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Philippine Oil Pump Price Calculation Model and Oil Company Gross Margin – Analysis and Conclusions

September 12th, 2012 Posted in Oil Pricing Formula

Philippine Oil Pump Price Calculation Model and Oil Company Gross Margin – Analysis and Conclusions

 

Analysis and Conclusions

 

This chapter presents the evolution and derivation of the oil pump price formula. There is a need to develop an oil pump price formula simply because the oil companies never divulge their oil company gross margin which is the residual or price difference when we subtract from the actual pump price all the importation value adding activities such as supply cost or FOB/MOPS/Dubai, ocean freight and insurance, customs duty, BOC fee, import processing fee, customs doc stamps, bank charge, arrastre charge, wharfage charge, and excise tax or specific tax to arrive at the 12% VAT on all importation activities, and all local value adding activities such as oil company gross margin, transshipment, pipeline, depot operation, biofuels, hauler’s fee and dealer’s margin to arrive at the 12% VAT on local activities.

 

The oil company gross margin (similar to % markup on raw material cost) is calculated as % of the Duty Paid Landed Cost (DPLC) which is the cost input to the refiner or importer/marketer. It could also be expressed as a % of the actual pump price which is similar to % return on sales in financial analysis parlance. The absolute oil company gross margin in Peso per Liter is then calculated by multiplying the % oil company gross margin to the DPLC.

 

However, since this study is limited only to gasoline and diesel, the weighted average oil company gross margin in this study may be calculated by considering that the proportion of gasoline to diesel sales is 1 part gasoline per 2 parts of diesel sales.

Oil Pump Price Model (Oil Company Gross Margin)

 

The third and last methodology to be used by the TWG is a step-by-step calculation of all the economic and value-adding activities in the supply chain. It requires knowledge of the international price (Dubai crude oil marker, MOPS of gasoline and diesel products), ocean freight, ocean insurance, and foreign exchange rate from US dollar to Philippine Peso to arrive at the dutiable value of the cargo (the Cargo, Insurance and Freight or CIF in peso value). It also requires an assumption of the parcel size of the cargo (minimum of 100,000 barrels per import entry) and for the purpose of this method, the TWG assumes the typical 300,000 barrels cargo size to minimize the cost impact of fixed charges which become magnified in smaller cargo size.

 

The following is a summary of the consultation and discussion with representatives of the Bureau of Customs (BOC). (See Annex D.8 for the Oil Pump Price Calculation Procedure)

 

The first step is to compute the customs dutiable value of the importation:

 

DUBAI$ = given Dubai crude oil price

 

MOPS$ = DUBAI$ x (factor to refine crude oil to finished product)

= MOPS + premium risks (supply, security, bottoms)

 

FOB$ = MOPS$ * 300,000

 

FRT$ = FOB$ * 2.00% (benchmark from BOC)

 

INS$ = FOB$ * 4.00% (benchmark from BOC)

 

CIF$ = FOB$ + FRT$ + INS$

 

CIF = CIF$ * (FOREX, P/$) (this is the customs dutiable value)

 

Then the BOC collects the applicable Customs Duty (CD paid to BOC) depending on the unit value of the crude or product (there are trigger points for 0%, 1%, 2% and 3% customs duty based on the US Dollar per Barrel value of the Dubai crude oil or MOPS provided by DOE memorandum circular):

 

CD = Customs Duty = CIF * 3.00% (presently zero per ASEAN AFTA)

 

Using the brokerage table from Customs Administrative Order CAO 1-2001, the brokerage fee (BF) is calculated. Since the value is way past the P200,000 maximum value in the table, the brokerage fee is calculated at the maximum rate as follows:

 

BF= Brokerage Fee = 5,300 + (CIF – 200,000) * 0.00125

 

Bank Charge (BC from Letter of Credit) is then calculated for the import cargo:

 

BC = Bank Charges = CIF * 0.00125

 

Arrastre Charge (AC paid to port operator) of 122 P/mt is then applied. This requires knowledge of the density of the cargo (0.75 kg/L for gasoline and 0.80 kg/L for diesel):

 

AC = Arrastre Charge (gasoline) = 122 * (0.75 * 158.9868 / 1000) * 300,000

AC = Arrastre Charge (diesel) = 122 * (0.80 * 158.9868 / 1000) * 300,000

 

Wharfage Charge (WC paid to Philippine Port Authority or PPA) of 36.65 P/mt is also applied as follows like the Arrastre Charge:

 

WC = Wharfage Charge (gasoline) = 36.65 * (0.75 * 158.9868 / 1000) * 300,000

WC = Wharfage Charge (diesel) = 36.65 * (0.80 * 158.9868 / 1000) * 300,000

 

Import Processing Fee (IPF paid to BOC) is computed from table defined by CAO 2-2001 and given the magnitude of the dutiable value, it is equal to the maximum fee of 1,000 P per import entry:

 

IPF = Import Processing Fee = 1,000

 

Customs Documentary Stamp (CDS paid to BOC) is a fixed amount of 256 P per import entry:

 

CDS = Customs Documentary Stamp = 256

 

Excise Tax (ET paid to BIR but collected by BOC on imports) is a fixed amount per L of product (4.35 P/L of gasoline up to now; 1.63 P/L of diesel when there was no VAT and zero when the VAT was introduced):

 

