ECONOMIC STING

PUZZLERS ECONOMIC STING

2020-05-31T13:05:00.000-07:00

TITLE: Puzzlers Economic Sting
AUTHOR: Marcelo L.Tecson
EDITED BY: Erick A. San Juan, Casiano A. Navarro.
PUBLISHED: Makati City : Raiders of the Lost Gold Publications, © 2005.
ISBN: 9719204923
DESCRIPTION: xviii, 247 p. ; 25 cm.
SUBJECT: Economic Crisis / Asian Financial Crisis

DEBUNKING THE MYTH OF OIL DEREGULATION: IT PRODUCED HIGHER—NOT LOWER—PRICES

2011-12-18T21:50:00.000-08:00

DEBUNKING THE MYTH

OIL DEREGULATION:

IT PRODUCED

HIGHER—NOT LOWER—PRICES

* * *

EXECUTIVE SUMMARY

THE MOST BASIC ISSUE AGAINST

DEREGULATION IS A QUESTION OF FACT:

DID IT REALLY PRODUCE LOWER PRICES?

IF NOT—AND IF ON THE CONTRARY IT SPAWNED

HIGHER PRICES—IT SHOULD BE DISMANTLED

1. The free market economic wisdom underpinning oil deregulation is misapplied under the peculiar conditions of the oil industry at the end of the past regulated regime, hence free market competition under the ensuing deregulation could not have produced the expected lowering of prices.

The government instituted oil deregulation in 1998 on the expectation that free market competition under it will yield a lowering of oil prices.

In early 2005, President Gloria M. Arroyo created an ad hoc Independent Review Committee (IRC) tasked to evaluate the wisdom and efficacy of oil deregulation instituted in 1998. In 2008, independent experts from the auditing firm SGV and the University of Asia & the Pacific (SGV-UA&P) conducted their own oil pricing study, which they submitted to the Department of Energy (DOE).

In its 2009 presentation materials to the House Committee on Energy, DOE cited the conclusions of the IRC and SGV-UA&P experts, quoted as follows:

IRC, on competition under deregulation: “There are both positive and negative effects on competition. The effect on lowering prices outweighs other effects.”

SGV – UA&P, on oil prices: “A comparison of the share of the oil company take in 2007 with that in 1998 shows the same trend of a declining share of the pump price that goes to the oil company.”

Peculiar Conditions in the Oil Industry

Under Past Regulation Did Not Lend to

a Lowering of Prices Under the Ensuing

Deregulation

The two independent study groups’ finding of lowered prices under deregulation has to be reviewed because it did not jibe with reality in the oil industry.

It appears that free market competition under deregulation could not produce the expected lowering of prices—because there was not much elbow room for price reduction owing to the following peculiar conditions in the oil industry at the advent of deregulation:

(a) There was NO prior HIGH MARGIN under past regulation from which price reduction under deregulation could be sourced.

(b) There was NO source of significant COST SAVINGS that could be passed on as price reduction to customers.

In effect, oil deregulation is a misapplication of free market economics in the wrong economic environment—the CAPTIVE local oil market, where, to maintain proper prices, the government has to intervene. It is the height of naiveté to expect oligopolistic sellers to charge their captive customers the possible lowest prices under supposed free market competition. Only outright regulation will make lowest prices possible in captive markets, as was done in the past for more than two decades right in the oil industry.

As a rule, REGULATION—not deregulation or free market—will provide order and sanity in CAPTIVE markets controlled by monopolies and oligopolies, like those in the oil, water, power, public transport, and tollway industries.

There was NO prior HIGH MARGIN under past
regulation from which price reduction under

the ensuing deregulation could be sourced

The main peculiar condition in the oil industry as of 1998 consisted of the old regulated prices set at levels that yielded barest minimum or rock bottom PESO MARGIN per liter to the industry. Consequently, upon the onset of deregulation, the unrestrained oil companies could be expected to raise their margin on sales but not reduce it further. Theywill not foolishly reduce voluntarily their prices to levels that will further erode their old government-set low profit rate on sales.

There was NO source of material COST SAVINGS

that could be passed on as price reduction to

customers—because (1) bulk of costs constitutes

non-controllable costs, and (2) the arena for price

competition in the local oil industry is very

limited: in the MARKETING phase only,

instead of in both production and marketing.

In the oil industry, three non-controllable costs alone—cost of imported oil, direct labor, and taxes—constitute roughly 90 percent of total cost, especially after crude oil prices soared in 2008 to unprecedented heights. As a result, both old and new players have very little elbow room for reducing prices out of SAVINGS from cost reduction in relatively minimal controllable costs.

Further, 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 crude oil production—hence their costs are much smaller than those of companies with integrated production and marketing operations.

For example, 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 mainly in the production aspect—which is not the case in the local oil industry.

In the absence of significant source of cost savings, deregulation will promote higher prices because with the sharing and division of the existing fixed market pie over the greatly increased number of economic players, and with resulting reduced or low per capita sales volume for each of them, there will be compelling desire for everybody to raise PESO MARGIN per liter to generate the absolute amount of net income satisfactory to each of them. With present HIGH MARGIN, the three oil majors are compensated for part of their market shares eaten up by the new market players, while the new players with still LOW SALES VOLUME are appeased by the significantly raised margin per liter—a win-win solution for all of them at the expense of the buying public.

2. The government-commissioned Independent Review Committee in 2005, as well as the private independent experts in 2008, stopped short of accurately determining if indeed there had been an actual lowering of prices under oil deregulation instituted in 1998, because they looked at the DECLINING relative rate (in PERCENT) of margin on prices, but not at the RISING absolute amount (in PESOS per liter) of margin on the same prices, which turned out to have rocketed: it TREBLED in the case of gasoline and QUADRUPLED in the case of diesel—a clear case of RISE in prices under deregulation.

To Begin With, What Does

“LOWERING of PRICES”

Under Deregulation Mean?

The oil industry selling prices consist of two main components, utilized by oil companies as follows:

First component: COST RECOVERY, for replenishment of operating capital used to pay business costs and expenses.

Second component: MARGIN on sales, for retention in the industry as profit, to be partly plowed back into the business and partly distributed as dividends to company stockholders.

If there has been a lowering of oil selling prices owing to free market competition under oil industry deregulation instituted in 1998, the price reduction could have emanated only from MARGIN on sales—because, as stated, the oil companies would not be foolish enough to reduce their prices to the extent of part of COST RECOVERY component. Doing so on a long-term basis is unsustainable. It would make them incur annual NET LOSS that would eventually drive them out of business.

In essence, anticipated “lowering of prices” under oil deregulation actually means lowering of MARGIN on sales—specifically, the PESO MARGIN on selling prices per liter, not PERCENT margin on the same prices, because, as explained hereafter, the latter becomes misleading and deceptive once there is drastic increase in prices that serve as base amounts.

In which case, when government-commissioned and independent experts concluded in 2005 and 2008 that oil deregulation should continue because it produced a lowering of prices, they should have meant lowering of PESO MARGIN on per liter prices.

Deregulation Bred DECLINING PERCENT Margin on Sales,

But with Equivalent RISING PESO Margin on Selling Price

per Liter, Owing to Drastic Rise in Base Amount—Exactly

the Situation that Eluded Exalted Experts Who Fallaciously

Affirmed the Wisdom of Deregulation Over Regulation in

2005 and 2008

Indeed, the exalted experts reported declining MARGIN on selling prices of oil products. However, they gathered—apparently from the Department of Energy—and meant only the declining RELATIVE RATE (in PERCENT) of margin on sales, such as, in the case of gasoline as shown in Part I hereof, 23% as of 1998, down to 16% as of 2005. In the case of diesel, it was 24% as of 1998, dropped drastically to 9% by 2005.

In its August 22, 2005 front-page news story, using the incomplete data reported by the government-commissioned Independent Review Committee in June 2005, thePhilippine Daily Inquirer conveyed the Committee’s misleading message that there was a lowering of gasoline price because margin on sales dropped significantly from 23% to 16% as of 2005, but the Committee was silent on the fact that the lower 16% margin is now applied to a much bigger base amount of P31.18 selling price per liter—vs. the old base of P11.62 per liter—thereby yielding a much higher P5.00 margin per liter, almost twice the old P2.67 per liter margin!

Use of Declining PERCENT Margin on Sales

is Sure to be Correct—Only if Base Amount

is Constant, Otherwise Absolute Amount of

Margin (PESOS per liter) Has to be Calculated

The government-commissioned and independent experts’ use of DECLINING PERCENT MARGINS on SELLING PRICES as bases for concluding that there had been a lowering of prices under deregulation as of 2005 and 2008 would have been correct if the base amounts or selling prices were constant, but these were not. In reality, the lower PERCENT margins on sales as of 2005 and 2008 were based on much HIGHER selling prices, hence the experts’ finding of lower deregulated prices was not correct.

Declining PERCENT Margin on Sales Can Drop to

Measly ONE PERCENT and Still Yield Higher Price—

If Base Amount Rose to Astronomical Heights

To drive home the point, let us look at an extreme hypothetical example. The 23% margin on gasoline price of P11.62 per liter as of 1998 equated to P2.67 per liter absolute amount of margin. This 23% margin can drastically drop to say 1% of selling price and yet there would still be a fantastic rise in price.

To illustrate, if the P11.62 per liter gasoline price rose to P100 MILLION per liter, the assumed dramatically reduced 1% margin on it would be a whopping P1 MILLION per liter—certainly a case of staggering rise in price despite the drastic decline in PERCENT margin from 23% to assumed 1%.

Under the situation, the experts’ proper way of determining if in fact there had been a lowering of prices under deregulation was to look at the equivalent ABSOLUTE amount (in PESOS per liter) of the declining PERCENT margin on sales as of 1998, 2005, and 2008.

BELIEVE IT OR NOT,

OIL PRICES ROSE UNDER DEREGULATION

If so, if LOWERING of prices under deregulation should

actually mean DECLINE in PESO—not PERCENT—margin

on prices, where is it? I could not find the touted

lowered PESO margin per liter in the experts’ reports in

2005 and 2008; what I found was rising PESO margin

per liter that constituted INCREASE—not lowering—of

deregulated prices.

As reported by the Independent Review Committee in 2005 and cited by the Department of Energy in its 2009 presentation to the House Committee on Energy, the lowering of prices under deregulation outweighs other considerations, hence it was the clincher in their conclusion affirming the supposed superiority of deregulation to regulation. However, from the experts’ 2005 and 2008 reports, as well as from DOE’s 2009 presentation, I could not find the conclusive proof of lowered deregulated prices—that is, decline not only of PERCENT margin on sales but also of PESO margin per liter.

The experts’ use of declining PERCENT margin on sales as basis for concluding lower deregulated prices is ERRONEOUS, because the base amounts (selling prices) registered substantial increases, so that the equivalent PESO margin per liter actually went up, not down. As shown in Part II of this paper, by 2008, the 1998 PESO margin per liter on gasoline TREBLED from P2.67 to P8.00 per liter, while that on diesel QUADRUPLED from P1.94 per liter to P7.69 per liter.

In short, contrary to what experts have reported in 2005 and 2008, there has been a significant RISE—not lowering—of oil prices under DEREGULATION.

3. Past oil industry regulation did not mean fixing of selling prices at arbitrary levels regardless of subsequent increase in oil importation costs—which could have resulted in net losses to oil companies and driven them away if it were so.

Past government regulators set selling prices that yielded the authorized fixed peso margin per liter of products to the oil companies, then adjusted the selling prices upwards or downwards whenever there were subsequent cost increases or decreases that would disturb the targeted peso margin per liter. In this manner, the oil companies were assured of return for their capital and efforts, while the spending public was protected from unwarranted overpricing and profiteering.

Under the past regulated regime, the big three oil companies had the entire market for themselves. This explains why they could afford to accept lower margin per liter of product. What they lacked through LOW MARGIN on prices, they made up for through HIGH SALES VOLUME. Consequently, small independent players could not compete with them then as the small players, given their low sales volume, could not live with low margin on prices.

4. Past oil regulation regime that spanned almost three decades did not drive away major oil players from the country, despite much lower PESO MARGIN on sales during the period.

Oil regulation started in the Philippines when R.A. No. 6173, which created the Oil Industry Commission—now Energy Regulatory Commission (ERC)—was enacted in 1971. It ended upon the nation’s shift to deregulation in 1998.

During the regulated regime, the oil companies did not complain against price regulation 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.

5. Today, some 13 years after institution of oil deregulation in 1998, the oil companies appear to have built up comfortable peso-per-liter profit rate on their selling prices, hence there is some latitude for price reduction if the government will opt for needed oil regulation—which can be done even without reviving the past mismanaged Oil Price Stabilization Fund (OPSF).

The oil industry is a sensitive one because lack of its products will bring the economy to a halt, while increases in its product prices trigger inflation, or chain increases in other product prices. Therefore, the oil industry cannot be left to its profit-oriented members. The government cannot delegate to oil companies the protection of the interests of the oil-consuming public. Based on data reported by the government-commissioned experts in 2005 and independent experts in 2008, when nobody was looking, the oil companies managed to raise their old regulated barest-minimum PESO margin per liter to much higher level, such as from P2.67 to trebled P8.00 per liter, and from P1.94to quadrupled P7.69 per liter, in the cases of gasoline and diesel, respectively. The latest substantially high profit rates have to be tempered under our present distressed economic conditions.

The Department of Energy declared sometime in the past that a particular oil industry price increase designed to recover oil importation cost increase was in order, butenergy officials have missed the point—or great probability—that tacked on to existing oil prices are accumulated past amounts of overpricing or cost-increase over-recoveries, which have to be reduced by way of needed special rollback in present prices. As an interim measure, DOE officials should promptly attempt to attain such rollback through moral suasion. Whether they are successful or not, the nation should return to oil regulation.

6. Impact of P1.00 per liter price increase or average increase in margin

At our present national oil consumption of roughly 300,000 barrels per day (159 liters per barrel), considering that P1.00 per liter unwarranted increase in average peso margin per liter will translate to a staggering more than P17-BILLION oil industry overpricing per year, it is very important that the cited trebled and quadrupled peso margins on gasoline and diesel prices, respectively, be promptly reduced by, at the very least, P1.00 per liter, or whatever is appropriate based on 2011 data and statistics.

PROPOSED RETURN TO OIL REGULATION

WITHOUT OPSF SUBSIDY MECHANISM

Oil regulation can be reinstituted in a limited or simplified way, devoid of all misconceived implementation problems, favorable to the economy as it will help stem inflation triggered by unwarranted product overpricing, at the same time protective of national interests through conscious and direct government effort aimed at addressing risks and problems in the oil industry, such as lack of diversified sources of reliable oil supply, insufficient oil inventory, and illogical overpricing in some captive markets like Cebu.

The recommended simplified and doable regulation scheme is as follows:

· At the start of return to regulation, the Department of Energy (DOE) shall study and recommend to the Energy Regulatory Commission (ERC) the new oil industry selling prices that will serve as benchmark prices for future price adjustments. The recommended selling prices will yield lower but still tolerable PESO MARGIN per liter to oil companies—the same scheme followed in the past regulation regime.

