Oil Deregulation in the Philippines (Final)

Filipinos rallying for lower oil prices
Photo courtesy of Anakpawis

For the first part of this series, read here. For the second part of this series, read here.

The prices we consumers have to deal with is a by product of government policy on the oil industry. It has been years since RA 8479 took effect. Gasoline prices rose from 11.62 pesos in 1998 (prior to RA 8479) to 58.45 pesos a liter in 2012. Diesel prices, meanwhile, rose from 8.10 pesos in 1998 to 48.70 pesos a liter in 2012. The Philippine peso weakened from 29.47 pesos in 1997 (prior to the Asian Crisis) to 42.23 pesos to the U.S. dollar in 2012. The total increase would be 251% for gasoline and 320% for diesel. In addition, all petroleum products rose by 535% since 1996. Also, it has been proven that oil companies change their prices along with the changes of the world market, even if the government deregulated the market. Given the unpredictable behavior of the world market, would oil prices in the Philippines ever be stabilized and reasonable?

A gasoline station of Petron
Photo courtesy of Petron Corporation

To achieve this end, what must be done with the current government policy characterized mainly by Republic Act (RA) 8479? House Bill (HB) 255 claimed the inaction of the government, specifically the Department of Energy (DOE), even if faced by such oil price adjustments. However, President Benigno Simeon C. Aquino himself was firm that deregulation will not be repealed, claiming that it will only create an artificial picture of low fuel prices while keeping the pressure on the resources of the government. Thus, if the law is to be retained, what needs to be explored is on how the government can deal the issue at hand with the existing law in place. What the government can do is effective enforcement and implementation of the law. The DOE must be beyond “announcing” and monitoring oil price changes by keeping the prices at check with improved cooperation with other agencies like the Department of Trade and Industry (DTI). Indeed, the government still has cards to play like regulation and taxation that can be utilized effectively in order to keep the Big Three from behaving more like a cartel in, at least in the legal sense, a deregulated market. Another specific plan of action could be the use of remaining government influence within Petron (only 40% has been sold to a subsidiary of Aramco), and form the company into a “moderator” that will set the trend for oil pricing. In a way, this is possible since Petron has 37% of the market share, as compared to 25.7% of Shell and 9.9% of Caltex. It is not far from the market share Petron had in 1975 (40%). However, the government would have to make the remaining 20% of Petron cooperate, because in 1994 an initial public offering (IPO) was made.

Another solution that needs to be explored would be amending the law. Senator Francis Escudero, formerly a vice presidential candidate, supported an amendment to the existing deregulation law. This was after observing the situation of the market in Negros Occidental. Possible amendments to the law includes increasing the powers of the government, particularly the DOE and the DTI to effectively carry out its duty in the oil industry and provision to further encourage the entry of new players in the market. In the former for instance, the DOE-DOJ task force formed by RA 8479 had a probe on unreasonable pricing in 2009 but ended in vain. Apparently, the task force can do nothing more to actually penalize or place sanctions on oil companies. If the government is virtually paralyzed under the existing law, amendments that are to be made should make sure that the government would be more effective and able to carry out the task at hand. Of course, in the latter, there are already incentives provided for new entrants in the existing law, but apparently it is not enough to pose real competition to the Big Three. With more than 80 players in the market, why is it that 72.6% of the market share belongs to the Big Three? Actually, the law provided only five months (from the original proposal of six months) as transition period before deregulation is fully implemented. Then again, it has to be considered that it takes more or less a year to set up one gasoline station. Yes, just one station. Say, in 2001, there were 3,658 gasoline stations in the country. Only 411 (11.2%) of these were from the new players, leading the way for them were Flying V (69), Seaoil (53) and Total (48).

