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Report on the Downstream Oil Industry Deregulation Act of 1998

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Title: Report on the Downstream Oil Industry Deregulation Act of 1998


1
Report on the Downstream Oil Industry
Deregulation Act of 1998
  • Independent Review Committee
  • June 2005

2
Purpose of the IRC
  • To answer questions such as
  • What is the main cause of the present high level
    cost of gasoline and other oil products?
  • Would the prices be any cheaper if we were under
    a regulated regime?
  • Could prices be reduced by asking companies to
    reduce their profits? Or by providing subsidy or
    a program like the Oil Price Stabilization Fund
    (OPSF)?

3
Purpose of the IRC
  • To answer questions such as
  • Why were increases in oil prices very frequent?
    Why didnt prices decrease right away where there
    was a decrease in international crude prices?
  • Why do oil companies seem to raise prices at the
    same time? Do cartels exist?

4
Purpose of the IRC
  • To answer questions such as
  • Did the deregulation law actually encourage
    competition? Did competition bring about lower
    prices?
  • Are there disorders in the deregulated regime
    that need to be addressed?

5
Purpose of the IRC
  • There was no consensus in comments heard around
    town
  • Repeal the law because it is
  • Unconstitutional
  • The main cause of price hikes.
  • Nationalize the industry and provide subsidies.
  • The law is fine but just need some tweaks.

6
Procedure Followed
  • The IRC sought facts on which to base
    recommendations
  • Learn about the industry through data gathering.
  • Interview oil players and stakeholders.
  • Analyze data and make conclusions.
  • Submit recommendations based on conclusions.

7
State Policy (RA No. 8479)
  • To liberalize and deregulate the downstream oil
    industry in order to
  • Ensure a truly competitive market
  • Under a regime of fair prices.
  • To introduce adequate measures to assure the
    attainment of these goals.

8
State Policy (RA No. 8479)
  • This is broken down into three main topics
  • Prices and their movement
  • Competition
  • Enforcement

9
PRICES
  • Pricing, Price Movement and Subsidy

10
On Prices
  • What is the main cause of the present high level
    cost of gasoline and other oil products? Is it
    the Oil Deregulation Law?

11
This shows that peso/dollar rates increased over
200 against the US dollar/ Crude oil prices
which increased more than 300. Fact Peso cost
of crude component in oil products increased over
six times (forex/crude multiple 6 times).
12
On Prices
  • The Philippines imports practically all our oil
    requirements because our own TOTAL PRODUCTION is
    less than one half of the countrys needs for
    half a day.
  • Any changes in international oil prices directly
    affect pump prices.

13
On Prices
  • What do we pay for at the pump price for
  • Gasoline
  • Diesel
  • Kerosene
  • LPG

14
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18
On Prices
  • Lets analyze the pump prices of gasoline and
    diesel in terms of pesos using the previous
    tables after imputing the forex/crude multiple of
    6.
  • The information on pump prices is condensed to
    show only the portion of crude oil cost and
    company take.

19
Gasoline
Regulated Theoretical Deregulated
Oil Company Take 23 P2.67 16 P5.74
Others 44 5.12 20 7.18
Crude Cost 33 3.83 64 22.98
100 11.62 100 35.90
Actual Deregulated Price 31.18
20
Diesel
Regulated Theoretical Deregulated
Oil Company Take 24 P1.94 9 P2.63
Others 29 2.35 13 3.81
Crude Cost 47 3.81 78 22.86
100 8.10 100 29.30
Actual Deregulated Price 27.31
21
On Prices
  • The theoretical prices of oil products are much
    higher than the actual pump prices.
  • The share of other components have dramatically
    reduced.
  • Conclusion Oil product price increases were
    mainly caused by the peso devaluation and the
    increase in the world price of Dubai crude not
    deregulation.

22
On Prices
  • There are two ways that prices could be reduced
  • Ask oil companies to reduce prices
  • Provide subsidy.