· Thereafter, oil companies have to submit price increase petitions to ERC every time they need price increase to recover new cost increase.

· ERC shall review the price increase petitions and, if warranted, approve the AMOUNT of price increase per liter of each oil product on COST-RECOVERY basis only, to ensure that there is no overpricing.

· ERC shall review and approve the EFFECTIVITY DATE of price increase, to ensure that there is no profiteering on low-cost oil inventory.

· ERC shall be given a period for reviewing the price increase petitions and deciding on them. The review period maybe 30 days, equated to the number of days the oil industry’s low-cost oil inventory will last.

So that the oil industry will not become hostage to the government’s bureaucratic red tape, if ERC failed to issue its decision on the price increase petition within the allotted review period, the oil companies can UNILATERALLY RAISE PRICES, subject to ERC’s subsequent order of downward adjustment over a limited adjustment period, if the total price increase unilaterally implemented is higher than the proper price increase eventually determined by ERC.

· There will be no revival of the supposed OPSF subsidy scheme because it will not be needed—the present PROMPT PRICE INSREASES under free market or deregulation will be maintained, subject to the valid and equitable limitation that the price increase will take effect upon exhaustion first of low-cost oil inventory.

· Oil companies shall regularly report to DOE their oil importation costs. Whenever there is material cost decrease, DOE shall petition ERC for corresponding reduction in selling prices, to take effect upon exhaustion of the oil industry’s high-cost oil inventory.

In short, the recommended regulation scheme is mainly aimed at ensuring that the AMOUNT and TIMING of every oil industry PRICE INCREASE is PROPER. What is wrong with that and who are against it?

PART I

THE MYTH OF OIL DEREGULATION:

THE REPORTED LOWERING OF OIL PRICES

A. THE INDEPENDENT REVIEW COMMITTEE

PRESENTED THE WRONG WAY OF

IMPLEMENTING OIL REGULATION, THEN

CONDEMNED IT; IT FALLACIOUSLY

CONCLUDED THAT DEREGULATION

BROUGHT ABOUT LOWER PRICES, THEN

UPHELD IT

In its presentation on its June 2005 Report on the Downstream Oil Industry Deregulation Act of 1998 (RA No. 8479), the government-commissioned ad hocIndependent Review Committee, which included experts in accounting and economics, presented two possible options in the lowering of oil product prices:

(1) Ask oil companies to reduce prices.

(2) Provide subsidy.

As the Committee correctly concluded, the two options are not feasible. If, as a matter of policy, selling prices are fixed at arbitrary levels under which oil companies would incur losses without any prospect of making profits in the future, they would certainly close shop.

On the other hand, if the reduction in selling prices would be made up for by taxpayers’ subsidy, it is also not feasible because, firstly, as a rule the government avoids subsidy, and, secondly, even if it wants to provide subsidy in this case, it simply does not have the needed funds for it

1. Why the Independent Review Committee’s Conclusion is Assailable and Has to be Overturned: Its Two Price-Reduction OPTIONS Were Woefully LIMITED or INCOMPLETE, Thereby Giving Rise to Wrong Affirmation of Oil Deregulation over Regulation.

The two options presented by the Committee were incomplete. It did not include a third option already followed during the past regulated regime of almost three decades, implemented smoothly from the early 1970’s up to the time the OPSF was subsidy-free shortly before the outbreak of the first Gulf War in August 1990.

The available third option: reined in selling prices (meaning, devoid of overcharging) through government-authorized fixed PESO margin on per liter prices, to be indefinitely maintained through subsequently allowed price increase or decrease whenever there is significant cost increase or decrease. The Committee totally ignored or overlooked the regulation not of selling prices per se but of PROFIT RATES, under which there will still be competition on sales volume and market share. It is a feasible conventional method enshrined in our laws and followed under economic conditions not suitable for deregulation or free market, as in the case of franchise-holder utility companies and public-service-provider transport and tollway operators.

Oil industry regulation through allowing a predetermined PESO margin per liter of products is the recommended feasible option because it addresses the objections to the two options cited by the Independent Review Committee in June 2005, as follows: (1) It does not arbitrarily FIX the SELLING PRICES at amounts that will yield losses to oil industry. On the contrary, it automatically allows PROFITS to oil companies at targeted reasonable range depending on prevailing economic conditions. (2) It does not entail taxpayers’ SUBSIDY, just prompt PRICE adjustments on COST RECOVERY basis only—after allowing the predetermined PESO margin on selling prices.

The features of oil regulation that does not fix selling prices yet does not need OPSF subsidy are shown in the last part of the Executive Summary.

2. While it is true that the government cannot provide subsidy towards oil price reduction, such inability is irrelevant because the government can go into oil regulation—which will yield reasonable return to oil companies at the possible lowest prices to oil consumers—without the need for government subsidy.

As stated, timely raising of oil product selling prices will totally avoid the need for government subsidy under a regulated regime. This was successfully done for years before EDSA I in 1986, and this was done after EDSA I up to 1990. This can still be done today if desired.

3. Indeed, There are Existing Price/Rate Regulation Models to Go by in Oil Industry Regulation, and These Do Not Involve Setting of Prices/Rates at Fixed Immovable Levels Regardless of Consequences (Gain or Loss) to Economic Players, Hence Return to Oil Regulation is Not an Outlandish Idea and Has to be Done—Because it is Needed in Giving the Oil Consuming Public the Possible Lowest and Most Advantageous Prices

Regulating product selling prices or public service rates does not mean setting prices/rates at fixed immovable levels—regardless of whether the product suppliers or service providers lose or gain in the process whenever there is cost increase or decrease. There are available price/rate regulation models that have been generally accepted by all concerned—the spending public, industry players, government regulators, and multilateral financial institutions—depending on the amounts at which the prices/rates are set.

The most notable local models are as follows:

a. Regulated Maynilad and Manila Water rates, which are allowed to rise for the recovery of legitimate cost increases.

b. Regulated Meralco electric power rates and Transco distribution rates, similarly authorized to rise for the payment of valid cost increases.

c. Regulated expressway and skyway toll rates, set at amounts designed to attain targeted rates of return.

d. Regulated public transport fares, given rate increases whenever there are substantial diesel cost increases to be recovered.

e. Indirectly regulated bank spreads or margins within allowable range during and after the 1997-1998 Asian crisis, done through moral suasion by Bangko Sentral ng Pilipinas (BSP).

B. A PARTLY DIFFERENT GROUP OF REPUTABLE

INDEPENDENT EXPERTS REITERATED IN 2008

THE SAME INCOMPLETE PREMISE AND WRONG

CONCLUSION IN FAVOR OF OIL DEREGULATION

The Independent Review Committee’s assumed wrong way of implementing oil regulation, together with its unjustified affirmation of oil deregulation over regulation, was the product of its apparent deficient information gathering, its failure to talk to the right past energy officials involved in implementation of oil regulation for years, as well as its faulty interpretation of misleading incomplete statistics—unfortunate series of lapses that were repeated by a partly different group of independent experts in 2008. Their reports are available in the Internet.

Fallacious Conclusions in the “Report

of the SGV-UA&P Independent Study

on Oil Prices” Issued in 2008

As a result of IRC’s deficient information gathering, it created wrong impressions, perpetuated to this day, that apparently misled current DOE officials. The misleading impressions were affirmed in the subsequent “Report of the SGV-UA&P Independent Study on Oil Prices” dated May 2008, prepared by an IRC member and submitted to DOE. This second report failed to correct the following WRONG conclusions or IMPRESSIONS created by the 2005 IRC report:

(1) That OIL REGULATION denotes PRICE CONTROL at immovable fixed cap per liter of oil products, with subsequent cost increases and decreases to be charged or credited to an OPSF subsidy fund, with any resulting fund DEFICIT to be funded out of the General Fund emanating from taxation and other sources. Under such concept, oil regulation is not feasible owing to OPSF funding problem.

(2) That the rationale for OPSF is to serve as SUBSIDY mechanism of price control under oil regulation, that it started in 1984 under PD 1956, and that today’s suggested return to oil regulation will necessarily entail revival of the subsidy mechanism OPSF.

(3) That OIL DEREGULATION produced LOWER SELLING PRICES, as evidenced by declining PERCENT margins on per liter prices as of 2005 and 2008, compared to regulated percent margins per liter as of the onset of deregulation in 1998.

WHY THE INDEPENDENT EXPERTS’

CONCLUSIONS ARE FALLACIOUS

1. ON OIL REGULATION INTERPRETED AS PRICE CONTROL, ATTAINED THROUGH SETTING FIXED CAP ON SELLING PRICES REGARDLESS OF SUBSEQUENT COST INCREASES

This is a wrong concept of oil regulation. The proper way—which does not involve fixing of selling prices regardless of cost increases to oil companies—is shown in the Executive Summary, particularly no. 3 and the proposed return to oil regulation without OPSF subsidy mechanism. Under this proposal, the oil companies can recover 100% of their cost increases plus reasonable rate of return out of adjustable selling prices, but this option will not allow them to make any overprice—both as to amount and timing of price increases—beyond authorized limits.

2. ON OPSF SUBSIDY SCHEME AS TOOL OF OIL REGULATION

As pointed out in my earlier emails to Department of Energy officials and others concerned, the OPSF became a subsidy scheme simply because of prolonged delay in the government’s approval of drastic price increases to oil companies when the Gulf War broke out in 1990. Had prompt price increases been allowed then, the OPSF would not have developed a huge deficit that necessitated government subsidy. What’s more, OPSF is not an absolute necessity in oil regulation. In fact, the recommended return to oil regulation presented in the Executive Summary does not include the revival of OPSF.

3. ON THE CRUX OF THE MATTER: ALLEGED LOWER SELLING PRICES UNDER DEREGULATION AS BORNE BY DECLINING PERCENT MARGIN ON SALES

The cited two independent reviewers’ reports conveyed the message that the oil consuming public benefited from OIL DEREGULATION by way of LOWER SELLING PRICES, brought about by DECLINING PERCENT MARGIN on SALES under deregulation, as shown below:

a. OIL COMPANY TAKE ON GASOLINE SALES

(1) Percent margin on industry sales under oil regulation as of 1998: 23% of

P11.62 price per liter.

(2) Percent margin on industry sales under deregulation as of 2005: 16% of

P31.18 price per liter.

(3) Percent margin on refiner sales under deregulation as of 2008: 18% of

P44.45 price per liter.

b. OIL COMPANY TAKE ON DIESEL SALES

(1) Percent margin on industry sales under oil regulation as of 1998: 24% of

P8.10 price per liter.

(2) Percent margin on industry sales under deregulation as of 2005: 9% of

P27.31 price per liter.

(3) Percent margin on refiner sales under deregulation as of 2008: 20% of

P38.45 price per liter.

NOTES:

1. As in the case of the Independent Review Committee in 2005, the independent experts in 2008 presented the oil company margin in relative terms, as PERCENT marginon selling price. They failed to show the margin in absolute terms, as PESO margin per liter of the same selling price.

2. According to the 2008 SGV-UA&P report on oil prices, the “oil company take” includes the recovery of refining cost and does not wholly constitute gross profit. If true, for a clearer and more precise look at oil price movements, DOE, IRC, and SGV-UA&P should have known better and should have asked their staff to segregate the refining-cost-recovery portion from “oil company take,” because the main issue is whether free market competition under deregulation yielded the envisioned lowering of prices. As explained in this paper, lowering of prices refers precisely to movement in profit or MARGIN on prices, which turned out to be not shown separately in the statistics they used.

Even then, refining cost is relatively insignificant in relation to combined imported oil landed costs and taxes on refined products sold. It could not have trebled or quadrupled over the past deregulation period. Therefore, the cumulative INCREASE in oil company take from 1998 to 2008 consisted essentially of increase in MARGIN on sales that equated to a RISE—not lowering—of deregulated prices.

PART II

THE HARSH REALITY

IN OIL DEREGULATION:

THE MISSING LOWER OIL PRICES

WHAT EXALTED INDEPENDENT EXPERTS

SHOULD HAVE REPORTED TO THE NATION—

BUT FAILED TO DO SO: THE TRUE TEST AND

DETERMINANT OF THEIR CONCLUDED LOWERING

OF PRICES UNDER PRESENT DEREGULATION:

DECLINING PESO MARGIN ON OIL SELLING PRICES

While the foregoing comparison of oil company margins showed a LOWERING of the PERCENT margin on sales under DEREGULATION, it does not follow that the corresponding selling prices were lower than those possible under REGULATION.

In fact, because the declining PERCENT MARGINS in 2005 and 2008 were based on selling prices or base amounts much higher than those in 1998, if we would do what the Independent Review Committee and independent experts failed to do—proceed further and calculate and compare the equivalent PESO MARGINS per liter on gasoline and diesel prices—we would find, as I did find when I made the needed calculation and comparison, that there was instead a RISE in PESO MARGINS per liter on gasoline and diesel prices as of 2005 and 2008.

In the following presentation, I restated the declining PERCENT MARGINS on sales and corresponding BASE AMOUNTS (selling prices) which the Independent Review Committee and independent experts showed in their 2005 and 2008 reports (posted to the Internet), then calculated and supplied the missing PESO MARGINS per liter on gasoline and diesel prices as of 1998, 2005, and 2008.

Taking into account the meaning of “LOWERING of PRICES” as propounded in the Executive Summary, the results clearly showed that, contrary to expectation of free market fundamentalists, DEREGULATION produced HIGHER—not lower—oil PRICES !!!

THE RISING EQUIVALENT PESO MARGIN PER LITER

OF THE DECLINING PERCENT MARGIN ON GASOLINE PRICE

(1) Under regulation as of 1998: Percent margin on industry sales:

23% of P11.62 price per liter = P2.67 margin per liter.

(2) Under deregulation as of 2005: Percent margin on industry sales:

16% of P31.18 price per liter = P4.99 margin per liter.

(3) Under deregulation as of 2008: Percent margin on refiner sales:

18% of P44.45 price per liter = P8.00 margin per liter.

THE RISING EQUIVALENT PESO MARGIN PER LITER

OF THE DECLINING PERCENT MARGIN ON DIESEL PRICE

(1) Under regulation as of 1998: Percent margin on industry sales:

24% of P8.10 price per liter = P1.94 margin per liter.

(2) Under deregulation as of 2005: Percent margin on industry sales:

9% of P27.31 price per liter = P2.46 margin per liter.

(3) Under deregulation as of 2008: Percent margin on refiner sales:

20% of P38.45 price per liter = P7.69 margin per liter.

The above margin statistics clearly show that while deregulated PERCENT margin on the price of each product was declining, the equivalent absolute amount orPESO margin per liter on the price of the same product was consistently rising. By 2008, the deregulated PESO margin per liter on gasoline sales TREBLED while that on diesel QUADRUPLED.

