FREQUENTLY ASKED QUESTIONS

ON OIL DEREGULATION

(REPUBLIC ACT NO. 8479)

 

 

What is Oil Deregulation?

 

Deregulation is the lifting of certain government controls (such as price control) on several aspects of a specific industry, specifically the oil industry.

 

Under the Oil Deregulation Law (Republic Act No. 8479) enacted by the Tenth Congress in 1998, government does not interfere with the pricing, export and importation of oil products, nor the establishment of retail outlets (gasoline stations); storage depots; ocean-receiving facilities; and refineries.  People can put up these installations practically wherever and whenever they want.  In the case of retail outlets, they can even be set up beside or across the street each other.  Provided of course the owners/operators of these installations & facilities notify and give prior notice to the Department of Energy (DOE).  The location of these installations & facilities conform to the zoning laws of the local government unit concerned.

 

Large business establishments and government corporations can also import their fuel requirements without securing any permit from the government; they just have to inform the DOE.  They can also choose any local or foreign supplier to provide these requirements.  Should they choose a foreign supplier, they can import their requirements directly from this foreign supplier.

 

For instance, the National Power Corporation (NPC) regularly bids out its fuel requirements for its power plants.  Before the deregulation of the industry, Petron Corporation was its exclusive supplier, which more or less dictated its price.  With deregulation, competitive offers were tendered, among them by Unioil, thus enabling NPC to purchase its fuel requirements at lower cost.  This in turn allows NPC to price electricity from its fuel-fired power plants at lower cost to the consumer.

 

From three players—Caltex (Philippines), Inc. (now Chevron Philippines, Inc.); Pilipinas Shell; and Petron—in 1996, there are currently more than 80 new players.

 

These new players, according to the Department of Energy, have invested more than P 28.35 billion as of 2005.

 

Deregulation will also make the industry more competitive.

 

The price of LPG is a prime example.  In Metro Manila (as of January 6, 2010), for instance, and based on the DOE’s price survey, the price of an 11-kilogram tank of LPG is as follows:

 

PRODUCT

PRICE

As of Jan. 6, 2010

(11-kg. cylinder)

Petron Gasul

P 648.00 – P 656.25

Shellane (Pilipinas Shell)

P 670.00 – P 695.00

Totalgaz (Total)

P 626.00 – P 685.00

 

Hence, the discriminating customer will be able to choose from which company he will buy his LPG requirements.

 

The same is true as far as fuels are concerned.  According a survey conducted by the Department of Energy, the prevailing pump prices (as of January 4, 2010) of fuel products (in Peso per liter) in Metro Manila are as follows:

 

 

Price (in Peso per Liter) as of Jan. 4, 2010

Product

Caltex

Petron

Shell

Total

Unioil

Unleaded Gasoline (95 Octane)

 

40.34 – 44.75

 

40.34 – 45.71

 

40.44 – 46.00

 

40.70 – 44.00

 

40.34 – 40.44

Unleaded Gasoline with E-10 (93 Octane)

 

39.84 – 41.35

 

39.84 – 44.52

 

39.69 – 44.52

 

39.95 – 41.50

 

None sold

Diesel

31.75 – 33.04

31.50 – 32.25

31.50 – 32.75

31.75 – 32.95

31.75 – 31.94

Kerosene

39.16 – 44.00

39.78 – 44.30 39.30 – 41.30 None sold 43.25

 

Deregulation and competition encourage oil companies to be more effective and efficient; they are compelled to improve their service.  Under a regulated set-up, however, domestic oil companies have little reason to strive to meet “world class” standards.

 

Under a regulated set-up, the three oil companies were guaranteed returns on their investments.  Hence, there was no incentive for them to provide customers with better service.  However, under a deregulated environment, the industry players would have to compete aggressively against each other for customers, and consequently, returns on their investments.

 

On the other hand, it should be noted that with the deregulation of the industry, the industry participants cannot resort to malpractices such as violating environmental laws or underfilling LPG cylinders. 

 

The rules implementing the law, for instance, require gas stations to provide price boards in conspicuous places so that the consumers will know how much the prices are.  Investors also need to secure an Environmental Clearance Certificate (ECC) before they can put up a gas station, refinery, or storage facility.

 

Why is there a need to deregulate the oil industry?