Evidently, the Big Three already made too far a head start for the new players to catch up. This is not to say, however, that there has been no significant increase among the new players. From 4.3% in 1998, 38 they now have 27.4% of the market share in 2012. This is more than the market shares of either Shell or Caltex. Deregulation also brought an increase of coverage. From 2,951 stations in 1998, there were 3,658 stations in 2001. That is, an increase of 24%. Another possible amendment would be the provision for decreasing the frequency of oil price changes. Since there are no restrictions, oil companies are able to adjust prices even every week. In 1974, there has been a requirement for oil companies to maintain a minimum supply of sixty days of oil products. If the supply goes below sixty days’ worth, rations will be given. A similar mechanism may be laid out in the amendments. In the eyes of proponents of amendments, the law must be as comprehensive as possible to minimize, if not eliminate completely, loopholes which oil companies may or have already been using to their advantage. It has also to be taken into note that new provisions will also mean new consequences, and lawmakers who would push for amendments must anticipate them.

Finally, another solution to be explored would be the repealing the law. This has been a popular solution for most consumers, particularly transport groups. Accompanying this is a call to restore the OPSF and buying Petron back from Aramco. Popular as it may be, it will pose a new set of issues. In the forefront of these issues would be this: How and where will the government get the resources to revive the OPSF and reacquire 40% of Petron? It can be argued that the government is not spending to subsidize the OPSF during the Marcos administration because PNOC had revenues to spare for the fund. In 1985, PNOC had a net income of 850 million pesos, increasing 23% annually on average since 1976. In addition, oil companies other than PNOC were required to contribute to the fund whenever prices in the world market were low. We do not have PNOC now, and the environment is different than that of 1986. The new players may not be able to keep up with the requirements of contributing to the fund. They are just starting out, and then they are being made to contribute? How are they going to continue their respective expansion programs if this is the case? It might work if we are dealing with foreign companies. For example, in the case of Getty Oil in 1974, instead of investing its earnings to expand market share, Getty Oil remitted 100% dividend payout to its head office abroad. Thus, instead of our money being invested here at home, it was being sent out of the country. In a way, the OPSF is also a mechanism of keeping our money at home. However, many of the new players were local. With the OPSF in force, these new players might even choose not to venture into the oil industry anymore. Then, an OPSF in force without a profitable government company like PNOC would cause the government to subsidize oil prices out of the national budget – a budget already strained by the multiple and increasing needs of Philippine society. The volatility of the world market and the weakness of the Philippine peso will make this an expensive affair. Getting back Petron might also cause an outrage on the part of Aramco, and in attachment Saudi Arabia. It has to be taken into account that besides employing a considerable number of overseas Filipino workers (OFWs), 71.9% of the country’s crude oil come from the Middle East.

An aerial shot of the Strategic Petroleum Reserve in Texas
Photo courtesy of USA Today

