Energy Technology Expert

Philippines Imposes Price Ceiling on Petroleum Products

President Arroyo issued Executive Order 839 that directed oil companies to revert oil pump prices of gasoline, diesel, kerosene and LPG to the Oct 15, 2009 prevailing retail prices in the calamity areas recently devastated with massive flooding, land slides, infrastructure damage to dikes, bridges, roads, houses, commercial establishments, industries and numerous loss of life.

The action was in response to the latest round of oil pump price increase announced by the 3 oil majors and minor players due to changes in MOPS of petroleum products for the periods Oct 5-9 and Oct 12-16.

Your energy technology expert got the MOPS for the 3 products from the PhilStar article today (Oct 26) on the price adjustments.

I compared the oil company adjustments of 2.00/L diesel, 1.25/L premium gas, 0.85/L regular gas and 1.50/L kero with my own calculations which is based on a given % oil company margin on duty paid landed cost.  My assumption is a little lower than my calculated 2007 average, and used instead 4.53% for diesel, 5.15% for kero and 7.35% for 95 octane gasoline.

Based on average exchange rate of 47PhP/$ and the changes in MOPS found in the PhilStar, my predicted price adjustment based on a lower % oil company margin as highlighted are as follows:

LSD:   PhP 2.1740/L versus PhP 2.00/L (under recovery) – diesel

KERO: PhP 1.8466/L versus PhP 1.50/L (under recovery) – kerosene

95RON: PhP 1.3843/L versus PhP 1.25/L (under recovery) – premium gas

But we have to consider the practice of rounding off adjustments to the nearest P0.25/L due to our currency peculiarity (smallest coin change is 25 centavo coin), competition and the need to maintain overall profitability (meaning, some will be adjusted downward, some upward in order to have an average increase that based on sales volume will result in attaining target revenues to meet oil company requirements for marketing, refining, reasonable returns, capital expenditures and O&M expenses.

I believe that requiring the oil companies to revert to Oct 15 price levels which translates to around P2.00/L rollback on diesel, P1.25/L rollback on premium gasoline, P0.85/L rollbank on regular gasoline and P1.50/L rollback on kerosene is not sustainable.

If imposed on a longer period, there is a significant probability that the country will suffer supply cuts, or smuggling of oil out of the country to neighboring countries that fully reflected the international oil price increase.

Petron, for instance, has indicated today that it would be losing around P20 million per day as a result of the mandated price rollback.

A number of oil industry experts and watchers also are of the opinion that the mandatory price rollback could not be sustained by the oil companies as it will eat on their current earnings and eventually on their returned earnings, and finally, into shareholder’s equity (paid-up capital l+ retained earnings – current losses).

My own estimates based on 2007 oil industry annual demand shows a monthly potential loss of PhP 141.92 million per month or around PhP 1.703 billion per year that will surely translate to erosion of shareholder’s equity.

This amount of losses will erode oil industry profitability that could only be financed by the oil companies borrowing from the banks, leading to higher interests and a further deterioration of the pesos against the US$ and other major currencies, and feeding further into higher fuel prices as a result of weakening of the Peso.

The above scenario is indeed scary for the country, and in these times of global financial crisis, this is a problem of our own making.  The country has shown that it could withstand an oil shock up to $ 147 per barrel in July of 2008, and certainly, it is capable of riding out this storm again.

I believe the issuance of the Executive Order 389 to freeze pump prices to October 15, 2009 price levels, if not rescinded soon, will result in disruption of oil supply leading to massive hoarding as customers would want to corner whatever supply is available.

The best way to face this impending “oil supply storm” is to allow market forces and competition and the ‘”law of supply and demand” take its natural course of self-correcting itself, since man-made solutions are no match to this world-wide phenomena of rising international oil prices as a result of global economic recovery.

With the US now having been declared out of recession, the global economy will surely recover, and the price of oil will surely rise.  Pegging local prices to October 15, 2009 levels, with typhoon calamity or none, will just add another man-made oil supply typhoon to the country.