 

There is a need to deregulate the industry because under a regulated environment, prices are not allowed to rise and fall with market levels.  This means that when prices went up, government had to shell out money to subsidize the difference between the old and the new price.  Had the government opted not to deregulate, the Oil Price Stabilization Fund (OPSF)—which was used to subsidize prices of oil products—would have ballooned to at least P 8.3-B in 1998.

 

According to the National Economic Development Authority (NEDA), the P 8.3-B is equivalent to the construction of more than 4,500 kilometers of provincial roads, 51,000 deep wells of potable water, 25,000 school houses, or free rice for 20% of the poorest Filipinos.

 

But with the deregulation of the industry, government would be able to use the money for vital services and infrastructure, such as school buildings, bridges, roads, and hospitals.

 

Where then will government get the money to subsidize prices if the industry is regulated?  It will be through an additional burden on all the taxpayers in the form of additional taxes.

 

It should be noted further that the industry is not limited only to the retail aspect: gasoline stations.  There are also the commercial-industrial (e. g., transportation, factories, power plants); refining; trading; and bulk storage sectors of the market. 

 

Why do the prices of oil products keep on increasing?

 

Prices are determined by a host of factors, including, among others, supply, demand, speculation, weather, and geopolitical factors.

 

Like nations the world over, prices of local fuel products are all dependent on just one raw material:  Crude oil.  This raw material is produced by several countries known as the Organization of Petroleum Exporting Countries (OPEC), which counts Algeria; Angola; Ecuador; Indonesia; Iran; Iraq; Kuwait; Libya; Nigeria; Qatar; Saudi Arabia; the United Arab Emirates; and Venezuela as its members.  The OPEC members produce about 40% of the world’s oil and hold more than 77% of the world’s proven oil reserves.  OPEC members also control most of the world’s excess oil production capacity.  However, Indonesia recently announced it will suspend its membership in the organization as it has now become a net oil importer.

 

Prices of fuel products are increasing because the oil-producing nations have refused to increase the supply of crude oil.  And since these countries control practically the entire world market, the price of oil is very much the same:  peaked at $ 135 per barrel, from just $ 10 per barrel in 1998.  It should be noted that the price of crude oil reached its record level in 2008.

 

Buying oil from non-OPEC countries such as Norway, Mexico, and Russia will not help either.  The non-OPEC countries have taken advantage of the price set by OPEC countries, and sell their crude oil at the same prices as the prices set by OPEC.  It is against their own national interest to sell below OPEC prices.  In other words, why sell oil at $ 10 per barrel if everyone sells oil at $ 130 per barrel?

 

Recently, increased demand from China and India have put upward pressures the price of crude oil.  As economic activities in these countries increase, so do their need for crude oil and oil products.  As a matter of fact, China has become a net oil importer from a net oil exporter just a few years ago.

 

Weather factors also determine the price of crude oil.  When a Hurricane Katrina hit the Gulf of Mexico and the US states of Louisiana, Mississippi, and Texas in 2005, oil companies were forced to suspend production since their oil rigs were in the path of the hurricane.  Hurricane Katrina also damaged oil refineries in these states, leading to shortages of fuel and consequently, a spike in prices.  Likewise, when Nigerian rebels sabotage oil pipelines, they disrupt production, resulting in a reduction of crude oil available to the global market.

 

Speculation has also played a huge role in determining the price of crude oil.  Due to the recent deterioration of the value of the dollar vis-à-vis other currencies, investors have moved to more “secure” investments such as commodities like crude oil and gold.

 

The prices of oil products are also affected by the Peso-Dollar exchange rate, since the oil companies use dollars to buy oil from the world market.

 

The oil companies are just middlemen, or intermediaries.  Therefore, if they buy oil from the market at $ 130 per barrel, it will be sold locally at no less than $ 130 per barrel.  This is a business reality and no one is in business to lose money.

 

Put it another way, consider for example Juan dela Cruz, who operates a sari-sari store in the hinterlands, buys a ream of cigarettes at P 200 per ream (or P 20 per pack) from the supermarket in the poblacion to sell in his store.  However, when he sells the cigarettes in his store located in the hinterland barangay where he lives, it will be priced at anywhere from P 21 to P 25 for each pack.  He has to take into account the relative distance of his store from the supermarket (transportation) and other related costs, so he can make a small profit to live on and keep his store—perhaps his only means of livelihood—afloat.