An alternative to the OPSF can be found in the United States example. In 1977, the government created and maintained a Strategic Petroleum Reserve (SPR). Since 1985, it was required to keep 115 days of supply. However, in 2008 the reserve was decreased to 64 days of supply. What makes this an alternative to the OPSF is that the country does not keep prices down by pouring in money to oil companies. Instead, the prices are kept down by ensuring adequate supply during an oil crisis. In addition, oil is not a perishable product. Therefore, you can buy oil when prices are low, and then use them when prices are high. It may also reduce the problem brought by the weakness of the Philippine peso. The effectiveness of the program in the U.S. case had been witnessed during the 1990 oil crisis. Another example in the U.S. case would be in the period 1999-2000, oil prices in the world market increased by 71.7%, while prices for gasoline in the U.S. increased only by 45.2%. Other solutions include abolition of the value-added tax (VAT) on oil, which found a major proponent in the person of Manuel “Mar” Roxas (Senate Bill 1962), further diversify our sources of energy to decrease dependence on oil (such as the development of renewable sources, but this is another topic altogether), and country-to- country agreements on oil products. The first solution seemed a long shot at the moment, with the administration of President Rodrigo Duterte seeking to pass the Comprehensive Tax Reform Program (CTRP). The CTRP includes the maintenance of the current VAT on oil products, and a three-phase increase in excise tax on oil. While it has the potential to increase government income from petroleum, it will also mean higher rates for consumers. The third solution had been in use when the Marcos administration regulated the oil industry. It has always been accepted that contracts with governments are firmer, especially if the volatility of the world market is taken into consideration. Then again, it has to be taken into mind how this setup (country-to- country agreements) can be applied in a deregulated market. Will oil companies allow the government to manage the supplies they are supposed to be getting themselves? Also, given the volatile world market, how can the government assure revenues if these agreements usually get pegged at a minimum of 12 months of supply and at fixed prices? It has to be taken into account that in the year 2008 alone, oil prices in the world market peaked at $145 a barrel (July) and dropped to a low $ 35 a barrel (December). It is not to be said that this cannot be done in a deregulated market. However, the question would lie on its effectiveness. Will this setup work? Recall that the environment where the oil industry revolves in 2015 is different from that of 1974. To add to all of these possible solutions, the notion that deregulation should have not taken full swing too fast could have been a possible way to take when we were starting out. A look at the case of Thailand would give us a background on this. In 1991, the government implemented “semi deregulation” and full deregulation three months later. The Philippines, while having a transition period of five months, did not have a “semi deregulation” phase per se. What they retained and we abolished was their oil fund similar to the OPSF. While they also faced problems as the Philippines did, a significant feature of Thai deregulation would be the considerable increase in service stations in the country. From 3,764 in 1992, the number grew to 6,156. That is, a 63.5% increase (in comparison to 24% in the Philippine experience from 1998 to 2001). Then again, it has already been 19 years since the law took in effect. Most likely, it is too late the hero for this case.

Workers rally for repealing oil deregulation
Photo courtesy of GMA News

There has been a number of possible ways to make government policy on the oil industry better for the public. The years that passed for Philippine deregulation of the oil industry has its own successes and failures. In response to the consequences of deregulation, the first three solutions presented explored what can be done with the existing law in force. The focus has been on the legal basis of deregulation. The last three solutions presented explored what the government can do beyond tweaking the legal provisions of deregulation. However, what must be clear is that the government must not remain doing nothing, or at least refrain from giving the public an impression of inaction to the concerns of the oil industry. When the government takes action, it may be any of the solutions presented or perhaps a new solution might be thought up altogether. A better idea is all that it takes. However, for every action, anticipate the consequences. Whether direct or indirect, whatever policy the government shall take will have an advantageous or disadvantageous effect. This must not flee from our minds. On another note, a law may be good on paper but not in practice. These two aspects of the legislation piece must be in harmony together in order to work. As for my personal opinion on the matter, it can be said that I am not in favor of repealing the existing law. I see that if one takes away something, another has to take its place – re-regulation. However, the state of the oil industry then and now is different, and it would take a different strategy to deal with a different problem. Of course, the Marcos administration had an easier job because they were only six players at the time. With more than 80 players in the market today, it will prove an arduous, not to mention expensive, task for the government to regulate the market again. The effects of deregulation today are consequence of the adjustments done to the old deregulation law. If lawmakers see that it will take to amend the law, or pass a new law altogether, then do it. However, what the government really needs is a strategy, not tactics, in dealing with the oil industry. Bearing a small economy and a weak currency, the Philippines cannot remain heavily dependent on imported oil forever. Without a sound strategy, either regulation or deregulation will not work in our case. Also, in coming up with a strategy for our country, we must heed to the lessons of the past and learn from them. We also must take into account the experience of other countries, and then look at our situation in comparison to them, even if this study has been limited to a comparison with Thailand and the United States. I therefore propose coming up with a strategy, in this case within a deregulated market, which will decrease our oil dependence abroad. In building up this strategy, good points in both our experience and the experience of other countries are to be integrated. Bad points are to be struck out. There is no one best way in dealing with the issue, and more so in a complex one as that of the oil industry. What we will do concerning the matter today will not only affect our generation, but also the generations to come. The burden is upon us now.

See the references here.