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Independent Oil Price Review Committee (IOPRC) found no Overpricing

September 6th, 2012 Posted in Oil Pricing Formula

Independent Oil Price Review Committee (IOPRC) found no Overpricing

In today’s news (Philippine Start, Sep 6, 2012, page B-3), the IOPRC released its findings after presenting the results to the DOE Secretary Rene Almendras and subsequently in a press conference at the DOE.

“Contrary to popular belief, oil companies are not overpricing their fuel products and are, in fact, merely tracking international price adjustments”, says the press report.  

The oil price review committee has just released its findings:

1) Local pump prices track international movement of oil prices

2) There is no over-pricing 3) oil companies enjoy reasonable profits

4) Current prices without subsidy encourage economic use of the fuel

5) Local taxes and oil company gross margin are lower in todays deregulated environment (1999-2012) vs. regulated environment (prior to 1998)

6) Crude oil and product supply and costs are purchased at international prices as tracked by Dubai crude marker price and Mean of Platts Singapore (MOPS) posted prices

7) Oil company margin as calculated by difference from pump price less import price, taxes, gov’t imposts, logistics, and dealer’s margin are in the order of only 5.4% of pump price and thus reasonable as of average June 2012

8) Historical oil company margins do not show any overpricing of 8 P/L for diesel and 16 P/L of gasoline as alleged by NGOs and other gov’t planning agency and transport groups.

9) DOE will post on its website the two-step oil price calculation model for tax paid landed cost and pump price of the gasoline and diesel fuel blend.

As shown in an earlier blog, the pump price is calculated first by determining the duty (tax) paid landed cost (DPLC) and then the pure gasoline DPLC is blended with the pure biofuels (10% ETHANOL gasoline blend and 2% CME biodiesel blend) at the depot, then delivered to the retailers/gasoline stations:

DPLC = (CIF + CD + BF + BC + AC + WC + IPF + CDS + ET)x (1 + %VAT1)

where:

FOB = MOPS + premiums due to risks (supply, security, transport availability)

CIF$ = FOB + FRT + INS

CIF = CIF$ x FOREX

CD = customs duty, % of CIF

BF = brokerage fee

BC = bank charge (for Letter of Credit)

AC = arrastre charge (to port operator)

WC = wharfage charge (to Philippine Port Authority or PPA)

IPF = import processing fee per entry (to Bureau of Customs or BOC)

CDS = customs documentary stamp per entry (to BOC)

ET = excise tax or specific tax (to Bureau of Internal Revenue or BIR but collected by BOC)

VAT1 = 12% value added tax impost on all importation value adding activities

Once the DPLC is known, we can now blend the pure gasoline or diesel with the pure biofuel component to arrive at the final pump price:

PP = DPLC * (1 – % biofuel) + [DPLC x (1 – % biofuel) * %GM + (TS + PL + DE) * (1 – % biofuel) + BIO + HF + DM] * (1 + %VAT2) + OPSF

where:

% biofuel = 10% for ethanol-gasoline blend and 2% for biodiesel blend

% GM = % gross margin of the oil company applied on the DPLC which covers the costs of the oil company for refining, storing, admin and marketing costs sand profit margin so it may enjoy profits to pay its loans and repay its equity investors

TS = transshipment (to barge and tanker operator)

PL = pipeline cost (to FPIC pipeline operator)

DE = depot operating cost

BIO = biofuel cost = 10% x ETHANOL COST, 2% x CME cost

HF = hauling fee (to trucking company)

DM = dealer’s margin (to gasoline station dealer owner)

VAT2 = 12% VAT on all local value adding activities

OPSF = oil price stabilization fund (subsidy during the deregulated era)

Since the pump price is known and each cost component is known, then the oil company margin may be computed by subtracking from the pump price all the intervening costs such as importation cost, taxes, gov’t imposts, logistics, biofuels and dealers margin:

PP = MOPS(CIF) + TAX (CD, ET, VAT1, VAT2) + GOV’T(WC, IPF, CDS) + LOGISTIC(BF, BC, TS, PL, DE, HF) + BIOFUEL(BIO) + DEALER(DM) + OCGM(oil company costs, profit margin)

OCGM(oil company costs, profit margin) = PP – [ MOPS(CIF) + TAX (CD, ET, VAT1, VAT2) + GOV’T(WC, IPF, CDS) + LOGISTIC(BF, BC, TS, PL, DE, HF) + BIOFUEL(BIO) + DEALER(DM) ]

The exact formula for the oil company gross margin is:

%GM = {[PP – OPSF – DPLC * (1 – % biofuel)] / (1 + VAT2) – [(TS + PL + DE) * (1 – % biofuel) + BIO + HF + DM]} / {TPLC * (1 – % biofuel)}

OCGM = DPLC * (1 – % biofuel) * %GM

Therefore, to predict future pump prices and adjustments, simply calculated the PP1 at period 1 using the MOPS1 and FOREX1 and the PP2 at period 2 using MOPS2 and FOREX2:

DPLC1 = function of MOPS1 and FOREX1

DPLC2 = function of MOPS2 and FOREX2

PP1 = DPLC1 * (1 – % biofuel) + [DPLC1 x (1 – % biofuel) * %GM + (TS + PL + DE) * (1 – % biofuel) + BIO + HF + DM] * (1 + %VAT2) + OPSF

PP2 = DPLC2 * (1 – % biofuel) + [DPLC2 x (1 – % biofuel) * %GM + (TS + PL + DE) * (1 – % biofuel) + BIO + HF + DM] * (1 + %VAT2) + OPSF

Then the theoretical price adjustment is delta PP:

Delta PP = PP2 – PP1

Each oil company has in one way or another a similar oil pump price calculating method. But at the end of the day, each oil company station has to look at the price adjustments of a neighboring gasoline station to remain competitive by matching or lowering his pump price to hold on to his market share and sell his products.

With such an automatic two-step formula for calculating absolute oil pump price and adjustments, then it is possible to deregulate the public transport fare so that automatic, monthly fare adjustments are made.

Please refer to previous blog on this matter.

1) Do you agree that the IOPRC findings are based on evidence and scientific methods of calculation (of the oil company margin by subtracting from the pump price all the intervening costs and supply costs)?

2) That based on an oil company gross margin average of 5.4% of pump price, the oil companies are enjoying a reasonable profit to sustain their operations without overpricing the motoring public?

3) That taxes and oil company gross margin are lower in todays deregulated environment as compared to the regulated period where oil companies are assured of a profit to ensure that the least efficient refinery continues to operate and thus insulated from competion from the more efficiency refinery.

4) That the internal rate of return (IRR) of the oil companies which is lower than other utilities, power companies, and mining companies?

5) That the higher margins on gasoline (12.33%) vs. diesel (1.93%) which indicates that oil companies are cross-subsidizing diesel pump prices to arrive at a weighted average margin of 5.39% is beneficial to the country as it provides lower diesel fuel costs to the transport sector vs. the gasoline private motoring sector?

6) That government taxes which is the lifeblood of the country’s economy should be maintained so as not to incur budget deficits; lowering oil taxes means lower government revenues, weaker foreign exchange rate, lower credit ratings, higher cost of private and public borrowing. Indonesia, Malaysia and Thailand have long subsidized oil and electricity prices and are now suffering great budget deficit with Thailand’s subsidy amounting to 2.7% of GDP. Since Thailand has an economy 4 time the Philippines, a similar subsidy or lower taxation will result in around an deficit of 8% of GDP, which is very close to the 13% of GDP deficit of Greece and other European Countries now suffering serious economic and social problems.

 

 

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