plants, price competition lies in the PRODUCTION aspect—which is not the case in the oil industry.  

On the contrary, as what can be observed, deregulation will promote high prices because with the division and spreading of the existing relatively fixed market over the increased number of economic players, and with resulting REDUCED or LOW PER CAPITA SALES VOLUME for all of them, there will be compelling desire for everybody to RAISE PESO PER LITER MARGIN to generate the absolute amount of net income satisfactory to them.  With present high margin, the three oil majors are compensated for their market shares eaten up by the new market players, while the new players with still LOW SALES VOLUME will be appeased by the doubled per liter margin—a win-win situation for all of them at the expense of the buying public.

It is time the government do justice to the Filipino people by giving them under regulation what the oil industry has deprived them under deregulation—proven fair and transparent oil product prices.

MARCELO  L. TECSON

9-30-09, 10-13-09