 

Even the United States, which is the world’s largest consumer of petroleum products, is not immune from the effects of price fluctuations in the world market.  According to the US DOE, “Generally speaking, sharp increases in oil prices hurt net oil importing nations and benefit net oil exporters.  For net oil importers, higher oil prices act similarly to a tax increase, decreasing consumer disposable income.  This often leads to a tighter monetary policy, and hence higher interest rates with higher inflation and weaker economic growth (the situation the United States currently finds itself in) than would otherwise be the case.  Sharply higher oil prices also have been identified as a major cause in 7 out of the 8 post-World War II recessions in the United States.”

 

Keeping the prices of crude oil high immensely benefits the economies of the oil-producing nations.  The US DOE notes that “Among other effects, sharply increased oil prices during 1999, 2000, and early 2001 have resulted in a dramatic improvement in OPEC countries’ economic situations, budgets, trade balances, etc.”

 

In addition, the US DOE found that “Increased OPEC oil export revenues since early 1999 have resulted in a dramatic improvement in OPEC finances and economic situations in general.  Low OPEC oil revenues during 1998 and early 1999 had posed difficult social/economic/political challenges and tradeoffs for many OPEC countries”.

 

Moreover, “Dramatically increased oil export revenues during 1999, 2000, and early 2001 are significantly impacting non-OPEC countries, such as Russia and Mexico, as well.  Russia’s economic situation has rebounded significantly (with positive economic growth in 1999, 2000 and—most likely—2001, following a sharp downturn in 1998), partly as a result of a rebound in the country’s oil and gas export revenues since 1998.  Mexico’s economy is expected to grow by 4.4% or more in 2001, up from 3.5% in 1999.”

 

What are the factors that influence the prices of petroleum products at the pump?

 

Competition determines the price at the retail level.  For instance, if a new industry player puts up a station in a particular area, that new station may choose to drop its price to garner market share and seek customers.  To avoid losing market share and volume, other stations in that area, whether established or otherwise, may choose to match the price adjustment.

 

On the other hand, if a particular player increases its price vis-à-vis its competitors and notices that sales are not affected, then that player will stick to its price.  But if that player’ sales is affected, it will have no recourse but to align its price with its competitors in a particular area.

 

Would prices be higher or lower if the industry was regulated?

 

Prices of oil products would be higher if the industry was not deregulated.  According to the report of the Independent Review Committee formed by the Secretary of Energy in 2005, the price of gasoline and diesel (in June 2005) would be:

 

Product

Regulated

(Metro Manila Prices)

Deregulated

(Metro Manila Prices)

Difference

Unleaded Gasoline

P 35.90

P 31.18

P 4.72

Diesel

P 29.30

P 27.31

P 1.99

 

It should be noted that the above (deregulated) prices as provided by the Department of Energy, are based on the Automatic Pricing Mechanism (APM) formula as approved by the Energy Regulatory Board.

 

What are the safeguards for consumers under the law?

 

Deregulation does not mean that government has no control over the industry.  While importers can import the volume they need and from wherever source, they have to notify the DOE of any importation. 

 

The importer also needs to make sure that any importation conforms to international standards of quality and to the specifications of the Clean Air Act of 1999.

  

Likewise, an environmental compliance certificate (ECC) has to be secured from the Department of Environment and Natural Resources (DENR) before a retail station; storage depot; ocean-receiving facility; or a refinery can be established.

 

Further, there are remedies in case a dealer sells LPG with an underfilled cylinder.

 

What remedies are available to the ordinary consumer in the event an industry player is perceived to be or indulges in cartelization, predatory pricing, or price fixing?

 

The deregulation law prohibits cartelization and predatory pricing on the part of oil companies and dealers.

 

The law defines cartelization as “any agreement, combination or concerted action by refiners, importers and/or dealers, or their representatives, to fix prices, restrict outputs or divide markets, either by products or by areas, or allocate markets, either by products or by areas, in restraint of trade or free competition, including any contractual stipulation which prescribes pricing levels and profit margins.”

 

On the other hand, predatory pricing is “selling or offering to sell any oil product at a price below the seller’s or offeror’s average variable cost for the purpose of destroying competition, eliminating a competitor or discouraging a potential competitor from entering the market.”  However, pricing below average variable cost in order to match the lower price of the competitor, and not for the purpose of destroying competition, shall not be considered predatory pricing under the law

 

Likewise, the DOE Secretary can—on his own—investigate any unreasonable increase in the prices of oil products.