The independent reviewers made much capital of the lower rates of return to oil companies under DEREGULATION. To make these data relevant, they have to show also the rates of return during past REGULATION regime. They would be surprised to find that low rates of return had persisted since decades ago but oil companies did not abandon us, except when the oil exporting OPEC countries suddenly nationalized their crude oil production facilities even before the 1973 Yom Kippur War. The nationalization wrested control of crude oil supply from multinational oil companies, thereby prompting Exxon Corporation, Mobil Oil, and Gulf Oil Corporation of the US to divest their oil refining and marketing investments in the Philippines, which investments were absorbed by the remaining oil companies.

CONCLUSION

IN FAVOR OF OIL REGULATION

THE POSSIBLE LOWEST OIL PRICES

THAT WE DO NOT HAVE TODAY, WE HAD IN THE PAST

UNDER REGULATION, SO WHY NOT RESTORE IT?

IF THE GOVERNMENT CAN RETURN TO SUBSIDY-FREE

SIMPLIFIED REGULATION, WHY NOT DO IT FOR THE SAKE

OF THE OIL CONSUMING PUBLIC, AS WELL AS COUNTLESS

VICTIMS OF INFLATION FROM OIL OVERPRICING?

The best that Filipinos wish—but do not have—under the present regime of deregulation, they already had in the past under regulation.

Under the old regulated regime, after allowing oil companies a much lower peso margin per liter, they were authorized to raise their selling prices on cost recovery basis only. Moreover, they could charge the newly increased prices 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, free market or deregulation is the catalyst to sustained product supply at competitive prices. Incredibly, as stated, we already enjoyed this situation under the past oil regulation regime. During that period, oil selling prices were set at much lower prices—with barest-minimum peso margin per liter to the oil industry—yet they never threatened to pull out en masse from the country. Despite price regulation, they stayed and continued their operation for their own reasons.

MARCELO L. TECSON

A Concerned Citizen

San Miguel, Bulacan

PHILIPPINES

August 19, 2011

WHY OIL REGULATION NOT DEREGULATION WILL YIELD LOWEST OIL PRICES

2011-04-02T22:41:00.000-07:00

WHY OIL REGULATION—

NOT DEREGULATION—

WILL YIELD LOWEST OIL PRICES

To: Energy Secretary Jose Rene Almendras
Sent: Tuesday, March 15, 2011 11:41:37 PM
Subject: REFUTATION OF DOE SECRETARY’S OBJECTION TO OIL REGULATION

With all due respect to the Energy Secretary, hereunder are excerpts from my position paper recommending return to OIL REGULATION WITHOUT GOVERNMENT SUBSIDY, which excerpts serve to refute his media-reported objection to persistent calls for return to oil regulation. For reference of energy and finance officials and technical experts, as well as others concerned, the complete position paper will be emailed to them shortly.

For the Secretary's information and attention.

MARCELO L. TECSON

A Concerned Citizen

March 15, 2011

Copy Distribution Through Separate Emails:

Office of the President;

Select Executive Branch government officials;

Select Senators and Congressmen;

Select members of Philippine Economic Society;

Select members of media and academe,

professional & think-tank organizations,

civil society groups, concerned citizens,

CBCP, etc.

=====================================

Abridged Position Paper:

WHY OIL REGULATION—

NOT DEREGULATION—

WILL YIELD LOWEST OIL PRICES

EXECUTIVE SUMMARY:

ACADEME PRODUCED ADVANCED-DEGREE

HOLDERS WHO ARE POOR PROBLEM SOLVERS,

THE ROOT OF HIGHER-PRICED DEREGULATION?

On the issue of oil regulation vs. deregulation, as reported by media, there has been a widespread misconception that the oil-regulation mechanism Oil Price Stabilization Fund (OPSF) is a subsidy scheme, that its revival is indispensable to oil regulation, and that regulation is not feasible because the deficit-plagued government lacks funds for the concomitant huge OPSF subsidy.

To address once and for all the misguided opposition to oil regulation, as well as avoid the labor-intensive and time-consuming accounting, audit, and clerical work involved in OPSF and thereby simplify and make easier the implementation of oil regulation, recommended herein is the return to oil regulation but without both subsidy and OPSF, just a refinement of the present prompt oil price increases under deregulation, through maintaining the common-sense and simple solution that avoids the need for subsidy—prompt price increases under deregulation whenever there are cost increases—but with a very important change: under regulation, the government will now have a say in both the amounts and timing of price increases and decreases.

Under oil regulation as of 1998, P8 per liter was the selling price of gasoline. Under deregulation 10 years letter, P8 was just the profit margin per liter of the same gasoline—and advanced-degree-holder free-market economists are saying that deregulation brought a lowering of oil prices!

It is a sad commentary on the academe that highly educated experts (who reviewed oil deregulation in 2005 and 2008) and high government officials (including a past Secretary of Finance) seem to have generally formed the totally erroneous belief that restoring oil regulation will necessarily entail problematical subsidy--without them going into the simple ART of EFFECTIVE PROBLEM SOLVING, under which they have to find and address not just the problem (in this case subsidy) but also its root, because the problem may just be a symptom of its root [Marcelo L. Tecson, Puzzlers: Economic Sting (Makati City: Raiders of the Lost Gold Publication, 2005), p. 160]. Had they done so, it could have dawned upon them that the ROOT or cause of past P15-BILLION subsidy under the then already 10-year old OPSF scheme--which was without subsidy from 1979 up to 1989--was simply the prolonged delay in price increases during and after the Gulf War in early 1990s, that such CAUSE of subsidy was addressed and remedied through PROMPT PRICE INCREASES under DEREGULATION that made it subsidy-free, and that OIL REGULATION will be similarly SUBSIDY-FREE for as long as such practice of PROMPT PRICE INCREASES is maintained under it--which is clearly doable--with the added advantage under regulation of having the government ensure that the AMOUNTS and TIMING of price increases are appropriate. Is this wrong and unfair and so difficult to understand?

In sum, oil REGULATION can prevent any oil industry OVERPRICING, as well as produce PRICES LOWER than what oil companies unilaterally set under deregulation that are self-serving and seemingly lopsidedly favorable to them. For example, under present difficulties of transport operators and commuters, oil-consuming industries, and the oil consuming public, as presented in my earlier emails the fourth of which is forwarded herein for ready reference, and against the backdrop of a PESO per LITER average price increase to the oil industry translating to a whopping over P17 BILLION increase in oil revenue per year, with the greatly increased PESO MARGINS per LITER on oil products as of 2008 under DEREGULATION—from regulated P2.67 to deregulated P8.00 and regulated P1.94 to deregulated P7.69 per liter in the case of gasoline and diesel, respectively—it is reasonable to conclude that present PESO MARGINS per liter on these products can be easily reduced by P1.00 per liter or even more without seriously harming the oil industry. However, in fairness to oil companies, the envisioned regulated prices should still yield reasonable return to them. Thus, if properly implemented, oil regulation can be fair to both the oil industry and the oil consuming public.

PART I

PROPOSED OIL REGULATION

WITHOUT OPSF SUBSIDY

THE NEED FOR ANTI-OVERPRICING OIL REGULATION

The root of the present global problem--the dawn of the era of $100 or higher per barrel price of crude oil and the consequent drastic rise in oil product prices—is beyond our control. In which case, at the very least, the government should protect the oil consuming public from probable cost over-recoveries or overpricing by the oligopolistic oil industry. To do that, the government--not the oil companies--should determine the amount and timing of price increases, subject to targeted reasonable rate of return to the oil industry.

Oil consumer protection is crucial and paramount because, with national oil consumption at 300,000 barrels per day as reported by media, a single centavo per liter overprice in oil product prices translates to a whopping P174 million annual increase in oil industry sales. If the overpricing—or over-recovery of past oil cost increases—is at P1.00 per liter, it would aggregate to more than P17 BILLION sales overprice per year.

There is a high probability of oil industry overcharging, which harms not only the suffering oil consumers and their customers but also the general public hit by inflation induced by oil price increases. As indirectly admitted by the INDEPENDENT REVIEW COMMITTEE created in early 2005 by President Gloria Macapagal-Arroyo, as of June 2005 or even earlier, the previously regulated P2.67 per liter margin on gasoline rose to P5.00 per liter under free-market deregulation instituted since 1998 (Philippine Daily Inquirer, August 22, 2005, front page), thereby registering a whopping increase of P2.33 per liter. If this staggering increase in profit margin under deregulation is true for all petroleum products and perpetuated to this day—something that could have been minimized if not totally avoided had regulation been maintained—then what did the nation get out of deregulation, if not simply more avoidable but not avoided sacrifices by victimized Filipinos!

Unfortunately, as things stand, there is an even more basic problem in the oil industry: oil consumers do not even know if the oil companies are indeed overcharging them and if so by how much? As shown by media, when crude oil prices peaked at roughly $145 per barrel (159 liters) in mid-2008 that resulted in rocketing of oil product prices, the government’s Department of Energy (DOE) could not even present calculations that would prove that the implemented drastic price increases did not entail unwarranted oil industry cost over-recovery or overpricing.

DOE SECRETARY'S OBJECTION TO OIL REGULATION THAT SERVES TO JUSTIFY PERPETUATION OF OIL DEREGULATION

The economic justification for the existing oil deregulation is the supposed evil of its alternative—the suggested return to oil regulation. However, oil regulation is evil simply because those who oppose it wittingly or unwittingly misrepresent it—through erroneously describing it and gratuitously assuming that its return will be implemented the wrong way. In reality, even without considering populist reasons, oil deregulation is worse than regulation in the protection of the interests of the oil consuming public, including probably the biggest oil consumer—the government itself.

As reported by media, the opposition to the suggested return to oil regulation came from no less than the head of the government’s Department of Energy, as follows:

“Surging world crude prices further pushed up the cost of fuel in the Philippines , but the Department of Energy (DoE) said it was not inclined to cap prices despite claims that oil firms were engaged in price-gouging. Energy Secretary Jose Rene Almendras said the DoE would not go back to a regulated oil industry at this time, saying that any moves to cap prices may likely put a heavy financial strain on national government coffers. Almendras said that for the government to control fuel prices, it should put up an oil price stabilization fund (OPSF), which would require a hefty capitalization of $2 billion. The amount, he said in a text message, would be used to ensure a 60-day supply inventory for the country.” (No cap in oil price as world crude surges,” Philippine Daily Inquirer, March 3, 2011, page A1)

WHY OBJECTION TO OIL REGULATION IS FALLACIOUS AND MISLEADING

With all due respect to the Secretary of Energy, his objection to oil price regulation is without merit because it is anchored on fallacious grounds.

His premise that oil regulation requires revival of the OPSF subsidy scheme is simply not correct. To begin with, the OPSF scheme operated smoothly from mid-1979 well up to 1990 without entailing any government subsidy. Based on a printed report to Malacanang, of which I have a file copy, OPSF reimbursements to oil companies for crude oil cost increases—those incurred at different dates before the government’s issuance of corresponding price-increase orders—aggregated to P11 BILLION as of mid-1984, with the fund having a hefty balance of P1.4 BILLION as of December 31, 1985, or shortly before the EDSA I revolution. It seemed the OPSF developed a huge negative balance, which was ultimately funded out of the General Fund, when substantial price increase was delayed for a prolonged period during the Gulf War in early 1990's—thereby creating the wrong impression—perpetuated to this day—that the OPSF was a subsidy scheme.

For as long as the prompt implementation of price increase under the present deregulation is continued on a timely basis under the proposed regulation, the latter can be successfully implemented even without reviving the old OPSF scheme. In fact, as herein presented, the recommended oil price regulation is explicitly without corollary OPSF. The recommended scheme is similar to that followed in the price regulation of water and power utility companies which does not involve the use of equivalent OPSF.

With respect to the $2-BILLION capitalization supposedly needed to ensure a 60-day supply inventory for the country, whether we stick to deregulation or return to regulation, it is actually needed as part of pursuing national interests and oil security, therefore it should not be counted against regulation. On the contrary, regulation will help attain the objective, as was the case under the old regulated set up where there was economic incentive for maintaining oil refining operations, under which we had a significant inventory of crude oil. Today, instead of the government itself spending $2 BILLION for increased oil inventory, it can mandate to the oil industry the maintenance of the desired inventory level, with the additional carrying cost built into the oil product selling prices per liter.

OIL PRICE DEREGULATION VS. RETURN TO OIL REGULATION

The proposed new oil price regulation does not include the revival of the discredited OPSF mechanism, therefore it is much simpler and easier to implement than the OPSF-complemented old price regulation, which entailed much time and hard work on the part of oil companies, the government’s regulatory agencies, and the Commission on Audit (COA) that audited OPSF transactions.

PRESENT OIL DEREGULATION SCHEME:

To visualize the impact of a return to oil regulation, that is, whether it will make matters worse or better for the oil consuming public and the entire nation, the present oil deregulation scheme is capsulized hereunder. (More detailed comparison between oil deregulation and regulation is presented in the complete position paper from which this email is excerpted.)

a. Whenever there are cost increases or decreases, oil companies adjust their prices at will—too early in case of price increases and late in case of price reduction. Owing to frequent upward and downward price adjustments, it seems both DOE and the public have lost track of what the proper prices—devoid of overcharging—should be.

b. Oil industry product pricing is not rationalized, or without sound logic. Urban center Cebu, which has more customers and entails lower product transshipment costs compared to distant places in Mindanao , has much higher selling prices.

c. Before the present unrests in the Middle East and Africa , the government did not impose any required oil inventory level to the oil industry. In general, there was not much thought about national oil security, so that Petron Corporation was privatized, while the initial oil security requirement--that the buyer of its 40% equity (Saudi Aramco) had to be a crude oil producer/supplier--was totally discarded when Saudi Aramco sold its equity to a non-supplier of crude oil based in UK, resold further to a consortium that included the country's San Miguel Corporation.

The incentives for crude oil refiners—which provide additional oil inventory in the form of crude oil on hand awaiting refining, as well as generate taxes, business, and jobs in the locality—was also indirectly scrapped under deregulation, causing Caltex to permanently shutdown its oil refinery in Batangas and Shell to abandon its planned oil refinery expansion in the country.

PROPOSED NEW OIL REGULATION SCHEME:

In brief, hereunder is the recommended oil price regulation scheme designed to address the erroneously assumed huge government subsidy in oil regulation and avoid the need for such subsidy:

a. The government will mandate the maintenance by the oil industry of at least 30-day oil inventory.

b. Whenever a price increase is needed to recover a new cost increase, the oil companies will implement the price increase after the assumed exhaustion of the low-cost inventory, which is 30 days after effectivity of the cost increase.

Within the 30-day price-increase waiting period, the affected oil companies will submit their petitions for price increase to the Energy Regulatory Commission (ERC), copy furnished DOE, together with pertinent supporting documents.

