OilEx again?

Gasoline prices have been making news again. Prior to the recent rollbacks, oil companies had hiked their prices, precipitating much protest and renewed calls for repealing oil deregulation Meanwhile, Cong. Enrique Garcia of Bataan has re-filed his Oil Exchange bill in the current Congress as House Bill No. 300. It is essentially a toned own version of last year’s bill that no longer provides for taking over private oil firms’ physical storage facilities and terminals. However, HB 300 Sec 4 still provides for an oil exchange whose:

” primary objective is to enable our country to get the best prices for our requirement of refined petroleum products. The OilEx shall:1) determine the country’s total monthly requirements for refined petroleum products, based on the requirements of the local oil marketing companies;2) conduct the worldwide bidding/negotiation open to all local and foreign oil refineries and traders; and3) award the supply to the lowest qualified bidders/term contractors. Only the refined petroleum products of the lowest complying winning bidder/s and term contractor/s may and shall be placed in commerce in the Philippines.”

Thus it will still intervene in the market by conducting an auction for
refined products where all interested foreign and domestic firms must
participate. However, the exchange won’t take possession or actually
purchase the inventory. It will merely “license” or allow the winning
bidders to sell their products; i.e. “place in commerce.” Anyone not
participating in the bidding or who does not submit the lowest bid will
presumably be prohibited from selling.

The oil exchange bill presumes the big three monopolize the local
refined products market and set “unfair” prices. Is there really
overpricing? Compared with January 1998, premium, unleaded, and diesel
prices have only risen by 40%, 42%, and 72%, respectively, whereas the
peso cost of crude oil went up 118%. This doesn’t look like it.
(January 1998 was during the transition period when the original oil
deregulation law was struck down and thus the industry was
“re-regulated.” Thus prices were under the ERB supervision again at
that time.)

An oil exchange promises to pose many problems in implementation.
Monitoring and coordination could be a huge problem. How often will the
bidding be done? The bill suggests monthly bidding, but how do we know
that a month’s inventory is the most efficient amount to order (EOQ or
economic order quantity in business parlance)? What if the amount bid
out is wrong; i.e. we run out of stock before the next month begins or
we still have leftover stock from the previous month’s bidding? If firm
A has leftover stock from the previous month but lost this month’s
bidding, how do we ensure that A will not sell that stock this month?
Should we care? What if this month’s winning bid price is higher than
last month? Then should we let A sell? But what if this month’s winning
bid is lower than last month’s, why would A want to sell? How will one
monitor that the gasoline being sold is actually gasoline that “won” in
the bidding, in over 3,000 gasoline stations nationwide?

Oil refining is not an on/off type of operation. Starting up a refinery
is so costly that once a refinery starts operations, it operates
continuously. Moreover, all the various refined products are refined
from the same process and are produced in more or less fixed ratios. In
the same operation the refinery will produce all the other products as
well; e.g. diesel, premium, kerosene, aviation fuel, etc. What if a
local refinery wins the bid for one refined product but not the others?
Will it be allowed only to sell that one winning product? What will it
do now with all the other fuel that were produced?

Or consider the hypothetical case where the big three all lost the
bidding but now refuse to sell refined products of the winning bidders.
If they are required or coerced to sell the products of foreign
refiners through their retail stations, won’t that be tantamount to
taking over their stations? And if they will sell, what will guarantee
they won’t overprice to recover the “stranded” costs of their
refineries?

The oil exchange bill misses the crux of the problem. If the Big Three
abuse their market power, that power rests in the distribution aspect
of the industry. Not refining. In an import-liberalized Philippines,
the new players can precisely import from foreign refiners if their
prices are cheaper. But gasoline must be dispensed and sold in gasoline
stations. Since the Big Three have an overwhelming majority of the
stations (not to mention the storage capacity), the new players can
only be price followers. Even if they could undercut prices, they
couldn’t serve the entire market if they wanted to. So why bother? Just
follow the majors’ prices and make some extra profits.

The author of the bill seems obsessed with finding out the exact landed cost of oil:
” With the establishment of the OilEx, we would now know the actual
landed cost of every RPP (refined petroleum product), down to the last
centavo, much unlike the present situation where only the oil companies
know the price, thus providing them the opportunity to overprice their
refined petroleum products. Knowing this, therefore, the local oil
companies (including the Big Three) will find it very hard to overprice
their RPPs because we would now know from their selling/pump prices if
their mark-ups (marketing cost recovery plus profit margin) are
reasonable.”

Estimating the landed cost of refined products is possible even today.
With the Internet, one can now find out what the various international
prices are today. One can also call up shipping, handling, and
insurance companies for their rates. Tariff and customs duties are set
at 3%.

Even if bidding in an oil exchange gives us a fair landed cost, does
that mean that we now know what the “fair” retail price should be? Do
we know how much the marketing and advertising costs are? Hauling
costs? Cost of capital? Labor costs? Of course not. Only the oil
companies know that for sure. So are we now going to set up an
advertising and marketing exchange? A trucking and hauling exchange? A
capital exchange? A labor exchange?

Finally, an oil exchange presents yet another opportunity for graft and
corruption. True the bidding can theoretically be conducted
transparently through electronic means. But the problems may be in
monitoring and implementation; checking that only products that won the
bidding are actually “put in commerce.”

An oil exchange is going to be a nightmare. Perhaps the only benefit is
that proposals of this kind are precisely so scary as to serve as a
form of moral suasion on oil companies to keep their prices in
check.

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