23
On Prices
  • Are oil companies making too much money?
  • Under the regulated regime, they were guaranteed
    a fixed rate of return (8 of
    rate base).
  • Financial statements in the deregulated regime
    show that most oil players (importers) lost
    money.
  • Total loss of about P2 billion for Total
  • Total loss of about P5 billion for PTT

24
On Prices
  • Are oil companies making too much money?
  • Only Shell and Petron made some money.
  • Financial data show that the two oil majors make
    less than the 91-day T-bill rate

25
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27
91-day T-bill rate 1998-2004
Year Rate
1998 14.27
1999 10.20
2000 9.86
2001 9.86
2002 5.43
2003 6.03
2004 7.43
Average 6.97
28
On Prices
  • What about subsidizing oil prices and instituting
    something like the OPSF?
  • OPSF was created as a buffer fund to absorb cost
    increases and minimize frequent price changes.
  • OPSF was wiped out during large spikes in the
    cost of crude during the Kuwait invasion of Iraq.
  • There was some mismanagement of the fund.
    Government subsidy reached P15 billion.

29
On Prices
  • What about subsidizing oil prices and instituting
    something similar to OPSF?
  • If OPSF were continued to this day
  • Subsidy would be about P18 billion if diesel were
    pegged at P18.70 when the LTFRB granted fare
    increases in May 2004.
  • Subsidy would be about P1.5 billion for the first
    4 months of the year if the government bore the
    P1/liter discount for diesel.

30
On Prices
  • What about subsidizing oil prices and instituting
    something similar to OPSF?
  • There is danger when there are too many players.
  • OPSF is only good when few players exist and are
    willing to stay in business when they have to
    contribute to the fund.
  • There are hit and run players.

31
On Prices
  • Can the government subsidize oil prices?
  • Subsidy is a system when someone other than the
    direct user pays a portion of the cost.
  • OPSF was sort of a subsidy but it was eventually
    wiped out.

32
On Prices
  • Can the government subsidize oil prices?
  • Subsidy in other countries
  • Indonesia reached 7 billion
  • Malaysia reached up to 1.5 billion for diesel
  • Thailand reached 2 billion for gasoline and
    diesel discontinued in June 2005
  • Can the Philippines afford subsidies of this
    magnitude?

33
On Prices
  • Can the government subsidize oil prices?
  • Subsidy is viewed as unsound fiscal practice
    ADB and UNESCAP
  • Subsidy has negative effects as it
  • Distorts relative prices
  • Discourages fuel conservation and efficiency in
    transport
  • Encourages overuse of subsidized items

34
On Prices
  • Can the government subsidize oil prices?
  • Conclusion Subsidizing oil prices (something
    like the OPSF) does not work in an era of rising
    crude prices because it would entail government
    resources that it cannot afford.

35
On Prices
  • If we accept for arguments sake that the oil
    players were not overcharging
  • Why were increases in oil prices very frequent?
  • Why didnt they reduce prices right away when
    there was a decrease in international crude
    prices?

36
DOEs price monitor shows that the local oil
companies are not able to adjust their prices
as fast as MOPS.
37
Dubai vs. Local Prices
Dubai benchmark reached 4.35 times its Jan 1998
level, in contrast unleaded gasoline and diesel
were about 2.37 and 3.13 times respective in Mark
2005. For the refiners, their raw material cost
went up faster than their selling price.
38
On Prices
  • Price Catching Up
  • Small but frequent adjustments.
  • The DOE secretary asked for the cooperation of
    local oil companies to increase prices on a
    staggered basis rather than in one big jump.
  • This resulted in weekly P.50 increases on March
    7, 15, 19, 27 and April 4.

39
On Prices
  • Parachute Phenomena
  • Since oil companies cannot keep up with price
    increases, they try to recover when there are
    price decreases.
  • Conclusion Frequent price increases resulted
    from government suasion in spreading major price
    increases over a longer period.

40
On Prices
  • Why do oil companies seem to raise prices at the
    same time?
  • Do cartels exist?
  • Nature of the product interchangeability
  • Competition is involved
  • Market share is the name of the game
  • Basic economics should consider that under these
    conditions, we should expect prices to go up and
    down together which is an indication that market
    forces are working not necessarily that cartels
    exist.

41
On Prices
  • Conclusion When products are interchangeable,
    when market share is the name of the game, and
    competition is in full swing, we should not be
    surprised, but rather expect, that oil companies
    prices will seem to rise and fall at the same
    time.

