Latest Oil-Price Hike Overpriced, Unjustified

Jun. 06, 2006

MANILA — The latest oil price hike (OPH) implemented by the Big Three and other oil firms over the weekend are unjustified considering that from January to May 2006 alone, petroleum products have been overpriced by 40 centavos per liter.

According to independent think-tank IBON, this clearly shows that government measures like tariff reduction on imported petroleum products are not enough to mitigate the impact of frequent OPHs because whatever benefit these measures bring is offset by overpricing.

Petron Corporation, Pilipinas Shell, and Chevron (formerly Caltex) Philippines– the three biggest oil companies in the country– together with Total and Unioil raised the pump price of their gasoline products by 50 centavos per liter and liquefied petroleum gas (LPG) by 50 centavos per kilogram.

Between January and May, the spot price of Dubai crude jumped from $58.44 to $64.99 per barrel while the value of the peso vis--vis the US dollar improved slightly from P52.58 to P52.13. This means that the ideal price hike during the said period should have only been P3.76 per liter but actual adjustments increased the average retail price of petroleum products by P4.16 or an overpricing of 40 centavos per liter.

IBONs estimates of overpricing use a rule of thumb (i.e. there is a corresponding impact on the pump price for every $1 change in Dubai crude and P1 fluctuation in the foreign exchange rate) that is adjusted monthly depending on the level of the Dubai crude and the foreign exchange rate.

Based on IBONs monitoring, there have been already 13 rounds of oil price hikes in the first six months of the year including the impact of the 12% value-added tax (VAT) implemented beginning February. The pump price of gasoline products (including the impact of the VAT) has already jumped by P5.13 to P5.27 per liter during the said period while diesel has increased by P5.58 per liter.

However, it is important to note that such overpricing does not yet fully reflect the actual overpricing that oil firms commit, in particular the local units of transnational companies (TNCs) such as the Big Three and Total. Through transfer pricing, these local TNC units are able to pad the production and importation cost and ultimately the pump price of their petroleum products. Oil companies are able to do this because of monopoly control.

Such monopoly control is the main reason why IBON argues that deregulation is wrong. Government should not allow the local units of oil TNCs to determine by themselves the pump price of their products. At the minimum, a system of centralized procurement of imported oil should be implemented instead of deregulation to help curb the practice of overpricing. This should be complemented by other important reforms such as establishing a buffer fund and supply; de-privatizing Petron; and effective state control over the exploration, development, and utilization of petroleum resources. All these policy reforms should pave the way for the eventual and full nationalization of the entire oil industry. (IBON)

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