Within the 30-day waiting period, DOE will submit its comments and recommendations on the oil-company petitions to ERC. In turn, within the same waiting period, ERC will issue its price-increase decision.

c. So that the oil industry will not become hostage to the government’s bureaucratic red tape, if ERC fails to issue its decision on the petition within the prescribed 30-day waiting period, the oil companies may unilaterally implement their petitioned price increase. It is subject, however, to ERC’s subsequent final determination of authorized price increase. ERC will affirm the implemented price increase, or order a refund of any implemented excess price increase, as the case may be. The refund, if any, will be deposited to a SPECIAL FUND to be administered by DOE.

d. Based on oil company petitions, ERC will authorize adjusted selling prices at the point of product supply origin, such as ex refinery or main importation-receiving port. DOE in turn will prepare the detailed product posted prices for various locations nationwide, which will consist of posted prices ex oil refinery (or importation-receiving port) plus applicable transshipment costs to each specific main destination in the country.

e. Oil companies will submit regular oil importation costs to DOE. As the oil industry may not initiate immediate downward price adjustments, DOE will be responsible for informing ERC about the need to issue timely price reduction order based on decrease in oil importation costs or other major cost items.

f. The public will have access to the basis of price adjustments recommended by DOE and authorized by ERC.

The proposed regulation scheme provides timely selling price increases—the foundation of oil regulation without OPSF scheme. The present deregulated situation will not get worse. On the contrary, it stands to get better from the viewpoint of the public—because under deregulation the oil industry has already been doing prompt price increase, perhaps even overdoing it, so that regulation will simply curb any such abuse in the timing of price adjustments. Regulation also includes a mechanism—in the form of DOE and ERC—that will ensure the accuracy, validity, and propriety of industry price adjustments. Certainly, it is an improvement over present deregulation where the oil industry can make self-serving price increases, or insufficient price decreases, without any veto power on the part of government.

WHY PAST REGULATION PRODUCED LOWER PRICES—OR WHY PRESENT DEREGULATION PROMOTED HIGHER PRICES

On Affording the Public the Possible Lowest Prices: Contrary to Expectation, Present Deregulation Promoted Peso Margin per Liter of Oil Product Much Higher than that Allowed During Past Regulation—Which Means that Current Selling Prices Would Have Been Lower Had Regulation with Lower Profit Margin Been in Effect Today

a. It appears that the present oil industry deregulation has promoted practically doubled peso margin per liter in the oil industry as far back as 2005 or earlier, and nobody from the public knows how much it has gone up further as of today—thanks but no thanks to the Department of Energy that appears clueless on the matter.

Paradoxically, instead of promoting reduced profit margin in the oil industry as a result of competition from new and independent players, the deregulation scheme instituted in 1998 appeared to have substantially increased the PESO MARGIN per LITER of oil products by 2005 or earlier. Worse, as of 2009, the Department of Energy (DOE) could not even tell media how much was the prevailing peso margin per liter of each type of oil products.

In the case of gasoline, as reported in the August 22, 2005 front-page news story by the Philippine Daily Inquirer, which used data presented by the government-commissioned Independent Review Committee in June 2005, the P2.67 per liter margin (23% of P11.62 per liter pump price) under the past regulated regime rose to P5.00 per liter (16% of P31.18 per liter pump price) under deregulation, or a whopping increase of P2.33 per liter. Thus, while PERCENT MARGIN on SALES dropped from 23% under regulation to just 16% under deregulation, it actually translated to almost doubled PESO MARGIN per LITER owing to the drastic rise in SELLING PRICE.

The misleading message of the Inquirer news item--gathered from data in the Independent Review Committee report--was that there was a lowering of prices because margin on sales dropped significantly from 23% to 16%, but it was oblivious to the fact that the lower 16% margin is now applied to a much bigger base amount of P31.18 selling price per liter--vs. the old base of P11.62 per liter--thereby yielding a much higher P5.00 margin per liter!

Past oil industry regulation did not mean fixing of selling prices at certain levels regardless of subsequent increase in oil importation costs—which could have resulted in net losses to oil companies and driven them away if it were so. Instead, it set selling prices that yielded the authorized fixed peso margin per liter of products to the oil companies, then adjusted the selling prices upwards or downwards whenever there were subsequent cost increases or decreases that would disturb the targeted peso margin per liter. In this manner, the oil companies were assured of return for their capital and efforts, while the spending public was protected from unwarranted overpricing and profiteering.

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

b. The peculiarity in the oil industry as of the onset of deregulation in 1998 that made free-market deregulation unable to produce oil product selling prices comparatively lower than what it would have been under regulation: there was not enough elbow room for the oil industry’s voluntary further reduction in PESO MARGINS per LITER of various oil products--because the margins were already set at what could be considered rock bottom rates during past 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 in 2008 to unprecedented heights, in the process giving new and smaller players very little elbow room for reducing 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 of the following:

(1) There was NO prior HIGH MARGIN under past regulation

from which the price reduction under present deregulation

could be sourced, and

(2) The arena for price competition in the local oil industry

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 mainly in the PRODUCTION aspect—which is not the case in the local oil industry.

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

PART II

ECONOMIC POLICY

CONSIDERATION:

FREE MARKET IS A SHAM

IN A CAPTIVE MARKET

Oil deregulation is a misapplication of free market economics in the wrong economic environment—the CAPTIVE local oil market, where, to be truly pro-free market, the government must constantly guard it against unfair trade practices; the government’s failure to do so will likely result in vitiated—not free—market, at the expense of the buying public.

As concretely demonstrated by the global economic meltdown that erupted in the United States in 2008, if regulation of business is bad, lack of regulation is worse. Economic players—sellers and buyers, creditor-banks and investor-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.

Economists have generally glamorized and espoused free market, or minimum government intervention in the economy and leaving to market forces the setting of prices of goods and services. According to them, government price control will disturb the economic law of supply and demand--consequently discouraging producers and adversely affecting supply of goods in the market, thereby ultimately harming consumers themselves.

A particular economic theory or solution, however, cannot always work with the same degree of efficacy under all economic conditions. Obviously, it cannot produce the same beneficial result under contrasting economic situations. Thus, economic solutions have to be condition-oriented and should depend upon the particular circumstances.

In simple terms, market value—from which the true meaning of (free) market forces and market price can be derived—is the price at which a willing seller will sell and a willing buyer will buy, with neither party under the compulsion to sell or buy. This is a judicial definition that binds the public because it is in principle the basis of valuation of real estates in the case of taxation (such as of donation and inheritance of property) and expropriation of private property in the exercise of the government’s power of eminent domain.

Market forces—if these are to produce really free market prices—should have the attributes then of genuine competition among sellers and free choice among buyers. For instance, if sellers raise the price of their product too high—say they doubled it—their total sales amount will not necessarily double because some customers will no longer buy their product and shift instead to cheaper substitute, or dispense with the product altogether. This way, the so called market forces have automatic restraint mechanism against product overpricing and profiteering. This kind of product is said to have elastic demand, meaning, its sales volume decreases as its price is raised and increases as its price is reduced.

Oil products, however, are of a different kind. These are sold in a CAPTIVE MARKET, where, regardless of how much the price is raised, the demand from oil consumers remain generally the same because they have no choice, they need the products. For example, industries, public utilities, and public transport companies have to either consume oil in their operations or close shop—but if they close shop and cease operations they would be the loser, plus the economy would standstill. In the end, they would just pass on their increased cost to their customers--who else if not the already suffering masses of Filipinos, crying for protection from seeming manipulations of big business.

Thus, oil companies can drastically raise their profit margins or go into outright profiteering--even at the risk of high inflation and more economic difficulties on the part of the people--and the demand for their products will not dramatically weaken. Unlike in the case of products with pronounced elastic demand, there are no outside economic forces that automatically restrain oil companies from raising prices. All they have to do is will it—the raising of prices whether justified or not—and nobody, not even the government, which is helpless in protecting the people against overpricing under the present deregulated regime, can stop them.

Further, free market satisfactorily works in numerous relatively low-capital small and medium enterprises, where collusion is impractical because 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 surge in competition brought high introductory prices significantly down. This is not 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 even under the old regulated regime, rendered deregulation incapable of producing the desired result—lower petroleum product prices.

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, overpricing, cartel, hoarding, intentional cutback in production, and other unfair business 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]

Under the situation, REGULATION--not deregulation, free market, or market forces—will restore order and sanity in captive markets controlled by monopolies and oligopolies, like those in the oil, water, power, public transport, and tollway industries.

ON STABILITY OF OIL SUPPLY UNDER REGULATION

There Was No Threat of Defiant Supply Cut-Off for as Long as Profit Margins Were Allowed and Cost Increases Were Recovered During Past Regulated Regime

Will the proposed shift from deregulation to regulation discourage continuing oil supply to the country?

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, there was no threat of supply cut-off ascribable to 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 was indefinitely maintained.

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

Before the advent of oil industry regulation in the 1970s through the creation of the Oil Industry Commission, when oil companies suffered increase in their crude oil importation cost, they raised their prices to recover their cost increase only, without any increase in profit margin per liter of oil product. I had first-hand knowledge of this event because I was one of those who calculated the needed price increase for my employer oil company, a local subsidiary of a US multinational oil company, now part of Petron Corporation. Thereafter, with the operation of the Oil Industry Commission and its evolving successor-regulatory agencies—the latest of which is the present Energy Regulatory Commission—the practice of allowing price increase corresponding to cost increase alone was institutionalized.

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 still served their profit maximization objective. Moreover, with limited number of competitors in the local market, they compensated through HIGH sales volume their LOW incremental margin.

PART III

DEBUNKING THE MYTH OF OIL DEREGULATION:

IT PRODUCED MUCH HIGHER—NOT LOWER—

PESO MARGIN ON PRICES

A LOOK AT THE INDEPENDENT REVIEW COMMITTEE’S

AFFIRMATION OF OIL DEREGULATION IN 2005

On the INDEPENDENT REVIEW COMMITTEE's June 2005 Conclusion which Affirmed the Supposed Wisdom of Oil Deregulation over Regulation: It is assailable and did not actually validate oil deregulation because it was based on half-truth or incomplete and misleading premise.

An Independent Review Committee was created in early 2005 by President Arroyo to evaluate the wisdom and efficacy of oil deregulation instituted in 1998. As shown hereunder, while the Committee concluded in favor of oil deregulation over regulation, its conclusion was not completely valid because it was based on incomplete and misleading premise: that oil price regulation means putting an immovable cap on selling prices—with consequent financial losses to oil companies once their costs exceed the government-imposed price limit--and that such resulting financial losses would have to be compensated through revival of the government’s OPSF subsidy scheme.

In reality, oil price regulation can be done without financial losses to oil companies, by allowing them full recovery of their cost increases—through putting a cap on profit rates (peso margin per liter of oil product), not selling prices per se—therefore oil regulation is feasible without the need for OPSF subsidy.

In the summarized presentation of its June 2005 Report on the Downstream Oil Industry Deregulation Act of 1998 (RA No. 8479), the government-commissioned Independent Review Committee, which included experts in accounting and economics, presented two possible options in the lowering of oil product prices:

(1) Ask oil companies to reduce prices.

(2) Provide subsidy.

On the other hand, if the reduction in selling prices would be made up for by taxpayers’ subsidy in order to entice oil companies to stay, it is also not feasible because the government does not have the needed subsidy fund. On the contrary, it is plagued right now with huge annual budget deficit. Moreover, such subsidy scheme is not right. It makes even poor people who pay taxes through 12% VAT on product purchases--but do not consume oil products--shoulder the cost of gasoline and diesel used by rich car and sports-utility-vehicle owners.

a. Why the Independent Review Committee’s Conclusion Has to be Overturned: While it Did Not Err in its Two Price-Reduction Options, its OPTIONS Were Woefully LIMITED or INCOMPLETE

The two options presented by the Committee were incomplete. It did not include a third option already followed during the past regulated regime for roughly TWO DECADES, implemented smoothly from the early 1970’s up to the time the OPSF was subsidy-free shortly before the outbreak of the first Gulf War in August 1990.

The available third option: reined in selling prices (meaning, devoid of overcharging) through government authorized fixed PESO MARGIN per LITER of oil products. The Committee totally ignored or overlooked the regulation of PROFIT RATES, not selling prices per se. It is a feasible conventional method followed under economic conditions not suitable for deregulation or free market, as in the case of franchise-holder utility companies and public-service-provider transport and tollway operators.

Oil industry regulation through allowing a predetermined PESO MARGIN per liter of products is the recommended feasible option because it addresses the OBJECTIONS against the two options cited by the Independent Review Committee in June 2005. It does not arbitrarily FIX the SELLING PRICES at amounts that may cause the oil industry to suffer losses. On the contrary, it automatically allows PROFITS to oil companies at targeted reasonable range depending on prevailing economic conditions. It also does not entail taxpayers’ SUBSIDY, just prompt PRICE ADJUSTMENTS on COST RECOVERY basis only—after allowing margin on sales to oil companies and exhausting their low-cost inventory.

b. There are Existing Price/Rate Regulation Models to Go by in Oil Industry Regulation, and These Do Not Involve Setting of Prices/Rates at Fixed Immovable Levels Regardless of Consequences (Gain or Loss) to Economic Players, Hence Return to Oil Regulation is Not an Outlandish Idea and Has to be Done—Because it is Needed in Giving the Oil Consuming Public the Possible Lowest and Most Advantageous Prices

Regulating product selling prices or public service rates does not mean setting prices/rates at fixed immovable levels--regardless of whether the product suppliers or service providers gain or lose in the process. There are available price/rate regulation models that have been generally accepted by all concerned—the spending public, industry players, government regulators, and multilateral financial institutions--depending on the amounts at which the prices/rates are set. The most notable local models are as follows:

1) Regulated Maynilad and Manila Water rates, which are allowed to rise for the recovery of legitimate cost increases.

2) Regulated Meralco electric power rates and Transco distribution rates, similarly authorized to rise for the payment of valid cost increases.

3) Regulated telecommunication rates and expressway/skyway toll rates, set at amounts designed to attain targeted rates of return, then adjusted as necessary.

4) Regulated public transport fares, given rate increases whenever there are substantial diesel cost increases to be recovered.

5) Bank spreads or margins, indirectly fixed by Bangko Sentral ng Pilipinas (BSP) during economic turbulences, in order to contain high interest rates.

The last model may not be of public knowledge and has to be explained.

Following are actual cases of how BSP officials, in coordination with banking industry leaders, indirectly set a fixed range of bank spreads or margins for 40 or so operating commercial banks—analogous to fixing peso margin per liter of products to oil companies—as means of stimulating low interest rates, in lieu of simply setting a ceiling or fixing bank lending rates at low levels:

First, at the height of the Asian meltdown during first quarter 1998 (when traders and other borrowers in Mindanao staged militant protests against the then prevailing very high interest rates of almost 40 percent), to calm down the protesting borrowers and avoid possible bank runs, the Bankers Association of the Philippines (BAP) itself came up with a published association members’ “gentlemen’s agreement”—a clear case of cartel--voluntarily limiting bank spreads, or margin, on bank lending from 3 percent to 8 percent over 91-day Treasury bill rates. (References: Deogracias N. Vistan, “Bringing down banks’ lending rates: The rationale of the BAP’s concerted efforts, The Philippine Star, February 20, 1998, page 25; Deogracias N. Vistan, “An Important Message from the Bankers Association of the Philippines,” Philippine Daily Inquirer, March 11, 1998, page B6.)