42
On Prices Major Conclusions
  • The main cause of oil price increases was the
    effect of major peso devaluations and increases
    in the international price of oil especially
    since we import practically all our oil product
    requirements.
  • Subsidy is not a viable solution because it will
    cost government excessive amounts of money.
  • There is no evidence of price cartels.

43
On Prices Recommendations
  • On Pricing
  • The DOE should not support or initiate any change
    in the Policy of the State in the Downstream Oil
    Industry Deregulation Act of 1998 (RA No. 8479).

44
On Prices Recommendations
  • On Pricing
  • The DOE should continue to monitor oil prices
    regularly. The DOE should
  • Let the public know what it is monitoring and how
    it is being done
  • Earn the trust of the public and dispel the
    impression that it may be acting as spokesperson
    for the oil companies
  • Enlist the assistance or cooperation of entities
    or persons who have credibility and in whom the
    public can trust for whatever information the DOE
    wishes to release on its monitoring efforts and,
  • Be able to persuade oil companies to spread oil
    increases into smaller price hikes over an
    extended period and inform the public so that the
    public understands the reason behind frequent oil
    price increases.

45
On Prices Recommendations
  • On Pricing
  • The DOE, working though the governments
    representatives in the Petron Board, should
    continue to urge the Company to act as price
    moderator. In a deregulated market, price is
    often set by the low cost producer. Petron,
    being a refiner and a market leader, suits the
    role. The action of price moderator should not
    be done just during price rollbacks but also
    during price increases.

46
On Prices Recommendations
  • On Pricing
  • Because we are practically 100 dependent on
    imported oil for our requirements, the DOE should
    accustom the public that we are now in a regime
    of high prices. As such, the DOE should continue
    its efforts to
  • Encourage exploration and development of
    indigenous energy resources including oil and
    gas
  • Encourage the use of alternative energy sources
    and,
  • Promote programs for the conservation of energy
    and avoidance of wastages in the use of oil
    products (e.g., stricter enforcement of laws
    governing colorum vehicles).

47
On Prices Recommendations
  • On Pricing
  • The DOE should spend some time to educate the
    media about the basics of the oil industry to
    provide reporters with a better perspective for
    news reporting and analysis. Medias influence in
    shaping collective judgments cannot be denied and
    towards this, helping them acquire the proper
    fundamentals would be very helpful.

48
On Prices Recommendations
  • On Pricing
  • It is interesting to note that the land transport
    group and the sea transport group have different
    views on oil deregulation. Land transport is
    still regulated while the latter is deregulated.
    The DOE should look into a an automatic fare
    setting mechanism or formula that can adjust
    fares quickly in response to both increases and
    decreases in fuel prices.

49
On Prices Recommendations
  • On Price Movements
  • While at present there is no hard evidence that
    cartels exist, the DOE should always be alert
    that in the future, cartels may be practised and
    that the DOE should be prepared to prosecute
    erring companies.

50
On Prices Recommendations
  • On Subsidy
  • The DOE should not propose or support any program
    that leads to any subsidy. On the other hand,
    the committee recognizes the need to alleviate
    the poorest sectors of society and some social
    action needs to be made. However, this is a
    function of another branch of government and not
    the DOEs.

51
COMPETITION
52
On Competition
  • Did the Oil Deregulation Law actually encourage
    competition?
  • Did competition bring about lower prices?

53
On Competition
  • Deregulation allowed more players to operate in
    the Philippines.
  • From 3 major oil players, there are now 35
    players (many importers).
  • From 3,000 service stations, there are now over
    4,000.
  • Proliferation of LPG players.

54
On Competition
  • There have been cases when the actual pump prices
    were less than what a player would have wanted to
    charge.
  • It is a fact that none of the new players
    (importers) is making any profit.

55
On Competition
  • There have been bad effects of competition
  • Gasoline retail outlets not making sufficient
    margins.
  • Bad practices like below standard outlets and
    smuggled products in the market.

56
On Competition
  • LPG industry has polarized large players against
    independents on issues such as
  • Cylinder ownership
  • Under-filling
  • Safety standard compliance

57
On Competition Conclusions
  • Deregulation has increased competition in the
    industry.
  • There are both positive and negative effects on
    competition. The effect on lowering prices
    outweighs other effects.