ET = Excise Tax (gasoline) = 4.35 * 158.9868 * 300,000

ET = Excise Tax (diesel) = 1.63 * 158.9868 * 300,000

 

The total Landed Cost (LC) is then the sum of the dutiable value and all charges:

 

Landed Cost = CIF (P) + CD + BF + BC + AC + WC + IPF + CDS + ET

 

The Value Added Tax (VAT1 paid to BIR but collected by BOC on imports) is then calculated based on the VAT rate which started initially at 10% in November 2005 and 12% later in February 2006:

 

VAT1 (on import) = 10% * Landed Cost (Nov 2005 – Jan 200

= 12% * Landed Cost (Feb 2006 – present)

 

Finally, the Duty Paid Landed Cost (DPLC) is calculated to include the VAT on imports:

 

DPLC = LC + VAT1 (imports) = LC * (1 + %VAT1)

 

On a per L basis, the DPLC is calculated:

 

DPLC (P/L) = DPLC / (300,000 * 158.9868)

 

A summary of charges collected by the BOC is then prepared and converted to a per L basis

 

Summary to BOC = CD + IPF + CDS + ET + VAT1

Summary to BOC (P/L) = Summary to BOC / (300,000 * 158.9868)

 

The DPLC from Dubai crude is the input cost of the crude oil refiner while the DPLC from the finished product MOPS is the input cost of the oil marketer. Then add the oil company gross margin (OCGM) which takes care of the refining, marketing and distribution costs as well as the profit margin of the oil company.

 

In this methodology, the OCGM is assumed as an add-on percentage of the DPLC – similar to a mark-up of any retailer selling goods and services to a customer. The mark-up takes care of all his operating expenses as well as profit margin needed to recover his investments while the DPLC takes care of his raw material (product) cost:

 

OCGM = Oil Company Gross Margin (P/L) = DPLC * (1 – % biofuel) * % gross margin

 

The % gross margin could further be disaggregated into cost recovery margin and profit margin:

 

% gross margin = % cost recovery margin + % profit margin

 

The % cost recovery margin takes care of the oil company costs such as refining (crude oil refiners), logistics (importers/marketers), marketing while the % profit margin takes care of recovering the invested capital in a reasonable recovery period. However, it is difficult to disaggregate the above gross margin into its components.

 

Later on, you will see that the OCGM is the residual value from subtracting all costs in the supply chain from the retail pump price. It is calculated by difference using goal seek function of MS Excel by setting to zero the variance between the calculated pump price and the actual pump price by varying the assumed % gross margin. It can also be calculated algebraically for the forward cost build-up formula shown below.

 

Other  oil company costs (OOCC) include transshipment using barges and oil tankers, pipeline operation (e.g. Batangas to Manila FPIC white oil and black oil pipelines), oil depot operation, and addition of biofuels (10% bioethanol and 2% CME biodiesel) and other fuel brand additives for product differentiation (e.g. Blaze 98, XCS 95, Unleaded 93, B2 Diesel).

 

OOCC = Other Oil Company Costs (P/L) = (TS + PL + DE) * (1 – % biofuel) + BIO

 

Where:

 

TS = Transshipment = 0.38 P/L (for oil tanker ships and barges)

 

PL = Pipeline = 0.000 P/L (for FPIC)

 

DE = depot = 0.27 P/L (gasoline)

= 0.28 P/L (diesel)

 

BIO = Biofuels = 10% * (P/L of ETHANOL)       = 10% * 26.30 = 2.63 P/L (gasoline)

=   2% * (P/L of CME Biodiesel) =   2% * 64.00 = 1.28 P/L (diesel)

 

From the depot, the oil products with their brand additives and biofuels are then transported using oil company-owned, retailer-owned or independent operator-owned tank trucks:

 

HF = Hauler’s Fee (P/L) = 0.21 P/L (gasoline and diesel)

 

Finally, with the oil product delivered at the retail station, the petroleum dealer retails the products (gasoline, diesel, kerosene, LPG for cooking and transport, lube oils) to its customers. The profit margin of the dealer (refiller’s margin for LPG marketers and dealer’s margin for gasoline and diesel retailers) is called the dealer’s margin (DM):

 

DM = Dealer’s Margin (P/L) = 1.72 (gasoline)

= 1.47 (diesel)

 

The Total Local Costs (LC) for all local value-adding activities is then computed:

 

TLC = Total Local Costs (P/L) = OCGM + OOCC + HF + DM

 

The VAT on all local value-adding activities (collected by the BIR on local activities) is then calculated:

 

VAT2 (local costs) = 10% * Total Local Cost (Nov 2005 – Jan 2006)

= 12% * Total Local Cost (Feb 2006 – present)

 

Finally, the Pump Price (PP) is calculated as the sum of all imported and local costs with the DPLC oil portion corrected for the biofuels content:

 

PP = Pump Price (P/L) = DPLC * (1 – % biofuel) + TLC + VAT2 + OPSF

= DPLC * (1 – % biofuel) + TLC * (1 + %VAT2) + OPSF

 

Substituting all the terms and making the PP equal to the actual PP, we obtain

 

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

 

 

Determining Oil Company Gross Margin (OCGM)

 

The calculated pump price is then compared with the actual pump price. To make the variance zero, the % gross margin assumed is adjusted until the variance is zero:

 

Variance (P/L) = Actual Pump Price – Calculated Pump Price

 

The OCGM is the residual value from subtracting all costs in the supply chain from the retail pump price. The % gross margin (%GM) may be calculated algebraically from the final PP formula as follows:

 

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

 

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

 

Hence, the OCGM in Pesos per Liter is calculated as follows:

 

OCGM (P/L) = DPLC * (1 – % biofuel) * %GM

 

Where:  % biofuel = 10% for gasoline and 2% for diesel

VAT2 = 12% value added tax

OPSF = Oil Price Stabilization Fund contribution (+) or drawdown (-)

 

If there is OPSF contribution (+) by the oil companies, this will reduce the oil company gross margin; while an OPSF drawdown (-) will increase the oil company gross margin.