Second, in reaction to my letter issued personally to BSP officials during the public hearing on high interest rates on April 17, 1998 at the BSP office--in which letter I recommended BSP’s granting of concessionary measures to banks conditioned upon their actual lowering of interest rates--“Bangko Sentral Governor Gabriel Singson has agreed to cut the reserve requirement on bank deposits by two percentage points to 8 percent from the existing 10 percent to enable banks to further bring down their lending rates…. Approval will be conditional on the BAP (Bankers Association of the Philippines ) agreeing to lower the member-banks’ lending rates from the present (spread of) 2-7 (percent)… to 1.5 to 6 (percent)…. BAP had accepted Singson’s condition…. The governor made it very clear… that he would only consider reducing the intermediation cost if… banks would reduce the range of their lending rates. Otherwise, the move would only benefit the banks, not their borrowing customers.” (Doris C. Dumlao, “Bank reserves cut to 8%,” Philippine Daily Inquirer, May 21, 1998, p. B1).

Third, during the fury of the Asian crisis in last quarter 1997 and first quarter 1998, BSP found all sorts of reasons not to regulate interest rates and pinned so much hope and reliance on its moral suasion over banks, as reflected on the July 27, 1998 report of the BSP Committee on Interest Rates. The fact, however, that Philippine banks charged the highest and way out-of-line interest rates and bank spreads in the region meant that BSP’s moral suasion was powerless against banks. However, this was not the case when a brand-new new Governor, Mr. Rafael Buenaventura, took over the reins of BSP. At that time, the following news item appeared in a local daily: “The Monetary Board, the policy-making body of… Bangko Sentral ng Pilipinas… is drawing up sanctions against banks violating the 1.5 percent to 6 percent spread on lending rates (the same 1.5 percent to 6 percent bank spread set by BSP Governor Gabriel Singson in May 1998, as shown in the second case above) over the prevailing yield of the benchmark 91-day Treasury Bills…. BSP… disclosed (that) the (monetary) authorities are looking at withholding approval of bank branch application of those summarily charging interest rates beyond the agreed spread.” (Fil Sionil, “MB prepares sanction on spread rule violation,” Manila Bulletin, September 6, 1999, p. B-1). What happened thereafter? “Reacting to threats that the Bangko Sentral will come down hard on banks that will sharply increase their lending rates, most banks left their rates unchanged or even lowered them, according to the Bangko Sentral’s industry survey…. The decline came despite the rise in Treasury bill yields across the board last Monday.” (R. G. Falgui, “Loan rates dip despite hike in yields of T-bills,”Business World, September 9, 1999, p. 13). Thus, under a new Governor, BSP suddenly found its bearings and successfully reined in bank spreads as means of stabilizing or lowering interest rates.

In sum, the recommended oil industry regulation, which uses the mechanism fixed PESO MARGIN per LITER of oil products in preventing profiteering selling prices, is not a foolish idea. It is just another form of already existing profit-rate regulation, applied in this case to inflation-inducer petroleum products and designed to yield targeted profits or return to industry players. It is in lieu of blindly fixing selling prices without regard to resulting gain or loss to industry members. Moreover, while it fixes peso margin per liter, it does not control sales volume, hence it encourages competition in the increasing of market share towards greater absolute amount of incremental income, thereby inducing each market player to reduce, not raise, selling prices to the extent it can.

c. While it is true that the government cannot provide subsidy towards oil price reduction, such inability is irrelevant because the government can go into oil regulation—which will yield reasonable return to oil companies at the possible lowest prices to oil consumers—without the need for government subsidy.

As stated, timely raising of oil product selling prices will totally avoid the need for government subsidy under a regulated regime. This was successfully done for years before EDSA I in 1986, and this was done up to 1990 after EDSA 1. This can still be done today if there is political will to do it.

On Performance Based Regulation (PBR)

Somebody pointed out that in some countries, performance based regulation (PBR) has been in vogue in lieu of rate of return (ROR) regulation.

It actually depends on the kind of business and who needs it more—or who has the stronger bargaining power—the regulator or the regulated? For example, an oil exporting country oozing with surplus oil can dictate stiff PBR terms to interested oil investors, while countries without proven oil reserves cannot do so—they have to provide attractive terms that conform to the high-risk high-reward tenet followed by shrewd investors.

Regulators may want PBR more but what attracts investors is high ROR. Thus, oil selling prices have to be set taking into account the rate of return that will induce oil companies to stay.

Anyway, having oil companies live profitably with the proposed government-set PESO MARGIN per liter of oil products, together with the mandated 30-day (or higher) inventory level, is also a form of performance based regulation.

IN SUM, WHY THE INDEPENDENT REVIEWERS’ CONCLUSION

IN FAVOR OF OIL DEREGULATION IS QUESTIONABLE

In “The Report of the Independent Committee Reviewing the Downstream Oil Industry Deregulation Act of 1998” issued in June 2005, the ad hoc Independent Review Committee (IRC) correctly observed: “Generally, proper analysis and valid conclusions can only be reached after seeking relevant data on which to base such analysis and conclusions.” Accordingly, IRC “has painstakingly taken time to learn the nature and peculiarities of the oil industry. It spent many hours interviewing industry players, consumers, consumer groups and other concerned individuals….”

Unfortunately, it seems the IRC members failed to talk to the one single person who could have very well explained to them the true rationale for Oil Price Stabilization Fund (OPSF)--the first Director of the then Ministry of Energy’s Bureau of Energy Utilization, a Texas A & M University alumnus, who was originally in charge of conceptualizing the OPSF. He worked with a higher official, an alumnus of both Columbia University and Wharton School , as well as with a peer, an alumnus of Carnegie Mellon University . These past government officials were no simpletons who would operate for years a monumentally flawed OPSF subsidy scheme.

As a result of IRC’s deficient information gathering, it created wrong impressions, perpetuated to this day, that apparently misled current Department of Energy (DOE) officials. The misleading impressions were affirmed in the subsequent “Report of the SGV-UA&P Independent Study on Oil Prices” dated May 2008, prepared by an IRC member and submitted to DOE. The second report failed to correct the following WRONG IMPRESSIONS created by the 2005 IRC report:

(1) That OIL REGULATION denotes PRICE CONTROL at immovable FIXED CAP per liter of oil products, with subsequent cost increases and decreases to be charged or credited to an OPSF subsidy fund, with any resulting fund DEFICIT to be funded out of the General Fund emanating from taxation and other sources. Under such concept, oil regulation is not feasible owing to OPSF funding problem.

(2) That the rationale for OPSF is to serve as SUBSIDY mechanism of price control under oil regulation, that it started in 1984 under PD 1956, and that today’s suggested return to OIL REGULATION will necessarily entail revival of the subsidy mechanism OPSF.

(3) That OIL DEREGULATION produced LOWER SELLING PRICES, as evidenced by declining percent margins per liter of oil products being sold as of 2005 and 2008, compared to regulated percent margins per liter as of the onset of deregulation in 1998.

1. ON OIL REGULATION INTERPRETED AS PRICE CONTROL, ATTAINED THROUGH SETTING FIXED CAP ON SELLING PRICES REGARDLESS OF SUBSEQUENT COST INCREASES

Of course, oil regulation with fixed cap on selling prices, with subsequent cost increases or decreases charged or credited to a revived OPSF, is not feasible, as explained by IRC. However, this is a gross misconception of what oil regulation should be. There is a feasible or DOABLE oil REGULATION scheme, explained in my earlier three emails and will just be pointed out here, which IRC members failed to highlight and recommend as a feasible alternative option: under OIL REGULATION without OPSF subsidy scheme, REINED IN ADJUSTABLE SELLING PRICES—meaning, prices are subject to upward or downward adjustment as cost rises or drops, but devoid of overcharging beyond established standards--through government-reviewed and authorized pre-determined fixed PESO MARGIN per LITER of oil products, designed to yield the oil industry a reasonable rate of return. The fixed peso margin per liter is subject to change whenever there are permanent major changes in refining and marketing expenses that are not considered in regular price adjustments, primarily designed to address increase/decrease in oil importation costs.

The alternative option is aimed at enabling the oil companies to recover 100% of their cost increases plus reasonable rate of return out of adjustable selling prices, but this option will not allow them to make any overprice—both as to amount and timing of price increases--beyond authorized limits.

2. ON RATIONALE OF OPSF AS SUPPOSED PRICE CONTROL SUBSIDY MECHANISM UNDER PAST OIL REGULATION

Apparently, the IRC members failed to get hold of two relevant printed reports by the then Ministry of Energy (MOE), today’s Department of Energy (DOE):

First: “Status of the CONSUMER PRICE EQUALIZATION FUND (As of June 30, 1984)—a Report to the President” dated July 17, 1984.

Second: “A Report to the President on OIL PRICE STABILIZATION FUND as of December 31, 1985” dated January 7, 1986.

Thus, IRC arrived at the wrong conclusion that the OPSF created in 1984 was a subsidy scheme since its inception, instead of many years later when it was grossly mishandled--through failure to raise prices during and after the Gulf War in early 1990s. The gross mishandling, which converted the OPSF into a subsidy scheme that permanently discredited it, took place after 10 long years of successful operation of this kind of Fund mechanism, within which period the original Fund--then sporting the name Consumer Price Equalization Fund (CPEF)--operated smoothly without entailing any subsidy. Compared to the original Fund, the OPSF was exactly the same CPEF dog but with a different collar, with the same role as mechanism of oil regulation but with a new name, with exactly the same mode of implementation but with a different and new enabling law (PD 1956 in lieu of RA 6173), and with the same Ministry of Energy as Fund administrator but with a newly designated approving authority for implementing rules on OPSF together with other matters under PD 1956—the Department of Finance, represented by then Prime Minister Cesar Virata as concurrent Minister of Finance.

The cited first printed MOE report included a backgrounder that briefly presented the history of CPEF as mechanism in aid of past oil regulation.

As an aftermath of the 1973 Yom Kippur War, which brought about disruption and lasting changes in world oil supply, at the advent of 1979, the first and foremost problem was how to assure the Philippines of adequate oil supply. When OPEC oil exporting countries had not yet unified their prices, the matter of higher and widely varying crude oil prices was just secondary to the oil supply problem. Hence, local oil companies were allowed to import available crude oil even if prices were higher than those of cheaper oil but with limited availability. Under this indefinitely lasting disorderly situation, it was not proper to authorize increase in oil product selling prices based on oil industry AVERAGE crude oil cost increase. Doing so would make those with cheap crude oil imports OVER-RECOVER their cost increase, while those with higher-price imported crude oil would UNDER-RECOVER their increase in cost.

To address the problem, the government allowed selling price increases based on lower crude oil costs, with the higher crude oil cost differential to be recovered on a case to case basis out of the CPEF created in March 1979 under RA 6173. Through Presidential Letters of Instructions, part of regular collections from the oil industry on the then already existing OIL INDUSTRY SPECIAL FUND (OISF)—used for years to finance government energy projects—was earmarked for CPEF. In 1984, when the OISF had outlived its usefulness except for the CPEF funding needs, both the OISF and its adjunct CPEF were abolished, with their ending balances transferred to the General Fund. To meet the continuing needs for CPEF, a new fund was created under PD 1956 exclusively for the reimbursement of crude oil cost increases and exchange rate fluctuations. To distinguish this newly created fund from the old CPEF, it was called Oil Price Stabilization Fund or OPSF, for all intents and purposes an exact continuation of the old CPEF mechanism under the then still prevailing oil regulation.

That the old CPEF mechanism under oil regulation was not a subsidy scheme can be gathered from the fact that, from its actual operation in mid-1979 up to mid-1984—a relatively long period of FIVE YEARS—the fund had the following total transactions:

Total fund revenues/collections …..…………. . 11.323 Billion Pesos

Less: Total reimbursements to oil industry … 11.147 Billion Pesos

Fund Balance—remitted to GENERAL FUND …. .176 Billion Pesos

In the case of OPSF, as shown in the second MOE printed report, it had a comfortable actual cash balance of 1.4 BILLION PESOS as of December 31, 1985, temporarily invested in the National Government’s Treasury bills.

Even when crude oil supply eventually eased, there were still uneven incurrences in oil industry crude cost increases that necessitated the OPSF, not only in avoiding frequent price increases while rising world crude oil prices had not yet stabilized at certain levels, but also in addressing different dates in start of incurrence of crude cost increases owing to different arrival dates of crude shipments to the Philippines. Oil companies that received, refined, and sold much earlier their high-cost crude oil shipments would justifiably need early price increase, but it could not do that alone because nobody would buy its products. On the other hand, if the price increase would be allowed earlier on an industry basis owing to one or some oil companies that suffered crude cost increase ahead of others, doing so would unduly penalize the oil consuming public and unwarrantedly benefit oil companies with late high-cost shipments. The problem was resolved through delaying the industry price increase until all oil companies had suffered cost increase. Companies that incurred crude cost increases ahead of the subsequently authorized industry price increase were compensated on specific identification basis through OPSF.

In both CPEF and OPSF under oil regulation, selling prices were increased as soon as the cost increases stabilized and were incurred by all oil companies, with claims from the Fund totally stopped to accrue at that point—but with oil industry remittances to the Fund still continuing for fund build-up purposes. Industry claims from the fund resumed when another round of crude oil cost increases—with differences in amounts and timing—was experienced again by the oil industry.

3. ON ALLEGED LOWER SELLING PRICES UNDER OIL DEREGULATION AS A FUNCTION OF LOWER PERCENT SALES MARGIN

A. OIL COMPANY TAKE ON GASOLINE SALES:

(1) Percent margin on industry sales under oil regulation as of 1998: 23% of P11.62 price per liter.

(2) Percent margin on industry sales under deregulation as of 2005: 16% of P31.18 price per liter.

(3) Percent margin on refiner sales under deregulation as of 2008: 18% of P44.45 price per liter.

B. OIL COMPANY TAKE ON DIESEL SALES:

(1) Percent margin on industry sales under oil regulation as of 1998: 24% of P8.10 price per liter.

(2) Percent margin on industry sales under deregulation as of 2005: 9% of P27.31 price per liter.

(Note: The much lower average percent margin was

apparently pulled down by lower margin earned by

oil importers compared to that of oil refiners.)

(3) Percent margin on refiner sales under deregulation as of 2008: 20% of P38.45 price per liter.

MY COMMENTS ON THE

INDEPENDENT REVIEWERS’

COMPARISON OF PERCENT

MARGINS ON SALES

Indeed, the foregoing comparison of oil-company percent margins on selling prices per liter of gasoline and diesel showed a LOWERING of the PERCENT MARGINS under OIL DEREGULATION, but it does not follow that the corresponding selling prices were lower than those possible under OIL REGULATION.

