Energy Technology Expert

How to calculate oil price adjustments given changes in product MOPS and foreign exchange rate

In a deregulated regulatory framework such as in the Philippines, price adjustments on a weekly basis are being implemented by both the three oil majors (Petron, Pilipinas Shell and Chevron/Caltex) and minor industry players (Flying V, Sea Oil, Total, Jetti, Unioil, Eastern, PTT, etc.).

Such adjustments are implemented by each company since the main price determinant of domestic oil prices in the Philippines has shifted to the small incremental volumes brought in by the minor industry players having product inventories of 1-2 weeks only, as opposed to previous crude oil inventories by the two remaining refiners (Petron and Pilipinas Shell) of around 1-2 months of crude.

Product imports are based on the Mean of Platts Singapore (MOPS) which track all major oil trades in the Asian Region while crude oil imports are based on the Dubai crude marker price which tracks all major crude oil exchanges in the Asian and Indian ocean economies.

In my previous blog on oil pricing, the author has presented the step-by-step procedure for calculating domestic price by simply following the oil supply chain:

FOB = MOPS + PREMIUM (freight on board)

FRT = 1.1049 $/bbl gasoline, 1.1089 $/bbl naphtha, 1.0530 $/bbl kerosene, 1.0329 $/bbl diesel, 1.2984 $/bbl fuel oil, 14.9810 $/MT LPG (ocean freight)

INS = (FOB + FRT) x 0.05%  (varies with insurer, type of product, size of vessel, shipping risks)

CIF = FOB + FRT + INS (cargo, freight and insurance)

WHARFAGE = 0.0823 $/bbl gasoline, 0.0886 $/bbl kerosene, 0.0946 $/bbl diesel, 0.1077 $/bbl fuel oil, 0.6999 $/MT LPG (port authority)

BOE FEE = CIF x 0.10% (Board of Energy Fee)

OCEAN LOSS =CIF x 0.50% (loss allowance)

DOC STAMPS = CIF x 0.15% (documentary stamps)

DEMURRAGE = actual claim = ($/day of delay) x (no. of days delay beyond control of the ship)

CUSTOMS DUTY = CIF x 3.00% (based on CIF value and varies from 0%, 1%, 2% and 3% for crude oils only)

SPECIFIC TAX = 4.36 PhP/liter gasoline, 3.67 PhP/liter avturbo (kerosene for jet aircraft), none for other products = (4.36 PhP/liter) x (42 x 3.7854 liter/bbl) x ($/48.00 PhP)

= 4.36 x 158.9868 / FOREX for gasoline

= 3.67 x 158.9868 / FOREX for avturbo

where FOREX = 48.00 PhP/$ = foreign exchange rate

SUBTOTAL1 = FOB + FRT + INS + WHARFAGE + BOE FEE + OCEAN LOSS + DOC STAMPS + DEMURRAGE + CUSTOMS DUTY + SPECIFIC TAX

VAT1 = (SUBTOTAL1) x 12% (VAT on imported oil)

DPLC = SUBTOTAL1 + VAT1 in $/bbl (duty paid landed cost)

The duty paid landed cost is then converted to equivalent Pesos per liter using the exchange rate and conversion from barrels to liters (1 barrel = 42 gallons, 1 gallon = 3.7854 liters):

DPLC = (SUBTOTAL1 + VAT1)  $/bbl x (48.00 PhP/$) x (bbl / 158.9868 liters) = (SUBTOTAL1 + VAT1) x FOREX / 158.9868

The next step is to add the oil company margin (the only portion that actually goes to the oil company since the other cost factors are simply pass-thru charges that go to the supplier, shipper, insurer, port authority, government tax and VAT) and the other local costs and local VAT.

Based on the author’s monitoring of 2007 annual average MOPS, exchange rate and pump price, the oil company margin as % of DPLC is shown below:

% OIL COMPANY MARGIN = 14.77% 95 RON, 13.17% 93 RON, 15.29% 87 RON, 30.90% kerosene, 1.34% avturbo, 9.07% diesel, 19.79% fuel oil, 29.28% LPG

OIL COMPANY MARGIN = DPLC x (% OIL COMPANY MARGIN)

BIOFUELS = 0.200 PhP/liter for 1% CME in diesel (I have no idea for 10% ETHANOL in gasoline)

DEPOT COST = 0.250 PhP/liter (depends on bulk plant location and type of products carried)

DEALER’S MARGIN = 1.200 PhP/liter for gasoline, kerosene, avturbo and diesel, 1.3640 PhP/kg for LPG

REFILLER’S MARGIN = 0.500 PhP/kg for refillers of LPG

TRANSSHIPMENT = 0.200 PhP/liter for gasoline, kerosene, avturbo and diesel, 0.0897 PhP/liter for fuel oil, 0.3226 PhP/kg for LPG (tankers and barges)

HAULER’S FEE = 0.1140 PhP/liter for gasoline, kerosene, avturbo and diesel, 0.1254 PhP/liter for fuel oil, 0.3059 PhP/kg for LPG

SUBTOTAL2 = OIL COMPANY MARGIN + BIOFUELS + DEPOT COST + DEALER’S MARGIN  + TRANSSHIPMENT + HAULER’S FEE

VAT2 = SUBTOTAL2 x 12% (VAT on local costs)

Finally, the domestic oil pump price is calculated by adding them all up:

PUMP PRICE = DPLC + SUBTOTAL2 + VAT2

= (SUBTOTAL1 + VAT1) x FOREX / 158.9868 + SUBTOTAL2 + VAT2

Thus by comparing the average prices between two adjacent periods, the price adjustment is calculated from this incremental formula:

ADJUSTMENT = PUMP PRICE(2) – PUMP PRICE(1)

With the above formula, it is possible to calculate with accuracy the correct price adjustments since we don’t need to know exactly the minor cost items like freight, insurance, wharfage, demurrage, biofuels, depot cost, dealer’s margin, refiller’s margin, transshipment and hauler’s fee since they will just cancel out when we subtract the pump price components between the two periods 1 and 2.

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Marcial T. Ocampo

email  mars_ocampo@yahoo.com

energydataexpert@gmail.com

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