top of page
Action for Economic Reforms

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.

bottom of page