What's wrong with oil deregulation?
Danilo Araña Arao
Philippine Daily Inquirer (Youngblood), 27 May 1995, p. 9
I WAS very surprised that not one candidate raised the deregulation of the oil industry as an election issue. Having good researchers at their disposal (some of whom are close acquaintances), I am very sure the senators who ran for re-election were aware of it. But I think they opted to join the bandwagon of silence in the belief that people would be better off uninformed about complex issues, something reminiscent of GATT.
But is oil deregulation really complicated? Do we just take it as given that oil deregulation will start in May or June and that there's nothing we can do about it?
A close scrutiny of the government's Proposed Downstream Oil Industry Deregulation Program reveals half-truths and outright lies in government press releases. Deregulation, in fact, was begun two years ago and right under our noses.
First, a simplified explanation of concepts. By "deregulation" we mean the process of removing the regulatory environment of particular economic sectors (in this case the oil industry). Government believes that industries would only develop if there is minimal government intervention and if there are few regulations or none at all. At present, the oil industry is "protected" in the sense that the three oil firms --- Shell, Caltex, Petron --- cannot make price adjustments without the consent of the Energy Regulatory Board (ERB), among other things.
The proposed deregulation program has two phases: the Transition Phase and Full Deregulation. The first has two components: pricing and non-pricing. As of this writing, the government is waiting for the enabling law to be passed to institute changes in the pricing component. Some activities in the non-pricing component do not need legislative approval, thus the government's decision to start laying the groundwork as early as 1993.
Which brings us to the most controversial part of the government's program, the automatic pricing scheme. Through this, the government will allow automatic adjustments in the peso landed cost of imported crude oil. This is a radical departure from the current practice of getting ERB approval for any oil price changes as well as the role of the Oil Price Stabilization Fund (OPSF) in cushioning the effects of increases in the price of crude oil in the world market.
The government says the new scheme would "acclimatize the public to frequent changes in the domestic price of oil products." In other words, the people's mind should be conditioned to accept changes in the prices of oil products as part of everyday life.
The other aspect of the pricing component which must be kept in mind is the annual review of the return on rate base (RORB) of oil companies. (RORB refers to the fixed profit an oil company can make, based on how much capital it has poured in.) At present, the oil firms' RORB is pegged at an average of one to six percent, and they are asking for at least 12 percent, saying the higher profits are needed to facilitate expansion. The government appears inclined to give in to the demands of the oil companies, since the deregulation program considers the return on investment of oil companies as "the most critical component of petroleum product prices under deregulation."
During the transition phase, the OPSF will be fixed at P2 billion and the government will work toward its phaseout. At present, oil companies contribute to the OPSF when the price of imported crude is low, and get reimbursed for losses when the price of imported crude is high. This way, oil prices are kept stable, which is what the government does not want to maintain since it wants to "depoliticize" the price setting and "acclimatize" the public to frequent fluctuations in oil prices.
As regards the non-pricing component of the Transition Phase, the importation and export of petroleum crude and products shall be relaxed, along with their shipping and transport. Instead of the usual practice of conducting public hearings, the government is open to just having summary procedures in undertaking oil-related activities like expansion of refineries. This should be cause for alarm for environmentalists since we may become exposed to more toxic and hazardous petroleum byproducts. Despite the government's assurance that adequate safeguards will be put in place, there is reason to doubt the government's capacity to live up to its promise. Doing away with public hearings to expedite the building of refineries, for instance, would expose the environment to greater danger.
Included in this component are the preparations as early as 1993 to strengthen the Department of Energy's (DOE) capability to ensure consumer protection and the conduct of fair trade. The training of DOE staff consist, among other things, of product inspection and petroleum processing.
The second phase of Full Deregulation is targeted for 1997. By that time, oil prices will already be determined by market forces, and government says "free competition" will rule the oil industry.
But setting aside the economic mumbo-jumbo, what will be the concrete effects of deregulation? For one thing, the 6.5 percent inflation rate targeted for 1995 could be adjusted to 7.3 percent, which means higher prices of basic commodities. Every P1 change in fuel cost translates into a 15-centavo change in fare, thus the minimum fare could increase to P1.65 if the price of oil is raised by P1 a liter. Power rates will also be directly affected by oil price changes, particularly in places like Luzon or Bohol where power supply is greatly dependent on oil-based plants (59.7 percent and 91.7 percent, respectively).
Now that even the government admits the possibility of higher price increases, why does it still want to deregulate a very strategic industry? It's simply because the government officials recognize the problem besetting the oil industry. But they see it from the point of view of the three transnational oil corporations that want to maximize their profits and expand their business, free from the hassles of public hearings and other transparent processes. Thus strict regulation is seen as a problem, and not a practical necessity in a vital industry like oil.
So what's wrong with oil deregulation? Everything.
Danny Arao, 26, is currently doing research on the Philippine oil industry and the Asean Free Trade Area (Afta).