 

The ordinary consumer, under Section 13 (b) of the law, can report any violation of the law to the Joint DOE-DOJ Task Force:

 

“The Joint Task Force shall investigate such reports in aid of which the DOE Secretary may exercise the powers under” the law.  “The Joint Task Force shall prepare a report embodying its findings and recommendations as a result of any such investigation, and the report shall be made at the discretion of the Joint Task Force.  In the event that the Joint Task Force determines that the deregulation law has been violated, the consumer “shall be entitled to sue for and obtain injunctive relief, as well as damages, in the Regional Trial Court having jurisdiction over any of the parties, under the same conditions and principles as injunctive relief is granted under the Rules of Court.”

 

If the DOE-DOJ Task Force finds that there is indeed a violation of the law, it can order the violator to readjust its business and business practices to conform to the bounds of the law.

 

It bears noting that these remedies were adopted from U.S. antitrust laws, particularly the Sherman Antitrust Act; the Clayton Act; the Robinson-Patman Act; and the FTC Act.

 

Finally, in times of national emergencies, the government may temporarily take the operation of over the players’ facilities (refinery, depots, etc.)—but only for the duration of the national emergency.

 

If there are a lot of new players that have already entered the industry, then why are the retail stations in the rest of the country limited to only Caltex, Petron, and Shell?

 

It takes about a year to put up a gasoline station.  From the time a suitable site is identified, to the negotiation with the lot owner/s, securing the necessary permits from the Local Government Units (e. g., Mayor’s permit, Locational Use Permit from the local sanggunian), to the construction phase, installation of equipment, and the opening of the retail outlet.

 

Can ordinary citizens put up their own retail stations?

 

Yes.  Under the Oil Deregulation Law, Congress made P 300-M available for management and skills training for the management, establishment, and operation of gasoline stations and LPG retail outlets.  This training program is under the auspices of Technology and Livelihood Resource Center (TLRC); Technical Education and Skills Development Authority (TESDA); and the DOE.

 

Persons who shall successfully complete the two-fold program shall be entitled to government assistance being extended by government lending agencies, in the form of medium- to long-term loans with low interest rates.

 

In the same manner, a jeepney cooperative can opt to put up its own station for its members and source the supply of diesel and/or lubricants from any of the many players already in the industry.

 

What incentives are available for new entrants in the deregulated oil industry?

 

Under Section 9 of the law:

SEC. 9.  Incentives for New Investments.  – To the extent applicable, persons with new investments as determined by the DOE and registered with the BOI in refining, storage, marketing and distribution of petroleum products, shall be extended the same incentives granted to BOI-registered enterprises engaged in a preferred area of investments pursuant to Executive Order No. 226, otherwise known as the “Omnibus Investments Code of 1987”.

 

Such incentives shall include:

 

(1)      Income tax holiday;

 

(2)      Additional deduction for labor expenses;

 

(3)      Minimum tax and duty of three percent (3%) and value-added tax (VAT) on imported capital equipment;

 

(4)      Tax credit on domestic capital equipment;

 

(5)      Exemption from contractor’s tax;

 

(6)      Unrestricted use of consigned equipment;

 

(7)      Exemption from the real property tax on production equipment or machineries;

 

(8)      Exemption from taxes and duties on imported spare parts; and

 

(9)      Such other applicable incentives under Article 39 of Executive Order No. 226.

Any provision of law to the contrary notwithstanding, the said incentives may be availed by persons with new investments for a period of five (5) years from registration with the BOIProvided, however, That in the storage, marketing and distribution of petroleum products, only the investments of new industry participants shall be entitled to incentives provided in the said Code.  As used herein, “marketing of petroleum products” shall include the establishment of gasoline stations.

 

For this purpose, the industry shall be included in the annual Investment Priorities Plan (IPP); Provided, That nothing herein contained shall preclude qualified persons or entities as provided under the “Omnibus Investments Code” from applying for or continue enjoying incentives and benefits under the said Code.

 

In an era of rising prices, there have been calls to repeal the Deregulation Law.  Should the law be repealed to bring down prices?

 

Repealing the Deregulation Law is not the answer to the rise in oil prices. 

 

Even if the law were repealed, the Philippines will still be subjected to the same factors—a rise in oil prices in the global market.