 

 

Determining the Variance Between Actual Pump Price and Calculated Pump Price

 

The calculated pump price based on the supply cost (MOPS), foreign exchange rate and % oil company margin (the other cost factors are usually constant) is then compared with the actual pump price.

 

Variance (P/Liter) = Actual Pump Price – Calculated Pump Price

 

If the Variance is greater than zero (positive), there is over-recovery (overpricing); while if the Variance is less than zero (negative), there is under-recovery (underpricing).

 

As to whether the level of over-recovery constitute profiteering is a subjective matter that needs to be validated by having consistently large variance over the predicted or calculated pump price based on a reasonable % gross margin. It is intuitive to calculate the long-term average % gross margin to see how the oil refiner or oil marketer operates to recover its invested capital.

Composition of Oil Pump Price (CIF, gov’t imposts, gross margin, transport, depot cost, biofuels, hauling cost, dealer margin)

 

The Duty Paid Landed Cost and pump price breakdown for 2012 is shown below:

 

 

Table 7: DPLC and Pump Price Build-up for 2012

GASOLINE

2012

%

DIESEL

2012

%

FOB

33.5624

74.67%

FOB

34.8400

83.73%

FRT

0.6712

1.49%

FRT

0.6968

1.67%

INS

1.3425

2.99%

INS

1.3936

3.35%

CIF

35.5762

79.15%

CIF

36.9304

88.76%

DUT

0.0000

0.00%

DUT

0.0000

0.00%

SD

0.00

0.00%

SD

0.00

0.00%

BF

0.0446

0.10%

BF

0.0463

0.11%

BC

0.0445

0.10%

BC

0.0462

0.11%

AC

0.0915

0.20%

AC

0.0976

0.23%

WF

0.0275

0.06%

WF

0.0293

0.07%

IPF

0.000021

0.00%

IPF

0.000021

0.00%

CDS

0.000006

0.00%

CDS

0.000006

0.00%

ET

4.3500

9.68%

ET

0.0000

0.00%

VAT1

4.8161

10.71%

VAT1

4.4580

10.71%

DPLC

44.9504

100.00%

DPLC

41.6078

100.00%

DPLC

40.4553

72.68%

DPLC

40.7756

88.77%

OCGM

6.8628

12.33%

OCGM

0.8854

1.93%

RC

0.0000

0.00%

RC

0.0000

0.00%

TS

0.4707

0.85%

TS

0.5125

1.12%

PC

0.0000

0.00%

PC

0.0000

0.00%

DEP

0.2805

0.50%

DEP

0.3052

0.66%

BIO

3.7790

6.79%

BIO

1.2336

2.69%

HF

0.3599

0.65%

HF

0.1970

0.43%

DM

1.8260

3.28%

DM

1.4717

3.20%

VAT2

1.6295

2.93%

VAT2

0.5526

1.20%

OPSF

0.0000

0.00%

OPSF

0.0000

0.00%

PP

55.6635

100.00%

PP

45.9336

100.00%

DUT

0.0000

0.00%

DUT

0.0000

0.00%

SD

0.0000

0.00%

SD

0.0000

0.00%

WF

0.0247

0.04%

WF

0.0287

0.06%

IPF

0.0000

0.00%

IPF

0.0000

0.00%

CDS

0.0000

0.00%

CDS

0.0000

0.00%

ET

3.9150

7.03%

ET

0.0000

0.00%

VAT1

4.3345

7.79%

VAT1

4.3688

9.51%

VAT2

1.6295

2.93%

VAT2

0.5526

1.20%

Govt Imposts

9.9037

17.79%

Govt Imposts

4.9502

10.78%

% ETHANOL

90%

  % CME BIODIESEL

98%

 

 

Gasoline Pump Price Build-up

 

For the DPLC cost breakdown, the main import cost is the CIF value at 79.15% (FOB, FRT, INS), followed by VAT1 at 10.71%, excise or specific tax at 9.68%, arrastre charge at 0.20%, brokerage fee at 0.10%, bank charge for LC at 0.10%, wharfage at 0.06% and other minor charges of the BOC (IPF, CDS).

 

For gasoline pump price, the main cost is the DPLC import cost at 72.68% of the pump price, followed by the oil company gross margin of 12.33% (to cover refining, marketing, administrative, and profit margin), biofuels at 6.79%, dealer’s margin at 3.28%, VAT2 at 2.93%, transshipment at 0.85%, depot operation at 0.50% and hauler’s fee at 0.65%.

 

Diesel Pump Price Build-up

 

For the DPLC cost breakdown, the main import cost is the CIF value at 88.77% (FOB, FRT, INS), followed by VAT1 at 10.71%, arrastre charge at 0.23%, brokerage fee at 0.11%, bank charge for LC at 0.11%, wharfage at 0.07% and other minor charges by the BOC (IPF, CDS).