It is quite possible that OIL REGULATION could have produced LOWER SELLING PRICES under the circumstances. Reason: the cited two INDEPENDENT REPORTS wittingly or unwittingly showed the PERCENT MARGINS only. In the comparison made, both reports did not show the equivalent PESO MARGINS per LITER of gasoline and diesel selling prices under past regulation and present deregulation--a failure to disclose very material information on the issue. As pointed out in my earlier first email dated March 15, 2011 on the subject Refutation of DOE Secretary's Objection to Oil Regulation, this is is the reason why the Philippine Daily Inquirer’s front-page news report on August 22, 2005 conveyed the misleading message that oil deregulation resulted in lower selling prices.

In reality, LOWER selling prices were quite possible under REGULATION, not deregulation. For, if we look at the equivalent PESO MARGINS per LITER of the declining percent margins on gasoline and diesel sales, because the deregulated LOWER PERCENT MARGINS were based on MUCH BIGGER BASE AMOUNTS, the much higher 2005 and 2008 peso selling prices per liter--the resulting PESO MARGINS per LITER under DEREGULATION were in fact much HIGHER, as follows:

THE RISING EQUIVALENT PESO MARGINS PER LITER OF THE FOREGOING DECLINING PERCENT MARGINS ON GASOLINE SELLING PRICES:

(1) Under regulation as of 1998: P2.67 margin per liter.

(2) Under deregulation as of 2005: P4.99 margin per liter.

(3) Under deregulation as of 2008: P8.00 margin per liter.

THE RISING EQUIVALENT PESO MARGINS PER LITER OF THE FOREGOING DECLINING PERCENT MARGINS ON DIESEL SELLING PRICES:

(1) Under regulation as of 1998: P1.94 margin per liter.

(2) Under deregulation as of 2005: P2.45 margin per liter.

(3) Under deregulation as of 2008: P7.69 margin per liter.

The above margin statistics clearly show that while DEREGULATED PERCENT margins on sales were declining, equivalent absolute amounts or PESO margins per liter were consistently rising. By 2008, the RAISED DEREGULATED PESO margin per liter on gasoline sales TREBLED while that on diesel QUADRUPLED !!!

The independent reviewers made much capital of the lower rates of return of oil companies under DEREGULATION. To make these data relevant, they have to show also the rates of return during past REGULATION regime. They would be surprised to find that low rates of return had persisted since decades ago but oil companies did not abandon us, except when the oil-exporting OPEC countries suddenly nationalized their crude oil production facilities even before the 1973 Yom Kippur War. The nationalization wrested control of crude oil supply from multinational oil companies, thereby prompting Exxon Corporation, Mobil Oil, and Gulf Oil Corporation of the US to divest their oil refining and marketing investments in the Philippines, which investments were absorbed by the remaining oil companies.

At any rate, as pointed out in my cited first email, at our national oil consumption of roughly 300,000 barrels per day (159 liters per barrel), considering that P1.00 per liter unwarranted increase in average peso margin per liter will translate to a staggering more than SEVENTEEN BILLION PESOS (P17 Billion) of oil industry OVERPRICING per year, it is very important that the present trebled and quadrupled peso margins on gasoline and diesel prices, respectively, be reduced by, at the very least, P1.00 per liter.

Taking into account the present wide elbow room for downward adjustment in peso margins per liter of oil products, plus the fact that the oil industry had lived for years with much lower peso margins under past regulated regime, it is obvious that return to oil REGULATION can make possible a lowering of prices bearable by oil companies. At this point, the Independent Review Committee members cannot prejudge that oil companies cannot bear any significant price reduction. Hence, the independent reviewers’ conclusion that DEREGULATION resulted in lower selling prices is NOT necessarily correct. Clearly, only a properly implemented oil REGULATION, with reasonable possible lowest peso margin per liter to the oil industry--as was already done in the past, it is a matter of repeating it--will afford the oil consuming public the possible lowest prices.

MARCELO L. TECSON

A Concerned Citizen

3-21-11, 3-22-11, 3-23-11, 3-27-11, 3-29-11

RECOMMENDED EXECUTIVE ORDER ON TRANSPARENCY IN GOVERNMENT

2010-12-06T23:05:00.000-08:00

RECOMMENDED EXECUTIVE ORDER

ON TRANSPARENCY IN GOVERNMENT

For: President BENIGNO AQUINO III pnoy@noynoyaquino.ph

Sent: Monday, November 29, 2010 6:57:09 PM

Subject: Recommended Executive Order Mandating Anti-Corruption

Transparency in the Government’s Executive Branch

As reported by media, “President Benigno Aquino III wants a thorough review of the Freedom of Information bill (FOI) provisions before he certifies it as an urgent measure…. The FOI seeks to give public access to government documents such as contracts, upon formal request with the agency. There are at least 15 versions of the FOI bill pending before the committee on public information, including House Bill 53 authored by (Deputy Speaker and Quezon Representative Lorenzo) Tañada…. This 15th Congress, Tañada anticipates debates on a provision allowing for a retroactivity effect of the bill, which is being opposed by some lawmakers. Contrarily, Davao City Representative Karlo Nograles, son of former Speaker Prospero Nograles, who opposed the measure, had filed his own version stating that the FOI would only cover the incumbent administration.” (Lira Dalangin-Fernandez, INQUIRER.net, November 25, 2010).

The foregoing news item clearly suggests the PROBLEM of prolonged dilatory debates on the Freedom of Information bill that has been pending for years in Congress, with consequent perpetuation of non-transparent conditions in government that are favorable to corruption.

Fortunately, the President can outsmart the traditional politicians in Congress who apparently do not want to act expeditiously against corruption. There is a doable SOLUTION to the PROBLEM that can substantially address the anti-corruption objective of the bill, as expounded on in the herein POSITION PAPER (ANNEX A), from which I quote, as follows:

“Under Article VII, Section 17 of the Constitution, ‘the President shall have control of all the executive departments, bureaus, and offices.’ Thus, the President has the POWER to institute and make a reality the badly needed anti-corruption TRANSPARENCY or freedom of information in the government’s Executive Branch….

“The President can already issue an enabling interim Executive Order that will require anti-corruption transparency solely in his jurisdiction, the Executive Branch, which includes anyway the government's biggest spenders like DPWH, DND, DOTC, DENR, DA, DAR, local government units, etc., therefore the envisioned Presidential order on transparency can already provide a tool for capturing corruption in some of its most fertile grounds, such as the 1.6 TRILLION-PESO budgeted annual expenditures of the national government alone….

“If the President has the POWER to curb corruption in his jurisdiction through issuing an Executive Order that can promote anti-corruption transparency in the Executive Branch, why wait forever for traditional politicians in the Legislative Branch to do it for him through unnecessary self-imposed prerequisite passage of the Freedom of Information bill—as was done by the past President? Why wait for legislators to do it at their own sweet time--which nobody can tell exactly when? …To begin with, after years of waiting, a highly emasculated, weak, and unsatisfactory anti-corruption Freedom of Information Act may come out from Congress….

“Issuance of the subject Executive Order is in accordance with President Aquino’s latest pronouncement: ‘Our country will move forward in the broad light of day, where everything we do and how we do it is clear, honest and transparent. It is our strategy for rectifying errors in the past; it is the standard of performance you can expect from this government.’ (Chino S. Leyco, “Purisima calls for transparency across all government institutions,” Manila Bulletin, November 28, 2010, pages B-1 and B-4).”

* * *

Accordingly, I hereby respectfully recommend the issuance by the President of an interim EXECUTIVE ORDER mandating anti-corruption TRANSPARENCY in government operations in the Executive Branch, in the meantime that our legislature has not yet passed the crucial Freedom of Information Act for the entire government bureaucracy. If this Presidential order is issued, we may yet achieve a significant breakthrough against corruption, because it will facilitate detection and prevention of rampant corruption in government.

For your reference, enclosed is the POSITION PAPER expounding on the need for the subject Executive Order, including the recommended expansion of the area of anti-corruption role of private-sector PUBLIC OBSERVERS--from PUBLIC BIDDING in government purchases and infrastructure contracts under the existing Procurement Law, up to actual CONSTRUCTION of infrastructure projects as herein proposed.

May I have your feedback through email on my recommendation.

Thank you.

MARCELO L. TECSON

A Concerned Citizen

martecson@gmail.com

San Miguel, Bulacan

11-28-10, 11-29-10, 12-27-10

Copy distribution through separate emails:

Select executive and legislative government officials;

Commission on Audit officials;

Coalition Against Corruption;

Select other Civil Society Organizations;

Select lawyers, members of media and academe,

professional & think-tank organizations,

CBCP, concerned citizens, etc.

-------------------------------------------------------

ANNEX A

POSITION PAPER ON

EXECUTIVE ORDER MANDATING

ANTI-CORRUPTION TRANSPARENCY

IN THE GOVERNMENT’S EXECUTIVE BRANCH

INFORMATION TECHNOLOGY CAN HELP

USHER IN A DISCONTINUITY OF BIG-TIME

CORRUPTION HERETOFORE COMMITTED

WITH IMPUNITY IN GOVERNMENT

The information technology explosion already upon us for quite sometime may yet usher in a discontinuity in event in corruption and "dagdag-bawas" cheating in elections, both of which have victimized the entire nation for so long.

Discontinuity in event signals the obsolescence/demise/end of an era, industry, technology, practice, or activity as a result of new development that introduces major innovations or change in conditions, such as the death of the private telegraph industry (exemplified by RCPI and PT&T) upon the advent and proliferation of affordable cell phones. Captains of industries have to guard against such discontinuity in event, otherwise they may be caught napping. At the same time, they should be alert to the opportunities offered by the ensuing change, such as what Mr. Manuel V. Pangilinan did when he took charge of PLDT, which now relies more on other sources of revenue—brought about by fantastic advancement in technology—which were not available years ago.

Early this month, while on holiday and visit to relatives abroad, I had a lengthy talk with a technical expert working right in Microsoft headquarters in Washington State in the US . The talk reinforced my idea that, as documents become available in the course of public bidding for government purchases and infrastructure contracts, if these documents can be posted to the Internet and reviewed online not only by designated PUBLIC OBSERVERS but also by the general public--especially the technical experts among them--then rigging or manipulation of public biddings will be extremely difficult to hide and can be readily exposed before all appropriate public and private fora, including the influential international community if major part of project funding comes as loan or grant from foreign governments and institutions. If foreign contractors are involved in corruption in public bidding and awarding of government contracts, if the corruption can be determined and proven online, even their own governments may run after them for their wrongdoing.

Thus, in the case of corruption, hopefully, this time around, advancement in information technology may help rein in corruption in government.

INFORMATION TECHNOLOGY CAN SERVE AS TOOL

FOR TRANSPARENCY IN GOVERNMENT OPERATIONS

We Filipinos will be a hopeless case as a people if we cannot properly act on fully documented and conclusive cases of corruption exposed online before the whole world.

Please note that documentary evidences of all exposed past big-ticket corruption have not been seen by the public, so there were no concerted outcries against them. In the $329-million ZTE-NBN deal where alleged huge contract overpricing was exposed first by Philippine Star columnist Jarius Bondoc, then subsequently affirmed by other whistle blowers in Senate Blue Ribbon Committee hearings, even the perceived corrupt past Administration backed out and aborted the already signed contract with ZTE Corporation, to avoid destabilizing public backlash from the potential full exposure of the alleged blatant $130-million overpricing.

(The apparently intentional failure to pin down seeming corruption in the highest places was treated in my email to the then investigating Senate Blue Ribbon Committee, Office of the Ombudsman, and the Commission on Audit, on the subject: 7th Joint Follow Up: THE LITMUS TEST OF SINCERITY AGAINST CORRUPTION... REQUESTED COMPARISON of CONTRACT PRICES vs. MARKET PRICES in the ZTE-NBN DEAL.... The requested price comparison--a standard audit and investigation procedure--could have readily proven, if true, the staggering overpricing, but it was never done to this day, so there is no proper closure yet on the ZTE-NBN controversy.)

If the bases for decisions on increases in oil prices and tollway rates (calculations, basic assumptions, and major supporting documents) are posted to the Internet and can be reviewed online, technical experts from the public can determine if the price/rate increases are valid and correct.

If relevant documents covering other important government transactions most susceptible to corruption can be reviewed online, then other cases of corruption can be detected and prevented and thereby minimized.

With the advent of election computerization or automation, if images of—or equivalent data on--all election ballots can be reproduced and reviewed online, then this very crucial development can usher in the neutralization of "dagdag-bawas" and other forms of election fraud and cheating that, heretofore, were seemingly condoned in COMELEC and presidential and senatorial electoral tribunals.

THE PRESIDENT IS EMPOWERED TO ISSUE

AN EXECUTIVE ORDER MANDATING TRANSPARENCY

IN HIS JURISDICTION—THE EXECUTIVE BRANCH

Under Article VII, Section 17 of the Constitution, "the President shall have control of all the executive departments, bureaus, and offices." Thus, the President has the POWER to institute and make a reality the badly needed anti-corruption TRANSPARENCY or freedom of information in the government’s Executive Branch. He need not wait for the enactment of a Freedom of Information Act as far as promoting transparency in the Executive Branch is concerned.

The President can already issue an enabling interim Executive Order that will require anti-corruption transparency solely in his jurisdiction, the Executive Branch, which includes anyway the government's biggest spenders like DPWH, DND, DOTC, DENR, DA, DAR, local government units, etc., therefore the envisioned Presidential order on transparency can already provide a tool for capturing corruption in some of its most fertile grounds, such as the 1.6 TRILLION-PESO budgeted annual expenditures of the national government alone. In effect, the Executive Order can provide the means of attaining within the Executive Branch the main objective of the long pending Freedom of Information bill.

If the President has the POWER to curb corruption in his jurisdiction through issuing an Executive Order that can promote anti-corruption transparency in the Executive Branch, why wait forever for traditional politicians in the Legislative Branch to do it for him through unnecessary self-imposed prerequisite passage of the Freedom of Information bill—as was done by the past President? Why wait for legislators to do it at their own sweet time--which nobody can tell exactly when? Why be at the mercy of Congress, which last time intentionally failed to pass the Freedom of Information bill in the first place? It will be unwise for the President to rely on a dilly-dallying Congress in doing what he himself can expeditiously and properly do. To begin with, after years of waiting, a highly emasculated, weak, and unsatisfactory anti-corruption Freedom of Information Act may come out from Congress.

The President can steal the thunder from traditional politicians in Congress if he will promptly issue the subject Executive Order. It is one bold and concrete move that will dramatize his strong resolve against corruption.

