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 25-26Source: DOE
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