 

For diesel pump price, the main cost is the DPLC import cost at 89.44% of the pump price, followed by dealer’s margin at 3.14%, biofuels at 2.73%,  the oil company gross margin of 1.73% (to cover refining, marketing, administrative, and profit margin), VAT2 at 1.13%, transshipment at 0.80%, depot operation at 0.59% and hauler’s fee at 0.45%.

 

 

 

Total Government Imposts in Pump Price Build-up

 

The total taxes collected by the BOC/BIR (customs duty, special duty, import processing fee, customs doc stamp, excise tax, value added tax) for gasoline is 9.9037 P/L or 17.79% of the pump price; while for diesel, the total tax is 5.0456 P/L or 10.78% of the pump price.

 

Historical Oil Pump Price Breakdown

 

The historical oil pump price breakdown is shown in the charts below as absolute Peso per Liter and as % of pump price. The CIF is the main cost component followed by government taxes (duty, excise tax and VAT), oil company gross margin (costs and profit margin) and dealer’s margin.

 

There are years with negative gross margin which is compensated by drawing from the OPSF to ensure positive margin during the regulated period. Following steep decline in the international price of crude oil and products, there large gross margin are trimmed via contribution to the OPSF kitty to replenish the fund.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Figure 1: Gasoline Price Breakdown (1974-2012) in Pesos per Liter

 

 

Figure 2: Gasoline Price Breakdown (1974-2012) in % of Pump Price

 

 

Table 8: Gasoline Pump Price Breakdown by Regulatory Framework

UNLEADED   GAS

Regulated

Deregulated

RVAT

 

(1974-97)

(1998-2005)

(2006-12)

CIF

42.2%

57.3%

60.1%

Biofuel

0.0%

0.0%

4.0%

Taxes

18.5%

27.4%

21.1%

BOC Fees

0.6%

0.2%

0.1%

Logistics

4.9%

3.4%

2.2%

Oil Co. Margin

24.7%

6.1%

9.0%

OPSF

2.1%

0.0%

0.0%

Dealer Margin

7.0%

5.7%

3.5%

Source of Primary Data: Industry   Players, BOC, BIR, DOE

 

 

Figure 3: Diesel Price Breakdown (1974-2012) in Pesos per Liter

 

 

 

Figure 4: Diesel Price Breakdown (1974-2012) in % of Pump Price

 

 

 

Table 9: Diesel Pump Price Breakdown by Regulatory Framework

DIESEL

Regulated

Deregulated

RVAT

 

(1974-97)

(1998-2005)

(2006-12)

CIF

66.7%

71.8%

78.6%

Biofuel

0.0%

0.0%

2.3%

Taxes

18.4%

14.9%

11.9%

BOC Fees

1.1%

0.2%

0.1%

Logistics

8.4%

4.5%

2.9%

Oil Co. Margin

-3.7%

1.9%

0.7%

OPSF

-0.4%

0.0%

0.0%

Dealer Margin

9.4%

6.8%

3.5%

Source of Primary Data: Industry   Players, BOC, BIR, DOE

 

 

Figure 5: Oil Company Margins (1974-2012) in % of Pump Price

 

 

 

Logistical import and local costs are minor costs which includes BOC fee, bank charges, arrastre charge, wharfage charge, import processing fee, customs doc stamps, transshipment, pipeline, depot, biofuels and hauling fee.

 

The oil pump price breakdown in Pesos per Liter and % of Pump Price are shown in Annex D.6 and Annex D.7, respectively.

 

It is worthy to note that gasoline taxes (customs duty, special duty or Estanislao Peso) were much higher during the regulated period (18.5% and 27.4%) vs. the deregulated period (21.1%). The same is true for diesel taxes: regulated period (18.4% and 14.9%) vs. deregulated period (11.9%).

 

Likewise, gasoline gross margin were much larger during the regulated period (24.7% and 6.1%) vs. deregulated period (8.8%) due to the regulator (ERB) ensuring positive returns even for the least efficient oil company so it may continue to survive to provide the needed security in oil supply.

 

However, diesel gross margin in both regulated and deregulated periods (-3.7%, 1.9% and 0.8%) were negative to marginal levels only, indicative of the high degree of cross-subsidy enjoyed by diesel product from the larger margins of the gasoline product. This is due to the fact that there is a conscious government effort to lower the cost of diesel used mainly for public transport (buses, jeepneys, taxis) by absorbing most of the costs of the imported crude from gasoline products.

 

However, this cross-subsidy of diesel could not be sustained in the long term during the regulated period, so much so that when the government deregulated the pricing of oil products in 1997, the gross margin of gasoline was reduced as subsidy for diesel was gradually phased out as shown in the above figures.

 

Currently, the diesel retail business has a very low gross margin that a retail station needs the higher margin from gasoline sales to support the overall viability of the retail station. Gas stations with mainly diesel sales are presently experiencing financial difficulty due to squezzed margins, and need to provide other services and rental investments to remain viable.

Oil Pump Price Formula to Predict Oil Price Adjustments

 

Regulated Period (1973 – 1997)

 

Initially, the TWG team for oil pump price presented the formulas during the regulated period (1973-1997) and deregulated period (1998-present) as well as the cost inputs provided by DOE such as Dir. Jesus Tamang (See Annex D.4).