 

Likewise, the repeal will necessitate subsidizing local oil prices.  According to the report of the Independent Review Committee in 2005, the OPSF—which was used to subsidize prices before the deregulation of the oil industry—encountered a deficit of P 15 billion.  Likewise, the committee, in its report, noted that subsidizing prices in the first 4 months of 2005 would have cost the country P 1.5 billion if the government had bore the P 1/liter discount for public utility vehicles (i. e., jeepney lanes).  This discount is currently borne by the oil companies.

 

The committee also noted that subsidies in neighboring Asian countries cost (with Dubai crude averaging $ 33.64 per barrel and $ 49.35 in 2004 and 2005, respecitvely:

 

Country

Amount of Subsidy

Indonesia

About $ 7 billion

Malaysia

Up to $ 5 billion

Thailand

About $ 2 billion for gasoline and diesel; discontinued in June 2005

 

In its report, the Independent Review Committee also noted that:  (a) there is danger when there are too many players”; (b) “OPSF is only good when few players exist and are willing to stay in business when they have contributed to the fund”; and (c) the country has “hit and run players’.

 

A recent report commissioned by the Department of Energy and authored by Dr. Peter Lee U of the University of the University of Asia and the Pacific, in conjunction with the auditing firm Sycip, Gorres and Velayo, stressed that:

But in crafting effective policy responses to the high energy prices, a better understanding of how oil, and energy in general, impacts the economy is necessary.  How are energy price shocks transmitted through the economy?  What forms of energy and what quantities are consumed by the various stakeholders in society, especially the poor?  All these questions and more must be studied further to aid in drafting laws and policies to address the energy crisis.  The Energy Summit last January has produced a slew of proposals that require further study to determine their likely impact and effectiveness.  The Department of Energy, perhaps in partnership with academe, industry and other stakeholders, can embark on a research program to study these and other issues.

What would happen if the law was repealed?

 

Repealing the law will require subsidizing prices—something which the government cannot afford with record prices in the global market.  Subsidies will also encourage conspicuous consumption and will discourage consumers from conserving and altering their consumption patterns.  In 1990, when pump prices moved from P 15 to P 20, there were long lines at the stations.  Likewise, there was a big gap between the price of diesel (used by public utility vehicles) and gasoline; government chose to cross-subsidize the price of diesel with gasoline.  As such, those who could afford it bought diesel-powered vehicles.  Thus, the subsidies intended for the transport sector and the poor eventually wound up benefitting the upper class.

 

Moreover, in 1990, when the industry was still regulated, crude prices rose from $ 15.69 per barrel in 1989 to $ 20.44 per barrel in 1990.  The $ 5 increase in crude prices forced Congress to enact Republic Act No. 6952, which appropriated P 5 billion to augment the Oil Price Stabilization Fund.  This law also capped the oil companies earnings to not more than 12% of their rate base.  With Dubai crude prices currently hovering at approximately $ 110 a barrel, and taking into consideration the experience in other ASEAN countries (see table above), can government afford subsidies of such a magnitude?

 

The UAP-SGV study was also emphatic in its recommendation that prices should not be subsidized: 

There is a natural temptation to subsidize oil prices.  Even in the 2005 IRC report, the IRC strongly discouraged subsidizing oil prices.  It urged instead more targeted assistance to the poorer sectors of society.  Countries that have been subsidizing oil prices have felt the strain it puts on government tax coffers.  Subsidizing oil prices also blunts the incentive to conserve and be more efficient in the use of oil.  There have also been calls for a return to oil price regulation, or a restoration of the Oil Price Stabilization Fund (OPSF), or both.  If there is no overpricing and market prices allow oil firms to simply earn a decent return, then price regulation can only effect lower prices by pushing profits below the decent rate of return.  In the long run, firms may simply leave the market and worsen the supply situation.  It will also likely discourage investments and entry of new firms in the industry; possibly lessening competition. Moreover, both would run counter to the spirit of oil deregulation.  As for a buffer fund like the OPSF, neither will it result in lower prices if implemented responsibly.  The objective of an OPSF, as the name suggests, is to stabilize prices, not to lower prices.  In times when oil prices are lower than the regulated price, the excess of the regulated price over the cost of oil go into the fund.  Then, when the cost of oil rises above the regulated oil prices, the market draws from the fund to allow it to keep the regulated price below the cost.  If the latter situation persists too long, the fund will eventually run out and need to be replenished, preferably by raising the regulated price to reflect the true cost of oil, or even above it, in order to replenish the fund...

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