Oil Exchange: A “Cure” Worse than the “Illness”?

The price of petroleum products has risen sharply two years into the

Estrada administration. The price of petroleum products for motor
vehicles has increased by around 50 percent. Fuel oil, an important
source of power generation, has increased by more than 100 percent.
LPG, a principal household commodity, has increased by 90 percent. And there is no end in sight. Just this week the new industry entrants have started raising their prices by around P1 per liter. The big firms are expected to follow suit next week by at least at much. These oil price hikes have enraged the public; transport groups held strikes. Going by media polls, the strikes enjoyed public support.

The public reaction is hardly surprising. After all, the economy remains sensitive to oil prices. For one, a study by the Philippine Institute of Development Studies (PIDS), shows that oil price increase negatively affects not only economic growth but income inequality and welfare as well.

Fanning the flames

Heightening the outrage even more are serious allegations that the oil
companies have taken advantage of the situation by increasing prices
beyond what is necessary. Critics of the oil companies charge that the
major oil companies, acting as price leaders, are overpricing petroleum
prices through transfer pricing and price padding. Transfer pricing is
done by purchasing crude oil from their foreign mother companies at a
higher cost than known international benchmarks. Price padding, on the
other hand, is done by increasing prices beyond the amount that would
cover movements in world crude oil price and the peso-dollar exchange
rate.

Critics argue that the overpricing is possible because the oil deregulation law fails to facilitate a truly competitive market. They observe that the three major oil firms continue to control 95 percent of the country’s supply of refined petroleum products.

The Remedy

In response to the problem, Representative Enrique Garcia of Bataan has
proposed the establishment of the National Oil Exchange Corporation
(OILEX). The OILEX, as conceived in pending bills in Congress, will
exclusively handle the original purchase of the country’s total requirement for each refined petroleum product. The process starts with the OILEX determining the country’s total monthly requirements for all refined products. It then exclusively undertakes the original purchase through bidding, which shall be open to both domestic and foreign suppliers. The OILEX shall then handle the storage and eventual distribution to of the petroleum products to distributors and wholesalers. Through this scheme, the proponents of OILEX hope to open the supply market to more than 40 foreign and local oil refineries and traders.

Wrong diagnosis

While the scheme is conceptually appealing, there is equally strong
evidence that no overpricing is taking place. The Department of Energy,
for one, reports that the actual prices are lower than under the regime
of regulated prices. This shows that the liberalization of entry into
the market has introduced competition and resulted in the clearing of
lower prices. (See Table 1)

Table 1: Actual prices lower than what would have obtained using the Automatic Pricing Formula (APM) (in pese per liter)

APM

July 2000

Actual Price Range

as of July 4, 2000*

Actual Price Range
as of July 27, 2000**
Premium 17.59 16.13-16.83 16.68-17.38
Unleaded 17.25 15.60-16.07 16.15-16.62
Kerosene 12.72 11.50-11.80 11.70-12.35
Diesel 13.09 11.75-12.18 12.30-12.73

*effective date July 1
** effective date of various oil companies: July 25-26
Source: DOE

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