 

Later on, after due consultation with the BIR and BOC and with the shipping and trucking groups and the oil companies, most of the cost inputs needed in the oil pump price formula were obtained.

 

The DOE Oil Industry Monitoring Bureau staff also provided the initial historical data on a daily basis from 1973 to 2012 consisting of pump price (gasoline, diesel), DUBAI, MOPS (gasoline, diesel) and FOREX. At this point, a sample excel file was prepared for editing by the DOE and the oil companies to supply historical data on a monthly average.

 

The TWG team on oil pump price presented the following formulas for calculating the absolute pump price patterned to the regulated period:

 

FOB$, $/bbl = MOPS + PREMIUM

CIF$, $/bbl = FOB$ + FRT$ + INS$

CIF, P/bbl = CIF$ x (FOREX, P/$)

SUB1, P/bbl = CIF + WFG + BOE + OCN + DOC + DMR + DUT + SPE

VAT1, P/bbl = SUB1 x 12%

DPLC, P/bbl = SUB1 + VAT1

DPLC, P/L = (DPLC, P/bbl) / (158.9868 L/bbl)

OCGM, P/L = DPLC x % OCGM

SUB2, P/L = OCGM + BIOFUEL + DEPOT + DM + HF + TS

VAT2, P/L = SUB2 x 12%

LOCAL COSTS, P/L = SUB2 + VAT2

PUMP PRICE, P/L = DPLC + LOCAL COSTS

 

Where:

 

FRT$ = ocean freight = FOB$ x 2.00%

INS$ = ocean insurance = FOB$ x 4.00%

WFG = wharfage and arrastre charges, P/bbl

BOE = Board of Energy fee = CIF x 0.10%

OCN = ocean loss = CIF x 0.50%

DOC = doc stamps = CIF x 0.15%

DMR = demurrage (actual claim for unloading delays)

DUT = customs duty = CIF x 3.00%

SPE = specific tax (excise tax) = 4.36 P/L gasoline, 1.63 P/L diesel

OCGM = oil company gross margin, P/L = DPLC x % OCGM

% OCGM = % oil company gross margin, % of DPLC

 

Based on monitoring of 2007 annual average MOPS, exchange rate and pump price, the oil company margin as % of DPLC is shown below (See Annex D.4):

 

% OCGM = 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.

 

BIOFUELS = 2% x 80 P/L of CME for diesel, 10% x 50 P/L of ETHANOL for gasoline

 

DEPOT = 0.250 P/L (depends on bulk plant location and type of products carried)

 

DM = dealer’s margin = 1.200 P/L for gasoline, kerosene, avturbo, diesel

= 1.3640 P/kg for LPG

 

RM = refiller’s margin = 0.500 P/kg for refillers of LPG

 

TS = transshipment = 0.200 P/L for gasoline, kerosene, avturbo, diesel; 0.0897 P/L for fuel oil; 0.3226 P/kg for LPG (tankers and barges)

 

HF = hauler’s fee = 0.1140 P/L for gasoline, kerosene, avturbo, diesel

= 0.1254 P/L for fuel oil

= 0.3059 P/kg for LPG

 

If the purpose is to compute the incremental price adjustment between period 2 and period 1, most of the cost factors will cancel out (WFG, DMR, SPE) and the following simplified equation shows that the main price determinant would be the change in FOB and FOREX as well as the assumed % oil company gross margin and current level of customs duty and VAT:

 

ADJ = Change in DPLC + Change in LOCAL COSTS

 

ADJ = { [ FOB(2) x FOREX(2) – FOB(1) x FOREX(1) ] x (1 + 2.00% + 4.00%) x (1+ 0.10% + 0.50% + 0.15% + 3.00%) } 1.12 / 158.9868 x (1 + % OCGM x 1.12)

 

By simply monitoring the MOPS or FOB and the FOREX, the expected oil pump price adjustments could be estimated quickly since the MOPS of FOB, FOREX and %OCGM or gross margin are known/regulated during that period.

 

Deregulated Period and RVAT Period (oil company gross margin unregulated)

 

With the advent of oil deregulation and varying regulatory framework (RVAT), the first step is to calibrate the model by calculating the oil company gross margin from the pump price (PP) and Duty Paid Landed Cost (DPLC) and subtracting the other logistical costs and VAT:

 

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

 

Then, the predicted pump price may be calculated from the following formula which starts from the supply cost to the oil marketer or oil refiner (DPLC), then adding the local value adding activities such as refining and marketing, transshipment, pipeline, depot, biofuel, hauling fee and dealer’s margin. Adjustments due to level of biofuel addition, any subsidy (OPSF) and % gross margin of the oil company are also made:

 

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

 

The theoretical pump price in period 1 (previous period) is calculated from DPLC1 which is a function of MOPS1 or DUBAI1 and the exchange rate FOREX1; while the period 2 (current period) is calculated from DPLC2 which is a function of MOPS2 or DUBAI2 and FOREX2:

 

PP1 = function of DPLC1 (DUBAI1 or MOPS1, FOREX1)

PP2 = function of DPLC2 (DUBAI2 or MOPS2, FOREX2)

 

Then the theoretical price adjustment (Delta PP) is finally calculated:

 

Delta PP = PP2 – PP1

 

The calculation of PP1 and PP2 is found at the bottom of the Excel Model prepared by the TWG (See Oil Price Model worksheet).

