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Recent Rollback Hides Overpricing of Oil Firms
(Second of two parts)

Published in The Journal and People’s Journal, December 1998

A rule of thumb is defined as "a method of procedure or analysis based upon experience and common sense and intended to give generally or approximately correct or effective results."

As determined by Energy Regulatory Board (ERB), the oil industry follows the rule of thumb that for every dollar change in crude oil prices, pump prices normally increase or decrease by 26 centavos per liter. On the other hand, the pump prices rises or slides by 13 centavos per liter for every P1 fluctuation in the peso-dollar exchange rate.

A Shell official earlier stressed that the rule of thumb does not exist anymore in a deregulated environment, since "price fundamentals differ from month to month" and that market forces already determine the prices of petroleum products.

Ironically, however, the Petroleum Institute of the Philippines (PIP) have used the same formula coming from the Energy Regulatory Board (ERB) in justifying the price increases last August 1998.

The PIP which serves as a research think-tank includes as members Petron, Caltex and Shell, as well as new industry players Total Petroleum, Petronas Energy and Liquigaz Corp.

Other oil firms, during the time that they increased prices of petroleum products, made no effort to correct media reports which persistently referred to the rule of thumb in justifying such actions.

About two months ago, a Caltex official has been quoted as saying that it is their company’s policy not to say anything about price adjustments to make it a "non-issue" given the deregulation of the oil industry last February 1998.

It must be stressed that IBON’s computation of the overpricing of oil companies is based on the industry’s rule of thumb which was applied during the period of regulation.

IBON maintains that profit greed must never be tolerated even in an atmosphere of deregulation. In this light, it has decided to adopt the industry’s rule of thumb ONLY as a standard in a situation where too much profiteering takes place.

Computing the Amount of Rollback

Given that Dubai crude prices dipped to $10.90 per barrel in November compared to $12.97 per barrel a month before, IBON computations based on the rule of thumb show that decreased crude prices already amount to a rollback of 54 centavos per liter.

The peso, meanwhile has strengthened to P39.45 per US dollar in November. Previously, the exchange rate was pegged at P40.38 per US dollar. Using again the rule of thumb, this means an additional rollback of 12 centavos per liter.

Taking into account the decreased crude prices and strengthening of the peso, the total rollback should be 66 centavos per liter at this point.

The oil firms, however, implemented a rollback amounting to 6 centavos on the average in November. Deducting this figure from the total rollback, one arrives at the rollback amounting to 60 centavos per liter.

Nevertheless, IBON computations still show that oil firms already had combined additional earnings of P1.9 billion from overpricing alone during the first 11 months of 1998. This translates to about 4 centavos per liter.

By the aforementioned figures, IBON concludes that there is basis to call for a 64 centavo per liter rollback at this point.

Extent of Overpricing

Overpricing of oil companies are based on the industry’s rule of thumb applied during the period of regulation. IBON uses this methodology to come up with a standard to the current price build-up and in a situation where profiteering takes place.

From January to November 1998, IBON computations show that Petron, in particular, earned an additional P831.9 million from overpricing alone, while Shell and Caltex pocketed an extra P636.7 million and P478.5 million, respectively. Other oil firms which still have a small market share had combined additional earnings of P5.9 million from January to November 1998.

The figures indicate that oil firms have been earning windfalls since January 1998 to the amount of P243,630 PER HOUR.

Oil firms earned an P1.9 billion from overpricing alone due to apparent refusal to make corresponding adjustments based on crude and forex fluctuations. It is therefore just to call for a rollback which reflects the oil firms overpricing, as well as the current trends in crude prices and foreign exchange.

In the Context of Deregulation

The current situation reflects the ill-effects of oil deregulation. Promises of lower prices and better services are not met as "price fundamentals" are defined along the lines of profiteering..

Officials of oil firms harp on deregulation when confronted by questions as to how their prices are determined, saying technical jargon to the effect that the people just have to trust them.

Industry sources have been quoted in the media lately that oil companies are deliberately "playing" with fuel prices to create the impression that the deregulation of the oil was working, and that there was no collusion among the three major oil companies.

Indeed, IBON computations validate this assumption, and it is therefore imperative for government to reverse the atmosphere of deregulation and initiate steps towards nationalizing the oil industry.

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