PROPOSED EXPANSION OF THE ROLE OF PRIVATE-SECTOR

PUBLIC OBSERVERS FROM PUBLIC BIDDING TO ACTUAL

CONSTRUCTION OF GOVERNMENT INFRASTRUCTURE PROJECTS

To strengthen anti-corruption internal control in government through promoting a more effective system of checks and balances in it, the role of private-sector PUBLIC OBSERVERS should not be limited to all stages of the PROCUREMENT process as currently provided under the Procurement Law, which deals essentially with public bidding and awarding of contracts for government purchases and infrastructure projects. The herein proposed Executive Order should extend the role of PUBLIC OBSERVERS to ACTUAL CONSTRUCTION of INFRASTRUCTURE PROJECTS--to ensure contractors' compliance to contracted quantity and quality specifications, such as thickness and strength (in terms of pounds per square inch or psi) of concrete mix poured on roads, bridges, and buildings; quantity and size of steel materials used, etc. Pictures and videos before, during, and after construction of the project should be taken and posted online, so that ghost projects and other forms of cheating can be detected and prevented, especially by stakeholders--the concerned local-community organizations and citizens--who stand to benefit permanently from proper construction of the particular infrastructure projects in their community.

RECOMMENDATION ON THE COMPELLING NEED OF THE HOUR

Issuance of the subject Executive Order is in accordance with President Aquino’s latest pronouncement: “Our country will move forward in the broad light of day, where everything we do and how we do it is clear, honest and transparent. It is our strategy for rectifying errors in the past; it is the standard of performance you can expect from this government.” (Chino S. Leyco, “Purisima calls for transparency across all government institutions,” Manila Bulletin, November 28, 2010, pages B-1 and B-4).

The need of the hour then is for the President to be faithful to his anti-corruption vow, to “walk the talk” through giving substance to his election anti-corruption promises to the people—by issuing an interim EXECUTIVE ORDER mandating anti-corruption TRANSPARENCY in government operations in the Executive Branch, in the meantime that our legislature has not yet passed the crucial Freedom of Information Act for the entire government bureaucracy. If this Presidential order is issued, we may yet achieve a significant breakthrough against corruption, because it will facilitate detection and prevention of rampant corruption in government.

Therefore, the issuance by the President of the urgently needed Executive Order on anti-corruption transparency or freedom of information in the Executive Branch is strongly recommended.

MARCELO L. TECSON

A Concerned Citizen

11-28-10, 11-29-10, 12-27-10

NOTE: The foregoing Position Paper is a consolidation and wrap-up of my anti-corruption emails issued to select government officials and concerned Filipinos from October 29 to November 27, 2010. --MLT

THE CASE FOR OIL REGULATION: FREE MARKET DOES NOT ALWAYS YIELD LOWER PRICES

2010-01-27T05:52:00.000-08:00

THE CASE FOR

OIL REGULATION:

FREE MARKET DOES NOT

ALWAYS YIELD LOWER PRICES

To: “ Energy Secretary Angelo Reyes”

Sent: Mon, January 25, 2010 10:03:59 AM
Subject: 1st Follow Up: THE CASE FOR OIL REGULATION: FREE MARKET
DOES NOT ALWAYS YIELD LOWER PRICES

This is to respectfully reiterate the recommended RETURN to OIL REGULATION--on the ground that doing so is feasible (as was done for years in the past), and that doing so is the option most beneficial to the nation, as propounded in the herein forwarded position paper (ANNEX A).

May I be favored with the courtesy of your reply regarding your STAND on the recommended return to OIL REGULATION?

MARCELO L. TECSON
A Concerned Citizen

San Miguel, Bulacan
January 25, 2010

Copy Distribution Through Separate Emails:
Office of the President;
Select Executive Branch government officials;
Majority of Senators and Congressmen;
Commission on Audit officials;
Members of Philippine Economic Society;
Select members of media and academe,
professional & think-tank organizations,
civil society groups, concerned citizens....

========================================

----- Forwarded Message ----
From: Marcelo Tecson
To: “Pres. Gloria M. Arroyo” ;
“Sec. Angelo Reyes” info@doe.gov.ph;
vp@ovp.gov.ph; erermita@op.gov.ph; ops_edp@ops.gov.ph; mteves@dof.gov.ph; absantos@neda.gov.ph;... nmonsada@doe.gov.ph; mobillo@doe.gov.ph; senator_enrile@senate.gov.ph; congress_nogie@yahoo.com; boy_nograles@yahoo.com; etc….
Sent: Tue, November 24, 2009 8:11:06 PM
Subject: --Fwd: THE CASE FOR OIL REGULATION: FREE MARKET DOES NOT ALWAYS YIELD LOWER PRICES

THE CASE FOR RETURN
TO OIL REGULATION:
FREE MARKET DOES NOT
ALWAYS YIELD LOWER PRICES

For: Concerned GOVERNMENT OFFICIALS and CITIZENS

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 anew. As culled from the annexed position paper, some of the salient points of the issue are as follows:

1. It is DOE’s job to monitor and keep the public informed of the actual result of oil industry deregulation, that is, whether or not it actually lowered oil product selling prices as touted by its proponents. As the cost-recovery portion (of sales) being used to pay oil company costs and expenses cannot be object of downward price adjustments, by selling prices we actually mean the sales portion that is left with the oil companies after paying their costs and expenses out of their sales proceeds. In other words, we refer to their profit MARGIN on sales. It is DOE’s duty to disclose to the public the movement of PESO MARGIN PER LITER of oil products as of the following points--shortly before the advent of oil deregulation in 1998, to serve as base number; as of 2005 when a government-commissioned independent review committee affirmed the propriety of deregulation, to establish the validity of the committee’s conclusion; in 2008 during the height of crude oil prices at roughly $150 per barrel, to prove that oil companies did not take advantage of the situation through overpricing; and as of today, to see how present oil industry PESO MARGIN PER LITER compares with the base number, or the margin shortly before implementation of deregulation in 1998--which will concretely show the existing impact of deregulation on selling prices.

2. DOE is against regulation on the ground that it will entail subsidy from taxpayers. This is simply not correct because it improperly presupposes that the Oil Price Stabilization Fund (OPSF) will be mismanaged once again as was done sometime after EDSA I. For as long as the OPSF is properly managed, it will not entail subsidy, as it in fact did not entail subsidy from its inception in 1979 up to 1986 and sometime thereafter.

3. Based on the front-page news story of the Philippine Daily Inquirer on August 22, 2005, it appears that, instead of bringing down selling prices, deregulation actually raised the oil industry profit margin on oil products. As reported by the Independent Review Committee in June 2005, in the case of gasoline, the P2.67 per liter margin (23% of P11.62 per liter pump price) under the past regulated regime rose to P5.00 per liter (16% of P31.18 per liter pump price) under deregulation, or a whopping increase of P2.33 per liter.

4. Deregulation or free market will not always yield lower prices. More than a dozen oil companies sharing an annual oil market of 12 BILLION liters may not be happy with the above P2.67 margin per liter of product, the probable reason why they raised it to P5.00 per liter by 2005 or earlier. However, if the same annual sales volume is enjoyed by just one or two or three oil companies in a regulated environment, they may be satisfied enough to stay in business even if the margin is fixed and reduced to just say P2.50 per liter—the apparent condition during the regulated regime prior to 1998. At that time, what the big three oil companies lacked from their relatively LOW MARGIN per liter, they made up for through HIGH SALES VOLUME.

5. Those who successfully worked for oil deregulation in 1998 might have erred in not considering the then peculiarities in the oil industry, which made deregulation an apparent failure in the lowering of oil product prices, as explained in detail in the position paper.

6. Oil regulation which employed OPSF as an implementation tool was instituted for years without entailing taxpayers’ subsidy. It was done when PNOC senior vice president Antonio V. del Rosario was Undersecretary of Energy, and when Petron Corporation vice president Orlando L. Galang was Director of the then Bureau of Energy Utilization, which had jurisdiction over the oil industry. Definitely, there are other Filipinos at present who can operate likewise the OPSF without requiring taxpayers' subsidy, therefore there is no need to hesitate in going back to regulation.

The herein position paper (ANNEX A) which recommends return to oil industry regulation is submitted for consideration of concerned government officials and citizens.

MARCELO L. TECSON
A Concerned Citizen

martecson@yahoo.com,
martecson@gmail.com,
San Miguel Bulacan
10-26-09, 11-06-09, 11-23-09

===========================

ANNEX A

THE CASE FOR RETURN
TO OIL REGULATION:
FREE MARKET DOES NOT
ALWAYS YIELD LOWER PRICES

INTRODUCTION:
OIL INDUSTRY DEREGULATION
PROVOKED HIGHER—NOT LOWER—PRICES
BECAUSE OF PECULIARITIES IN THE OIL INDUSTRY

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 one at a time over the years. The solutions must adapt to the prevailing economic conditions. Accordingly, 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 because 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 this paper, presented for the information and consideration of concerned government officials and citizens.

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, leaving everything to market forces, 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]

II. OIL DEREGULATION VS. REGULATION—
WHICH OPTION PRODUCES THE
DESIRED MARKET?

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.

1. On the Provision of Stable Supply—
There Was No Threat of Supply Cut-Off
in Defiance of Regulation for as Long as
Profit Margins Were Allowed and Cost
Increases Were Recovered During Past
Regulated Regime

It is assumed under the dominant--though currently criticized 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—
Deregulation Promoted Higher Peso
Margin per Liter of Oil Products

a. It seems the present oil industry deregulation has promoted practically doubled peso margin per liter in the oil industry as far back as 2005 or earlier, and nobody from the public knows how much it has gone up further as of today—thanks but no thanks to the Department of Energy that appears clueless on the matter.

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 margin is.

In the case of gasoline, as reported in the August 22, 2005 front-page news story by the Philippine Daily Inquirer, which used data presented by the government-commissioned Independent Review Committee in June 2005, the P2.67 per liter margin (23% of P11.62 per liter pump price) under the past regulated regime rose to P5.00 per liter (16% of P31.18 per liter pump price) under deregulation, or a whopping increase of P2.33 per liter. Thus, while PERCENT MARGIN on SALES dropped from 23% under regulation to just 16% under deregulation, it actually translated to almost doubled PESO MARGIN per LITER owing to the drastic rise in SELLING PRICE. (The witting or unwitting message of the news item was that there was a lowering of prices because profit margin on sales dropped significantly from 23% to 16%, but it was oblivious to the fact that the lower 16% margin is now applied to a much bigger base amount of P31.18 selling price per liter, thereby yielding a much higher P5.00-margin 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. If the average margin for all products is, say, P3.00 per liter, based on 12 billion liters of annual sales, the oil industry will earn some THIRTY SIX BILLION PESOS (P36 billion) in annual net income. If there is a government oil company like Petron Corporation in the past that has say 40% market share, then roughly P14 billion of industry net income would go back to the Filipino people as owners of the government oil corporation.

On the other hand, if the oil industry does not generate this absolute amount of net income, parent-company-to-subsidiary transfer pricing of oil imports beyond international prices used in local product pricing, as well as other possible causes—like failure to attain break-even point on the part of new oil players, or error in calculation of peso margin per liter--may explain the situation.

It goes without saying that the people have to know the very crucial oil industry peso margin per liter, the determinant of possible oil industry overpricing.

So, how much is the average per liter margin today? Will DOE officials please ascertain this critical information--which may make or break deregulation--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 oil industry regulation operated through setting fixed peso margin per liter of oil products and allowing price increases on cost recovery basis only—a scheme accepted by oil companies from inception of regulation in the 1970’s up to its abolition in 1998--and there is no showing that present oil deregulation produced lower peso margin per liter compared to that under past regulation; on the contrary, as just shown, it appeared that the peso MARGIN per liter practically DOUBLED way back in 2005, the year an independent review committee affirmed the supposed need for continued deregulation on the basis of alleged lowering of oil product prices.

Past oil industry regulation did not mean fixing of selling prices at certain levels regardless of subsequent increase in oil importation costs—which could have driven away oil industry players if it were so. Instead, it set selling prices that yielded the authorized fixed peso margin per liter of products to the oil companies, then adjusted the selling prices upwards or downwards whenever there were subsequent cost increases or decreases that would disturb the targeted peso margin per liter. In this manner, the oil companies were assured of return for their capital and efforts, while the spending public was protected from unwarranted overpricing and profiteering.

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

In the first place, how did the fixed peso margin per liter of oil products originate as tool in the regulation of selling prices?

Shortly before the creation of the Oil Industry Commission (now Energy Regulatory Commission) in the early 1970’s, I saw the practice of maintaining existing profit levels and raising selling prices just enough to recover crude oil cost increases done by oil companies themselves. Thereafter, when the foreign parent oil companies tried to raise their margin on crude oil sales to their local subsidiaries by way of “hardening of prices” or increase in inter-company pricing—it was too late for them. The increased inter-company billings were not allowed as price-increase item by the already created Oil Industry Commission. This scheme of allowing a fixed margin per liter was refined later and perpetuated throughout the regulation regime through a conscious determination of what was the appropriate peso margin per liter, then maintaining it under all subsequent selling price adjustments.

Government regulators used the allowed peso margin per liter as an easy way of projecting the annual net income of oil companies. If peso margin per liter of products, market shares, and sales volumes were known, then a calculation of estimated ANNUALIZED OIL COMPANY NET INCOME can be readily made. The making of such approximation in the oil industry is quite feasible because three cost accounts alone that are readily determinable accurately--cost of imported oil, direct labor, and taxes--already constitute roughly 90 percent of total cost, so if we estimate the remaining 10 percent on a very conservative or high basis, our calculations would be substantially correct.

C. To ascertain the propriety of price increases regularly implemented by oil companies, the Department of Energy has to tell the people the historical peso margin per liter of oil products shortly before start of deregulation in 1998, as of 2005 when the independent review committee affirmed the supposed wisdom of the present oil deregulation, as of 2008 when crude oil prices rocketed to roughly $150 per barrel, and as of 2009 under current prices.

At present, the Department of Energy is not being asked to regulate selling prices because it has no such power under the Oil Deregulation Law. However, under the monitoring requirement of this law, it is expected to answer the question as to how the peso margin per liter of oil products behaved after the advent of oil deregulation in 1998, so the people will know whether deregulation has indeed been beneficial to them by way of lowering of prices, as professed by the independent review committee that evaluated deregulation in 2005.

The independent review committee concluded that deregulation brought about lower prices. By prices, it meant SELLING PRICES PER LITER of oil products. The selling prices consist of two components—COST RECOVERY and MARGIN. The cost-recovery component refers to part of sales used to pay the cost of goods sold: oil importation costs, taxes, and refining and marketing expenses. Margin refers to the remainder of selling prices that inures to the oil companies as profits.

We don't have to quibble over the selling price component used to compensate the oil companies for their costs because, in reality, this portion does not remain with them--it goes to the payees of their costs. For as long as necessary and incurred on an arms-length basis, their costs would be the same whether they are under regulated or deregulated regime.

What we should scrutinize then is the selling price component that goes to the oil companies--the PESO MARGIN PER LITER. Oil deregulation would have been beneficial, it would have LOWERED indeed the oil industry SELLING PRICES--if there is a DROP in the component subject to possible reduction as a function of competition under deregulation--the PESO MARGIN PER LITER of products.