 

A complete example for oil pump price calculation for Jan-May 2012 is shown in Annex D.5. It is recommended that this Excel Model be made available to the public for their calculations in the spirit of transparency. Sample data may be provided to guide the public on how it is used.

 

The first step is to calculate the DPLC from the parcel size, import costs, exchange rates and government taxes and imposts. Then all the importation value adding activities are added up and a 12% VAT is applied to arrive at the DPLC.

 

 

Table 10:Duty Paid Landed Cost (DPLC) Calculation Model

DPLC Calculator    
As of Jan-Jun 2012 average

Gasoline

Diesel

Parcel Size, Bbl

300,000

300,000

Liters per Bbl

158.9868

158.9868

Total Volume, L

47,696,040

47,696,040

Density, kg/L

0.75

0.80

Total Metric Tons (1000 kg)

35,772

38,157

MOPS, $/Bbl

124.351

129.084

FOB, $

37,305,163

38,725,207

Freight, % FOB

2.00%

2.00%

Insurance, % FOB

4.00%

4.00%

CIF, $

39,543,472

41,048,719

Exchange Rate, PhP/$

42.911

42.911

CIF, PhP

1,696,843,029

1,761,434,401

Customs Duty, % of CIF

0.00%

0.00%

Customs Duty, PhP

0

0

Special Duty, PhP/L

0.00

0.00

Special Duty, PhP

0

0

Brokerage Fee, PhP

2,126,104

2,206,843

Bank Charge, PhP

2,121,054

2,201,793

Arrastre Charge, PhP

4,364,188

4,655,134

Wharfage Charge, PhP

1,311,045

1,398,448

Import Processing Fee, PhP

1,000

1,000

Customs Doc Stamps, PhP

256

256

Excise Tax, PhP/L

4.35

0.00

Excise Tax, PhP

207,477,774

0

Landed Cost (LC), PhP

1,914,244,449

1,771,897,874

VAT1 on Importation, % LC

12%

12%

VAT1 on Importation, PhP

229,709,334

212,627,745

Duty Paid Landed Cost, PhP

2,143,953,783

1,984,525,619

Duty Paid Landed Cost, PhP/L

44.9504

41.6078

Source: Bureau of Customs calculation procedure

 

The second step is to add the pure oil costs with the biofuels that will be added to the fuel blend. Gasoline is 90% petroleum and 10% ETHANOL while diesel is 98% petroleum and 2% CME BIODIESEL.

 

 

Table 11: Oil Pump Price Calculation Model

Pump Price Model    
As of Jan-Jun 2012 average

Gasoline

Diesel

  % Pure Oil

90.00%

98.00%

DPLC, PhP/L

40.4553

40.7756

Oil Company Gross Margin, % of DPLC

16.96%

2.17%

Oil Company Gross Margin, PhP/L

6.8628

0.8854

Refining Cost, PhP/L

0.0000

0.0000

Transshipment, PhP/L

0.4707

0.5125

Pipeline Cost, PhP/L

0.0000

0.0000

Depot Operation, PhP/L

0.2805

0.3052

Pure Biofuel Cost, PhP/L biofuel

37.7897

61.6786

  % Biofuel in Blend

10.00%

2.00%

Biofuel Cost, PhP/L

3.7790

1.2336

Hauler’s Fee

0.3599

0.1970

Dealer’s Margin

1.8260

1.4717

  Sub-Total Local Costs,   PhP/L

13.5788

4.6053

VAT2 on Local Costs , %

12%

12%

VAT2 on Local Costs , PhP/L

1.6295

0.5526

OPSF

0.0000

0.0000

Pump Price, PhP/L

55.6635

45.9336

Source: DOE, Oil Companies and Engr. Marcial Ocampo.

 

Based on the above oil company gross margin and pump price, the % return on sales of the oil industry is estimated to be 5.39% on sales which is comparable to the one calculated using the financial statements submitted by the oil companies to SEC. The weighing factor used is 1 part gasoline sales per 2 part diesel sales as per DOE advise.

 

Table 12:Estimated Oil Company Gross Margins

Gasoline

Diesel

Oil Company Average

Assumed Volume Share

1/3

2/3

3/3 =100%

Gross Margin (P/L)*

6.8628

0.8854

2.8778

Pump Price (P/L)*

55.6635

45.9336

100% x Gross margin / Pump   Price

12.33%

1.93%

5.39%

*Based on raw   data for period covering Jan-June 2012

 

Retail Market Competition and Actual Oil Pump Price

 

Oil firms should ensure that they do not charge their customers prices that bear no reasonable relation to the economic value of the good or service provided, and is above that economic value. In the end, competition dictates final oil pump price (regional price fluctuations and differences).

 

As to whether the level of over-recovery constitute profiteering is a subjective matter that needs to be validated by having consistently large variance over the predicted or calculated pump price based on a reasonable % gross margin. It is intuitive to calculate the long-term average % gross margin to see how the oil refiner or oil marketer operates to recover its invested capital.

 

After this IOPRC exercise, it may be entirely possible that a standard norm on % gross margin for crude oil refiners and oil importers/marketers would be adopted through a greater understanding and sensitivity to the plight of the end consumers. The level of % gross margin adopted will enable the crude oil refiners and oil importers/marketers recover their costs and expenses and earn a reasonable profit comparable to other capital-intensive industries that will allow a sustainable operation while protecting the rights of the consuming public from overpricing.