58
On Competition Recommendation
  • DOE should continue to foster safe and fair
    competition in the oil industry so that market
    forces can work for the benefit of the consumers
    by checking price increases.

59
ENFORCEMENT
60
On Enforcement
  • Are there disorders in the deregulated regime
    that need to be addressed?
  • Why cant the DOE seem to fix identified problems
    in the industry such as substandard service
    stations and those in the LPG industry?

61
On Enforcement LPG
  • Unsafe and unfair LPG practices
  • Tampering of cylinders
  • Unauthorized refilling of LPG cylinders
  • Under-filling
  • Maintenance of illegal retail outlets
  • Illegal repainting of cylinders
  • Fake cylinder and seals
  • Proliferation of unbranded/substandard cylinders,
    and
  • Pilferage or Paihi

62
On Enforcement LPG
  • EO No. 377 watered down the authority of the DOE
    to monitoring it cannot suspend or revoke
    licenses of industry violators.
  • LPG Refillers Association is challenging DOEs
    Revised Schedule of Penalties for the LPG
    Industry.

63
On Enforcement LPG
  • Effects of DOE monitoring without authority to
    revoke
  • 45 of 5,285 LPG establishments inspected were
    violating LPG rules and regulations (between
    August 2000 to March 2005) and,
  • Violators of LPG rules for three consecutive
    times are recommended for closure to the
    concerned LGUs. However, implementing the closure
    depends on the political will of the concerned
    LGUs.

64
On Enforcement LPG
  • Addressing DOEs limited powers
  • Self-policing - LPG Task Force assists in
    enforcing LPG regulations
  • DOE advocating the passage of the LPG Bill (House
    Bill No. 2422)
  • Conclusion The limited powers of the DOE over
    the LPG industry have permitted illegal, unfair
    and unsafe practices to go uncorrected.

65
On Enforcement Service Stations
  • Under the deregulated regime, the requirements to
    operate a service station have been relaxed.
  • There has been an increase of about 42 in
    service stations.

66
On Enforcement Service Stations
  • The problems of the liquid fuels/service stations
    sector include the
  • Presence of illegal traders and mosquito
    retailers who have substandard facilities and
    inferior products.
  • Lack of enforcement of the Retail Rules
    promulgated in 2004 that govern the operation of
    a gasoline station business.
  • Emergence of the bote-bote method of retailing
    and gasoline stations with unauthorized above
    ground tanks.

67
On Enforcement Service Stations
  • Illegal substandard stations compete unfairly
    with legitimate players.
  • Illegal unsafe practices are due to DOEs
    inability to police, suspend or revoke licenses
    left to the political will of respective LGUs
  • Conclusion The limited powers of the DOE have
    enabled the illegal, unsafe and unfair practices
    in the service station sector to continue without
    being corrected.

68
On Enforcement Recommendations
  • For both LPG and service station sectors
  • To work for stronger inter-agency cooperation
    against illegal activities in the sectors.
  • To be more vigilant and organized in the strict,
    equitable and effective enforcement of
    regulations.
  • To ensure the personal safety of all inspectors
    especially in cases where syndicates and persons
    with strong political/police connections are
    involved in product pilferage and other illegal
    operations.

69
On Enforcement Recommendations
  • For the LPG sector
  • To formulate, unify and update industry standards
    on quality, integrity and safety of LPG products,
    facilities, handling and marketing practices
    and,
  • To mount a strong lobby for the immediate passage
    of an LPG Bill that addresses the needs of the
    sector.

70
On Enforcement - Recommendations
  • For the service stations sector
  • To close down illegal and substandard gasoline
    stations and work more closely with the relevant
    LGUs concerned.
  • To ensure that effective competition exists in
    the service station business by discussing with
    the oil companies
  • The existence of ruinous competition such as when
    there are too many service stations located
    within the same trading area and,
  • Providing adequate or fair returns to dealers to
    enable them to survive non-survival means
    closure of business and therefore, decrease in
    competition.

71
In Summary
  • Do not change the Policy of the State.

72
Report on the Downstream Oil Industry
Deregulation Act of 1998
  • Independent Review Committee
  • June 2005
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