Petroleum Products	LOW SULFUR DIESEL		KEROSENE		MOGAS 95 RON
Test Periods	Oct 5-9	Oct 12-16	Oct 5-9	Oct 12-16	Oct 5-9	Oct 12-16
Exchange Rate	47.0000	47.0000	47.0000	47.0000	47.0000	47.0000
Dubai Benchmark Crude	50.1000	50.1000	50.1000	50.1000	50.1000	50.1000
New Ratio of Product MOPS to Dubai	1.477	1.597	1.487	1.588	1.416	1.490
MOPS FOB Singapore	74.0100	80.0300	74.4800	79.5600	70.9400	74.6600
Premium
FOB Singapore	74.0100	80.0300	74.4800	79.5600	70.9400	74.6600
Freight	0.0000	0.0000	0.0000	0.0000	0.0000	0.0000
Insurance	0.0370	0.0400	0.0372	0.0398	0.0355	0.0373
CIF	74.0470	80.0700	74.5172	79.5998	70.9755	74.6973
Wharfage	0.0946	0.0946	0.0886	0.0886	0.0823	0.0823
BOE fee	0.0740	0.0801	0.0745	0.0796	0.0710	0.0747
Ocean Loss	0.3702	0.4004	0.3726	0.3980	0.3549	0.3735
Doc Stamp	0.1111	0.1201	0.1118	0.1194	0.1065	0.1120
Demurrage	0.0000	0.0000	0.0000	0.0000	0.0000	0.0000
Duties on Imported Oil	2.2214	2.4021	2.2355	2.3880	2.1293	2.2409
Specific Tax on Imported Oil (new)	0.0000	0.0000	0.0000	0.0000	14.7147	14.7147
Sub-total (SUB)	76.9184	83.1672	77.4002	82.6734	88.4341	92.2955
VAT on Imported Oil (new)	9.2302	9.9801	9.2880	9.9208	10.6121	11.0755
Duty Paid Landed Cost	86.1486	93.1473	86.6883	92.5942	99.0462	103.3710
Duty Paid Landed Cost	25.4674	27.5364	25.6270	27.3729	29.2802	30.5587
% Oil Company Gross Margin	4.53%	4.53%	5.15%	5.15%	7.38%	7.38%
Oil Company Gross Margin	1.1546	1.2484	1.3196	1.4095	2.1623	2.2568
CME Cost
Depot Cost
Dealers’ Margin	1.2000	1.2000	1.2000	1.2000	1.2000	1.2000
Refillers’ Margin
Haulers’ Fee	0.1140	0.1140	0.1140	0.1140	0.1140	0.1140
Transshipment	0.2000	0.2000	0.2000	0.2000	0.2000	0.2000
Sub-total other costs	2.6686	2.7624	2.8336	2.9235	3.6763	3.7708
VAT on other costs (new)	0.3202	0.3315	0.3400	0.3508	0.4412	0.4525
Pump Price (Retail)	28.4562	30.6303	28.8006	30.6472	33.3977	34.7820
Price difference between periods		2.1740		1.8466		1.3843
Using adjustment formula		2.1740		1.8466		1.3843
		0.0000		0.0000		0.0000
Price difference		2.1740		1.8466		1.3843
Actual adjustment		2.0000		1.5000		1.2500
Over recovery / (Under recovery)		(0.1740)		(0.3466)		(0.1343)
$/bbl increase		6.0200		5.0800		3.7200
Rule of thumb		0.365		0.367		0.376
PhP/L increase		2.1972		1.8663		1.3990
Oil Industry Sales Volume, 000 barrels (MB)		40,502		1,573		23,222	65,297
Oil Industry Sales Volume, 000 Liters		6,439,338		250,088		3,692,007	10,381,432
Total Under Recovery, Million PhP/yr		-1,120.68		-86.68		-495.67	-1,703.03
Total Under Recovery, Million PhP/month		-93.39		-7.22		-41.31	-141.92

Please post your comments.

Marcial T. Ocampo

Energy Technology and Oil Pricing Expert

For more information on energy technologies (conventional, renewable), oil pricing issues and investing opportunities in energy and power generation, please visit my website:

http://www.energydataexpert.com