 

Thus, the DOE or an independent entity could estimate the calculated pump price given changes in the MOPS, FOREX, customs duty, excise tax and VAT, and other cost inputs incurred during importation and local delivery of the product.

 

By regularly monitoring the variance between the actual pump price and calculated pump price, the cumulative and average variance over an agreed period (say 1 year period) should approach zero if there is neither under-recovery nor over-recovery.

 

In this manner, the DOE thru its independent entity, could assure the oil consuming public that the oil industry participants are not over-profiteering at the expense of the end consumers and the oil industry is a vibrant and sustainable contributor to the national economy by way of its provision of timely, affordable and secure oil supplies, collection of needed government revenues (customs duty, specific tax, value added tax and other fees), and it conducts its business in a responsible and transparent manner with assurance of reasonable returns.

 

Adjusting local prices to reflect correctly the international oil price movements will also protect the country from unwanted smuggling and loss of valuable tax revenues: pricing our products below international prices will encourage smuggling of oil products out of the country with higher prices while pricing our products above international prices will encourage smuggling of oil products into our country. This will happen if we adopt regulated pricing using the OPSF mechanism for compensating oil companies when prices are kept artificially low, and overpricing the consumers when international prices are low to build-up the OPSF buffer.

Is there Overpricing of Oil Products?

 

Is the gross oil company margin (to recover refining and marketing costs, to provide profit margin) excessive?

 

The ratio of MOPS gasoline to Dubai crude and MOPS diesel to Dubai crude is approximately the processing/refining cost needed to convert crude oil to its finished product form. It ranges during the early years from 1.179 (gasoline) and 1.144 (diesel) indicating that gasoline is more expensive to process than diesel during the 1984 period. (See ANNEX D.1)

 

In later years by 1997 at the end of the regulated period, the ratio of MOPS gasoline to Dubai rose to 1.354 while that of diesel to 1.337, maintaining the same relative cost ratio. By 2002, this cost ratio dropped to 1.176 for gasoline and 1.167 for diesel.

 

By 2007, the ratio increased to 1.212 for gasoline and 1.277 for diesel, indicating that diesel has become more expensive to process than gasoline thru the use of more thermal catalytic cracking (TCC) units to produce more diesel and gasoline from crudes and minimize exports of fuel oil and pitch stocks at a price lower than crude cost.

 

By 2011, the ratio has stabilized to 1.127 for gasoline and 1.188 for diesel. For the first half of 2012, the ratio is 1.119 for gasoline and 1.162 for diesel. So if you have Dubai crude cost, simply multiply by 1.119 to convert to MOPS gasoline and 1.162 to convert to MOPS diesel, i.e. you need to add 11.9% and 16.2% as cost of processing for gasoline and diesel respectively from Dubai crude oil.

 

The next significant ratio is the ratio of actual pump price to the Duty Paid Landed Cost of each product. This is the ratio of all the cost build-up of the raw material and delivering it to the end consumer after adding all the additional costs and taxes. There were periods of high ratios which resulted in large % oil company gross margins (See ANNEX D.2 for gasoline and ANNEX D.3 for diesel).

 

For gasoline during the regulated period 1984-1997, large ratio (1.375) of gasoline pump price to DPLC indicated a large % oil company gross margin (31.93% or 1.189 P/L gross margin from a DPLC of 6.584 P/L and predicted pump price of 9.053 P/L).

 

Diesel during the same regulated period 1984-1997 had a smaller ratio (1.160) with a moderate % oil company gross margin (7.26% or 0.198 P/L gross margin from a DPLC of 5.361 P/L and predicted pump price of 6.220 P/L).

 

During the deregulated period 1999-2005, the ratio was smaller (1.148) for gasoline with a modest % oil company gross margin (6.74% or 1.027 P/L gross margin from a DPLC of 17.423 P/L and predicted pump price of 19.993 P/L); while diesel had a much smaller ratio (1.091) with a very small % oil company gross margin (1.38% or  -0.075 P/L gross margin from a DPLC of 14.786 P/L and predicted pump price of 16.129 P/L).

 

The years of 1984-1988 exhibited very large ratio of around 1.727-2.417 with very large % oil company gross margin (63-119%) for gasoline; while for diesel, the ratio was also large up to 1.305-1.778 resulting in also large % oil company gross margin (21-44%).

 

Surely, the oil industry has its ups and downs during periods of uncertainties and crisis and the DOE needs to look into this further for an explanation of the large margins during the 1984-1988 periods. However, data from the DOE/ERB suggests large OPSF contributions by the oil companies during the 1984-1988 periods indicating the part of the calculated margins went to beefing up the OPSF. This was a period of large margins to recoup previous losses and also to contribute positively to the OPSF fund.

 

With the R-VAT deregulated period 2006-2012, the ratio stabilized at (1.209) for gasoline with a modest % oil company gross margin (11.57% or 4.322 P/L gross margin from a DPLC of 37.491 P/L and predicted pump price of 45.312 P/L; while diesel had stagnated at a small ratio (1.091) with oil company gross margin 0.79% or 0.316 P/L gross margin from a DPLC of 34.775 P/L and predicted pump price of 37.940 P/L).