Now, what are the facts? After deregulation, did the oil company PESO MARGIN PER LITER in fact DROP from its level before deregulation in 1998 to lower levels as of 2005, 2008, and 2010?

Any defense of oil industry deregulation is not right for as long as the above question is evaded and not correctly answered.

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 the latter's dealership contracts with the big three oil companies 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, our law enforcers 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.

The very low oil inventory of new economic players without refining facilities is precisely one of the disadvantages of the present deregulated system. During volatility of international prices, they may raise their local prices, but it is possible that before they get their replenishment stock, the international prices have gone down, and yet they have already unduly raised their prices even if it will turn out later that they will not actually incur increased cost because of the subsequent drop in international prices.

However, the WORST EFFECT of very low oil industry crude oil and product inventory will be felt as and when there is war or international political upheaval and there arises a disruption in oil supply to us. Within a very short period of less than a month, the country will run out of needed oil supply—which will bring the entire economy to a halt. This is not the case in other countries conscious of this contingency and have prepared for it.

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

It seems there is a misconception about OPSF as implementation tool of oil industry regulation. It will not be used to shoulder any needed price increases that have to be borne by the buying public. All necessary increases in pump prices of petroleum products will still be instituted as is the case right now under deregulation, hence regulation will not result in any subsidy by taxpayers. The main difference is that, under regulation, after allowing the oil industry a pre-determined peso margin per liter of products, subsequent price increases will be on cost recovery basis only.

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 will arrive 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 has to be authorized by the Energy Regulatory Commission. Whenever the motoring and consuming public buy oil products, their purchase prices will include the OPSF levy. Oil companies will receive the OPSF impost as part of their daily sales collection from customers. On a monthly basis, they will remit the collected OPSF impost to the Land Bank trust account designated for the purpose. As can be seen, part of the public which does not buy oil products will 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 is. 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. Please note that at our own initiative and request, which was granted by the Commission on Audit (COA) as an exception to the then already existing practically 100% withdrawal of COA pre-audit, all OPSF reimbursements were pre-audited by COA.

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 as a matter of right 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 generally well-off private stockholders—a basic application of the democratic fundamental philosophy of achieving the greatest good for the greatest number. 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. For short-term gain out of the proceeds of privatization, they cannot see the crucial long-term 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 propounded 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
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 P8.00per 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 Manilaplus 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….”

9. Past Regulation Ensured that High Transfer Pricing
Was Not Passed on to the Consuming Public

In the past, under regulation, the government addressed the problem of high crude oil transfer pricing between foreign parent oil companies and their local subsidiaries--by creating the Philippine National Oil Company in November 1973 and acquiring two local oil companies that now jointly exist as Petron Corporation. Thereafter, PNOC bought crude oil direct from oil exporting countries, principally Saudi Arabia, so the problem of unfair transfer pricing was avoided.

In the case of other oil companies, their selling prices were made competitive to that of Petron, so their high transfer pricing was also nullified. However, such high transfer pricingmay have persisted to this day to show low net income in the financial statements of their local oil subsidiaries--which might have misled those looking at their financial statements into believing that deregulation has indeed pared down oil industry profits.

Unfortunately, with the advent of globalization and deregulation, Petron Corporation was privatized-- thereby sacrificing for short-term gains the need for the government's permanent presence as CATALYST in the inflation-sensitive oil industry.

Today, high transfer pricing may not count in the setting of selling prices, but it may still have a role in the showing of low net income for multinational oil-company subsidiaries. As for the possible low net income of new marketing oil companies without refineries, that may be more due to their failure to go way above break-even sales volume, not because of low selling prices.

10. Considering the Advent of the Era of Crude
Oil at $100 per Barrel, We Have to Take Another
Look at Oil Industry Deregulation vs. Regulation--
Because Oil Product Prices Have Gone so High
that the Public Cannot Afford Even the Slightest
Overpricing by Oil Companies.

Oil industry regulation was implemented in the past for years with sustained LOW MARGIN PER LITER, together with rationalized wholesale posted prices that were fair to CEBU customers and others. I cannot see why it cannot be done today. Some of the highest government officials responsible for the implementation are still around and can give insights on the matter.

The simple test of the advantage or disadvantage of oil deregulation is on its impact on the PESO MARGIN PER LITER of oil products. We should not begrudge the oil companies if they raise prices to recover actual cost increases of imported oil. However, if under prevailing distressed conditions of our economy, their price increase constituted increase in their INCOME over what they used to earn under the past regulated regime, then we have to take a fresh look at oil industry deregulation under present distressed economic conditions.

So, the question now is, what was the oil industry PESO MARGIN PER LITER shortly before the onset of oil deregulation in 1998, what was it as of mid 2005 when the independent review committee affirmed deregulation, and what is it TODAY? We have to know first the answer to this question before continuing to meekly accept that deregulation actually resulted in lower prices.

III. DISSENT TO THE INDEPENDENT REVIEW
COMMITTEE'S AFFIRMATION OF OIL
DEREGULATION IN JUNE 2005:

REGULATION OF PROFIT RATES—NOT SELLING
PRICES PER SE--IS A METHOD ENSHRINED IN
OUR LAWS AND FOLLOWED UNDER ECONOMIC
CONDITIONS THAT DO NOT EXACTLY LEND TO
DEREGULATION OR UNBRIDLED FREE MARKET,
AS IN THE CASE OF FRANCHISE-HOLDER UTILITY
MONOPOLIES AND PUBLIC SERVICE PROVIDERS

In its June 2005 Report on the Downstream Oil Industry Deregulation Act of 1998 (RA No. 8479), the government-commissioned Independent Review Committee, which included experts in accounting and economics, presented two possible ways of reducing oil product prices:

(1) Ask oil companies to reduce prices.

(2) Provide subsidy.

As the Committee correctly concluded, the two options are not feasible. If, as a matter of policy, selling prices are fixed at arbitrary levels under which oil companies would incur losses without any prospect of making profits in the future, they would certainly close shop.

On the other hand, if the reduction in selling prices would be made up for by taxpayers’ subsidy in order to entice oil companies to stay, it is also not feasible because the government does not have the needed subsidy fund. On the contrary, it is faced right now by more than P200-BILLION budget deficit. Moreover, such subsidy scheme is not right. It makes even poor people who pay taxes through 12% VAT on product purchases--but do not consume oil products--shoulder the cost of gasoline and diesel used by rich car and sports-utility-vehicle owners.

1. The Independent Review Committee Did Not Err
in its Two Price-Reduction Options; Unfortunately,
its OPTIONS Were INCOMPLETE

Please note, however, that the options presented by the Committee were incomplete. It did not include a third option already followed during the past regulated regime for roughly TWO DECADES, implemented smoothly from the early 1970’s up to the time the OPSF was subsidy-free shortly before the outbreak of the first Gulf War in August 1990. The feasible third option: reined in selling prices (meaning, devoid of overcharging) through government authorized fixed PESO MARGIN per LITER of OIL PRODUCTS.

Oil industry regulation through allowing a predetermined PESO MARGIN per liter of products is the recommended feasible option because it addresses the OBJECTIONS against the two options cited by the Independent Review Committee in June 2005. It does not arbitrarily FIX the SELLING PRICES at amounts that may cause the oil industry to suffer losses. On the contrary, it automatically allows PROFITS to oil companies at targeted reasonable range depending on prevailing economic conditions. It also does not entail taxpayers’ SUBSIDY, just prompt PRICE ADJUSTMENTS on COST RECOVERY basis only—after allowing margin on sales to oil companies and exhausting their low-cost inventory.

2. There are Existing Price/Rate Regulation Models
to Go by in Oil Industry Regulation, and These
Do Not Involve Setting of Prices/Rates at Fixed
Immovable Levels Regardless of Consequences
(Gain or Loss) to Economic Players

Regulating product selling prices or public service rates does not mean setting prices/rates at fixed immovable levels--regardless of whether the product suppliers or service providers gain or lose in the process. There are available models that have been generally accepted by all concerned—the spending public, industry players, government regulators, and multilateral financial institutions--depending on the amounts at which the prices/rates are set. The most notable local models are as follows:

a. Regulated Maynilad and Manila Water rates, which are allowed to rise for the recovery of legitimate cost increases.

b. Regulated Meralco electric power rates and Transco distribution rates, similarly authorized to rise for the payment of valid cost increases.

c. Regulated telecommunication rates and expressway/skyway toll rates, set at
amounts designed to attain targated rates of return, then adjusted as necessary.

d. Regulated public transport fares, given rate increases whenever there are substantial diesel cost increases to be recovered.

e. Bank spreads or margins, indirectly fixed by Bangko Sentral ng Pilipinas (BSP) during economic turbulences, in order to contain high interest rates.

The last model may not be of public knowledge and has to be explained.

Following are actual cases of how BSP officials, in coordination with banking industry leaders, indirectly set a fixed range of bank spreads or margins for 40 or so operating commercial banks—analogous to fixing peso margin per liter of products to oil companies—as means of stimulating low interest rates, in lieu of simply setting a ceiling or fixing bank lending rates at low levels:

First, at the height of the Asian meltdown during first quarter 1998 (when traders and other borrowers in Mindanao staged militant protests against the then prevailing very high interest rates of almost 40 percent), to calm down the protesting borrowers and avoid possible bank runs, the Bankers Association of the Philippines (BAP) itself came up with a published association members’ “gentlemen’s agreement”—a clear case of cartel--voluntarily limitingbank spreads, or margin, on bank lending from 3 percent to 8 percent over 91-day Treasury bill rates. (References: Deogracias N. Vistan, “Bringing down banks’ lending rates: The rationale of the BAP’s concerted efforts, The Philippine Star, February 20, 1998, page 25; Deogracias N. Vistan, “An Important Message from the Bankers Association of the Philippines,” Philippine Daily Inquirer, March 11, 1998, page B6.)

Second, in reaction to my letter issued personally to BSP officials during the public hearing on high interest rates on April 17, 1998 at the BSP office--in which letter I recommended BSP’s granting of concessionary measures to banks conditioned upon their actual lowering of interest rates--“Bangko Sentral Governor Gabriel Singson has agreed to cut the reserve requirement on bank deposits by two percentage points to 8 percent from the existing 10 percent to enable banks to further bring down their lending rates…. Approval will be conditional on the BAP (Bankers Association of the Philippines) agreeing to lower the member-banks’ lending rates from the present (spread of) 2-7 (percent)… to 1.5 to 6 (percent)…. BAP had accepted Singson’s condition…. The governor made it very clear… that he would only consider reducing the intermediation cost if… banks would reduce the range of their lending rates. Otherwise, the move would only benefit the banks, not their borrowing customers.” (Doris C. Dumlao, “Bank reserves cut to 8%,” Philippine Daily Inquirer, May 21, 1998, p. B1).

Third, during the fury of the Asian crisis in last quarter 1997 and first quarter 1998, BSP found all sorts of reasons not to regulate interest rates and pinned so much hope and reliance on its moral suasion over banks, as reflected on the July 27, 1998 report of the BSP Committee on Interest Rates. The fact, however, that Philippine banks charged the highest and way out-of-line interest rates and bank spreads in the region meant that BSP’s moral suasion was powerless against banks. However, this was not the case when a brand-new new Governor, Mr. Rafael Buenaventura, took over the reins of BSP. At that time, the following news item appeared in a local daily: “The Monetary Board, the policy-making body of… Bangko Sentral ng Pilipinas… is drawing up sanctions against banks violating the 1.5 percent to 6 percent spread on lending rates (the same 1.5 percent to 6 percent bank spread set by BSP Governor Gabriel Singson in May 1998, as shown in the second case above) over the prevailing yield of the benchmark 91-day Treasury Bills…. BSP… disclosed (that) the (monetary) authorities are looking at withholding approval of bank branch application of those summarily charging interest rates beyond the agreed spread.” (Fil Sionil, “MB prepares sanction on spread rule violation,” Manila Bulletin, September 6, 1999, p. B-1). What happened thereafter? “Reacting to threats that the Bangko Sentral will come down hard on banks that will sharply increase their lending rates, most banks left their rates unchanged or even lowered them, according to the Bangko Sentral’s industry survey…. The decline came despite the rise in Treasury bill yields across the board last Monday.” (R. G. Falgui, “Loan rates dip despite hike in yields of T-bills,”Business World, September 9, 1999, p. 13). Thus, under a new Governor, BSP suddenly found its bearings and successfully reined in bank spreads as means of stabilizing or lowering interest rates.

In sum, the recommended oil industry regulation, which uses the mechanism fixed PESO MARGIN per LITER of oil products in preventing profiteering selling prices, is not an outlandish idea. It is just another form of already existing profit-rate regulation, applied in this case to inflation-inducer petroleum products and designed to yield targeted profits or return to industry players. It is in lieu of blindly fixing selling prices without regard to resulting gain or loss to industry members. Moreover, while it fixes peso margin per liter, it does not control sales volume, hence it encourages competition in the increasing of market share towards greater absolute amount of incremental income, thereby inducing each market player to reduce, not raise, selling prices to the extent it can.

IV. 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 margin per liter, they were authorized to raise their selling prices on 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, or during the first Gulf War in 1990-1991 when crude oil prices rose dramatically without corresponding prompt adjustments in authorized local oil product prices, thereby leaving OPSF the burden of shouldering the necessary stiff price increases.

Knowing how the multi-billion-peso OPSF subsidy arose in the past, are our energy officials so incapable that they do not know how to avoid its fallacious repetition--which is why they always assume that it will be repeated, which is why they always pose its repetition as objection to re-regulation?

If not, 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 in 2008 to unprecedented heights, in the process giving new and smaller players very little elbow room for reducing prices and margins.

The reason is that unlike in other industries where economic players compete in both thePRODUCTION 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 of the following:

First, there was NO prior HIGH MARGIN under past regulation
from which the price reduction under present deregulation
could be sourced, and

Second, the arena for price competition in the local oil industry
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 mainly in the PRODUCTION aspect—which is not the case in the local oil industry.

On the contrary, as what can be observed, deregulation will promote high prices because with the sharing and division of the existing fixed market pie over the greatly increased number of economic players, and with resulting REDUCED or LOW PER CAPITA SALES VOLUME for each of them, there will be compelling desire for everybody to RAISE PESO MARGIN PER LITER to generate the absolute amount of net income satisfactory to each of them. With present HIGH MARGIN, the three oil majors are compensated for part of their market shares eaten up by the new market players, while the new players with still LOW SALES VOLUME are appeased by the significantly raised margin per liter—a win-win solution 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, transparent, and most advantageous oil product prices.
Accordingly, return to oil regulation is hereby respectfully recommended, for consideration by concerned government officials and citizens.

MARCELO L. TECSON
A Concerned Citizen

martecson@yahoo.com,
martecson@gmail.com,
San Miguel, Bulacan
9-30-09, 10-26-09, 11-06-09, 11-23-09, 1-24-10, 1-27-10