August - September 2008
Till debt do us part?

‘Dubious’ oil price hikes hurt the poorest most

NELSON MARTINEZ has only one child, but he says getting by each day has become even tougher because oil price hikes have diminished his earnings.

The 46-year-old who drives his own jeepney for a living complains, “It’s the little people who have been hit, and it’s hitting us hardest in the pocket.”

From the beginning of the year and up to last July 12, the prevailing prices of unleaded gasoline, diesel, and kerosene in Metro Manila have risen by as much as P16 per liter. The price of liquefied petroleum gas (LPG) has also gone up by P2.52 per liter, or roughly an increase of P50 per 11-kilogram cylinder tank. (see Table 1)

by end of year, 1997-2008
Source: Department of Energy

(in pesos per liter)
(in pesos per liter)
(in pesos per liter)
(in pesos per liter)
1997 0.84 -0.33 -0.24 0.41
1998 -0.18 -0.30 0.22 -0.23
1999 2.61 2.60 1.84 2.04
2000 4.06 4.55 4.35 1.68
2001 -1.87 -1.29 -1.32 -0.88
2002 1.75 1.83 1.48 2.37
2003 3.09 2.63 2.33 0.95
2004 6.90 7.05 6.68 3.87
2005 7.85 8.33 7.44 5.55
2006 1.46 2.43 2.39 1.13
2007 7.10 5.11 5.10 6.91
2008 15.47 16.89 15.85 2.52

The series of oil price hikes in 2008 are the highest so far in the history of oil industry deregulation. Local pump prices of petroleum products have increased more steeply from May to July this year than at any given time since 1996.

According to Rosario Bella Guzman, executive editor of the non-profit think-tank IBON Foundation Inc., these oil price hikes are unwarranted. She argues that the benchmark prices oil companies use in determining local pump prices — the Dubai crude spot price for crude oil importers like Petron and Shell or the Mean of Platt’s Singapore (MOPS) spot price for refined oil importers like Chevron (formerly Caltex) — have become increasingly dubious.

IBON data show that speculation has accounted for much of the rampant and abrupt price increases in oil at least in the last two decades. And this is apart from the global oil monopoly that has dictated supply and prices.

As of June 2008, the $127.82 per barrel average price of Dubai crude was a whopping 280-percent higher than its average price in June 2004. It was already 46 percent higher than the price in January 2008. (see Chart 1)

Chart 1: Spot Prices of Dubai Crude, 1996–2008
(in dollars per barrel)

This upsurge of global price of crude oil has been the subject of inquiry in the U.S. Congress. IBON cites a study conducted by the U.S. Senate Permanent Subcommittee on Investigations, which revealed that 30 percent or more of the prevailing crude oil cost is driven only by speculation. Democrat Senator Carl Levin of Michigan has estimated that speculation adds about $35 to a barrel of crude oil.

Speculation does not refer simply to the anticipation of the effects of rumors of declining inventories or uncertainties of war and politics in oil-producing countries, explains Guzman. Rather, she says, it is a profiteering activity done in markets where investors do not buy or sell actual commodity but simply acquire a contract for estimating the value of a product at which the product — the object of speculation — may be sold in the future. She also describes it as “an unscrupulous and a parasitic practice since it is being done outside production realities.”

“Yet,” says Guzman, “the Philippines imports 92 percent of its oil needs at a crude oil price that has been bloated 30 to 60 percent by speculation.”

According to the Department of Energy (DOE), 78 percent to 89 percent of the local pump price of gasoline makes up for the crude-oil cost. By IBON’s calculations, which use the lowest estimates (30-percent speculation multiplied by 78 percent for the share of crude oil cost), 23 percent of the prevailing pump price of unleaded gasoline or P13.76 per liter (23 percent of P59.81 per liter) is unwarranted.

In its previous calculations, IBON assumed that the average price of the pump price would increase by 26 centavos for every dollar change in Dubai crude price and by 13 centavos for every peso devaluation. Using these parameters, it estimated that petroleum products were overpriced by P5.80 per liter from 2000 to 2004.

In 2005, however, IBON was “corrected” by the oil industry’s so-called “Big 3” — Petron, Shell, and Chevron — and the DOE, which all said the assumptions had changed. Yet even with the “new formula” for diesel, IBON noted that “no less than the DOE had monitored that the average price of diesel in 2005 was overpriced by P1.61 per liter.”

The Big 3, though, are still claiming huge losses, justifying their demand to increase pump prices. This is despite the fact that financial statements show that Petron and Shell netted P5.9 billion and P4.12 billion, respectively, in 2007 while Chevron recovered with a net income of P2.7 billion.

The Big 3 rank among the country’s top 10 corporations and their mother companies are also among the world’s top gainers.

The government, meanwhile, says it is helpless in stopping the frequency and steepness of oil price hikes, which it says must reflect supply-demand factors. IBON notes that while the Palace called for an energy summit early this year, this “failed to offer concrete moves to lower oil prices.” The government also implemented an oil-tariff cut, but this failed to have any effect on domestic pump prices, says IBON.

Meantime, the administration has continued to defend the 12-percent value-added tax it imposed in 2006 despite popular clamor to suspend or scrap it. The government has earned about P95 billion from the VAT on petroleum products since 2005, representing 58 percent of total VAT collections.

IBON says scrapping the VAT on petroleum products could have immediately resulted in concrete benefits to millions of jeepney and tricycle drivers, fisherfolk, farmers, and households using LPG. Also, a price rollback, shaving off the speculations-driven profit of P13.76 for instance, would translate to additional savings of P101.40 for jeepney drivers every day.

But economist Ernesto Pernia says scrapping the VAT is not a good idea, arguing that this “would only benefit the rich.” He also says it is not advisable for the government to start regulating oil prices because this cannot be sustained given the country’s feeble economy.

A better option, says Pernia, is a direct and well-targeted subsidy program to cushion the impact of high fuel prices.

“Tax collections must be done the right way,” jeepney driver Martinez says. “And then the monies must go to schools, hospitals — not to the corrupt.”