 

The entry of my small players into the oil industry as a result of the Oil Deregulation Law somewhat provided competition that restrained the ratio pump price to DPLC and % oil company gross margins to respectable levels from the view point of consumers, but also provided sustainable returns.

 

As of June 2012, gasoline have average returns of 16.96% of DPLC or 6.863 P/L which seems to compensate for the much lower diesel average returns of 2.17% of DPLC or 0.885 P/L. This is a sentiment that was borne out during the consultation with the Big 3 (Caltex, Shell, Petron) and the minor oil industry players.

 

The following table shows a comparison of the pump price breakdown between 1997 (regulated) and 2012 (deregulated RVAT) periods. It is noteworthy to mention that supply cost (CIF) has increased by 14.4% to 18.3%; taxes (customs duty, exise tax and VAT) has decreased (-24.2% and -11.8%), logistical costs (imporation and local delivery) has generally decreased indicative of higher efficiency in transporting the fuels (-1.7% and -3.1%), oil company gross margin have increased for gasoline (8.1%) while diesel margins have declined (-2.7%), and lastly dealer margins continued to be squezzed by rising pump prices (-3.4% and -5.0%).

 

Table 13:Oil Company Margins (1997 vs 2012) in % of Pump Price

U   N L E A D E D   G A S

D   I E S E L

1997

2012

Change

1997

2012

Change

CIF

43.2%

57.5%

14.4%

60.5%

78.8%

18.3%

Taxes

41.9%

17.7%

-24.2%

22.5%

10.7%

-11.8%

BOC Fees

0.2%

0.0%

-0.2%

0.4%

0.0%

-0.3%

Logistics

3.9%

2.3%

-1.7%

5.7%

2.6%

-3.1%

Oil Co. Margin

4.2%

12.3%

8.1%

4.6%

1.9%

-2.7%

OPSF

-0.2%

0.0%

0.2%

-1.9%

0.0%

1.9%

Dealer Margin

6.7%

3.3%

-3.4%

8.3%

3.2%

-5.0%

Source of Primary Data: Industry   Players, BOC, BIR, DOE

 

The table above shows there are more benefits arising from deregulation as compared to the regulated environment where pump prices are fixed at uniform intervals, and undergo a politically-charged ERB hearings to arrive at the new prices, where upon massive under or over recoveries accumulate, thus resulting in unwanted consequences such as hoarding in anticipation of huge price increases, inward smuggling into the country when prices are kept high compared to neighboring countries in order to replenish the OPSF, and outward smuggling towards our neighboring countries when prices are kept low when oil companies withdraw from the OPSF to keep prices artificially low. In either case, the government’s tax revenue losses are tremendous due to inward smuggling and security of supply is never assured because of outward smuggling.

 

Hence, a refiner, importer or retailer needs to have more than modest gasoline sales to compensate for the lower diesel margins in order to survive and sustain its operations. Thus single pumps selling diesel products only will find it difficult to survive since it has to match the lower price of other competitors selling diesel and gasoline products.

Is there Excessive Profits resulting in Grossly Unfair Prices?

 

The largest absolute gross margin for gasoline was 7.300-6.863 P/L in 2011-2012 to recover all costs and provide a profit which is nowhere from the claimed over 8.00 P/L overprice (that is gross margin to meet costs and reasonable profit to sustain operations).

 

For diesel, the largest absolute gross margin was 1.437-1.257 P/L way back in 1985-1986 during the good years of the oil industry consisting mainly of crude oil refiners during the regulated period.

 

However, if some players would not pay the right taxes (customs duty, specific tax, VAT on imports and local activities), then indeed there would be an overprice perhaps of that 8.00 P/L magnitude, but certainly, not from the law-abiding oil industry participants that pays dutifully all taxes upon importation and withdrawal from their customs bonded warehouses and issuance of official receipts to the end users at the retail outlets and direct customer accounts.

 

Is there an over price today for gasoline and diesel? THE ANSWER IS NONE.

 

Using an oil pump price calculation model developed by the Committee — wherein the retail prices of gasoline and diesel are built up from import costs to transport and distribution including all taxes — there is no evidence of overpricing:

 

  • Using the OPPC model developed by the IOPRC, no evidence was found of overpricing of some P8 per liter for diesel and P16 per liter for unleaded gasoline, as claimed by some consumer groups.
  • As of June 2012, the average oil company gross margin was estimated at 16.92% of Total Paid Landed Cost (DPLC) for gasoline and 2.20% of DPLC for diesel.
  • In June 2012, the average oil company gross margin as percentage of pump price is 12.3% (6.86 Pesos per Liter) for gasoline and 1.9% (0.88 Pesos per Liter) for diesel. This gives a weighted average of 5.4% (2.88 Pesos per Liter), assuming that sales proportion are in the order of one-third gasoline sales to two-thirds diesel sales.
  • The oil company gross margin for gasoline during the regulated periods were much larger than that during the deregulated period, indicating the level of competition arising from the oil industry deregulation law.
  • On the other hand, the oil company gross margin for diesel during the regulated period, as well as during the deregulated period, were consistently lower compared to gasoline. This suggests that oil companies are cross-subsidizing diesel from their higher gasoline margins to sustain their operations.

 

The oil pump price breakdown (1973-2012) in Pesos per Liter and % of Pump Price are shown in Annex D.6 and Annex D.7, respectively.

 

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