Monday, April 6, 2009

Proposals to Resolve the Recurring Oil Crisis in the Philippines

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I have written a piece, originally for Palag Na! but later for Pagkakaisa ng Manggagawa sa Transportasyon (PMT), that is meant to consolidate and give a framework for proposals, both popularly demanded and what we managed to come up with, to resolve the recurring oil crisis in the Philippines. This is in the context of the oil price crisis of mid-2008. But the proposals, I think, remain valid even if the financial crisis and the global recession eroded the price of petroleum recently.

As with any alternative, the long-term and strategic changes needed is inevitably tied with the short-term and the mid-term - so the short-term measure of regulating the domestic downstream oil industry is inevitably related to the mid-term measure of supply-side management and industrial structure and the long-term vision of demand-side management towards oil independence, assuming oil to be a finite resource. Realizing these proposals, of course, must be accompanied with better service standards from the end of the transportation industry (and workers) themselves, something which can be developed later on.


Regulation of the Domestic Downstream Oil Industry

1. Abolishing E-VAT on Oil – Any taxation on oil, an important production input, will naturally lead to propagated and cumulative effects on prices of other commodities, leading to cost-push type inflation. Moreover, we all know that a flat-rate indirect consumption tax on oil enables the government to make windfall revenues out of the increasing oil prices. The government, in this case, is put in an awkward and ironic position of gaining more when oil prices increases, its revenues being proportional to such increases. In effect, E-VAT incentivizes laxity and dependence on the part of the government. Instead of plugging tax leakage and tax evasion on the foreign corporations’ income on oil, it chooses to take the easy way out and levy the consumers instead.

Thus, instead of E-VAT, a more efficient corporate taxation measure of the Oil Industry must be established and implemented. Leakage and tax evasion, not tax structure or regime, is the fundamental cause of tax collection inefficiency. A strengthened corporate tax system on the downstream oil industry would not necessarily discourage investment on oil retail, because the main basis of investments is the existence of a market for consumer petroleum, and there is an existing and thriving domestic market.

2. Regaining control over Petron, reforming it as an industry pacesetter, and rebuilding the State Oil Complex with which it will engage the market. Private companies, whether domestic or foreign, is driven by profit-making as any other business. In this case, a State Operated Enterprise (SOE), which operates on the basis of social welfare maximization and not profit-motivation, is needed in order to tame the oil market. For this to happen, PNOC must buyback Petron, now in the hands of San Miguel (who happens to have been wrestling its way for control over MERALCO, and was scantily outbidded in TransCo, PNOC-EDC, and geothermals) and Ashmore.

Following this, Petron must be made to assume the lead in the oil industry, whether in terms of pricing by offering the most reasonable price to the consumers or in supplying high-quality and environmentally-sound petroleum products. This is with the end of disciplining other oil companies in the aspects of pricing and quality control.

3. Abolish the Oil Deregulation Law – The Republic Act No. 8479, which outlines the current policy environment of deregulation and liberalization of the downstream oil industry, only resulted to staggeringly high price hikes on end-consumer prices. The law is actually a result of an International monetary Fund (IMF) conditionality for its 1994 Extended Arrangement with the Philippine government.

Oil Regulatory Commission (ORC) must be established so as to monitor the true costs of landed oil of oil companies, and it must be accorded with quasi-judicial powers in order to make binding decisions on price controls and prosecutory powers in cases of violations.

4. Re-institution of Oil Price Stabilization Fund (OPSF) according to its original concept of equalization – The original OPSF, as established by Presidential Decree (PD) 1956 “for the purpose of minimizing frequent price changes”, is not meant as a buffer fund for consumers. Instead, the energy ministry monitors the landed cost of crude oil being brought by oil companies and gets the average. Those with true costs lower than the average would have to pay for the fund. Those with higher true costs can withdraw from it. Thus, in order to reflect its true nature, the Marcos administration even found it fit to rename it as Oil Industry Equalization Fund (OIEF).

As Equalization fund against the Ill-Effects of Laws against “Predatory Pricing” – Originally conceptualize as an antitrust instrument, the provision against predatory pricing is to ensure that firms that are large and capitalized enough to temporarily operate at a lost will not artificially lower down prices in order to steal markets or prevent entries of new players. What happened was, it compels players to raise their prices to the level of the player with highest price in the market, so as not to be accused of predatory pricing.

What the equalization fund does is that it eliminates the excuse to artificially inflate prices with the expectation that others will follow suit, since those with higher costs will be subsidized by those with lower costs.

As Equalization fund to encourage small players – Small domestic players must be encouraged by the government to engage in the oil industry, so as to realize the anti-cartel promise of liberalization of entry.

5. Establishing a new, separate buffer fund for consumers – A form of socialized price subsidy and price relief, the government must establish a Consumer Prices Buffer Fund, being financed not by VAT, as other subsidy programs of the administration are, but by windfall profits of oil companies and regulatory taxes on its profit expatriation.

With the assumption that on Oil SOE will be operating in the market so as to assure the most reasonable cost to the consumers and will prevent any artificially inflated price, the consumer buffer fund will make sure that consumers can afford petroleum products without compromising the production of SOE or the other companies.


Supply-side Management

1. On Oil Exploration – Optimum Linking, with the end goal of Strategic Vertical Integration, of the Domestic Upstream and Downstream Oil Industry. We recognize that while indigenous sources of oil cannot be enough to supply for current domestic demand and that there is a continuing need for oil importation, it is in the national interest to place into state-regulation the upstream industry and re-channel it for sole domestic use. The Service Contract System and production-sharing mechanisms under Presidential Decree (PD) 87 must be reformed to as to ensure greater gains for the government, the local government and the community involved, and so as to favor domestic capital over foreign capital.

2. On the Oil Importation Industry – The government, acting through the PNOC, should directly participate in the procurement of imported crude oil and other refined petroleum products, taking advantage the possibility of:

a. Bilateral Arrangements with Oil Exporting Countries – Government-to-government negotiations for oil are more stable, and oil that can be procured using such mechanism may even be cheaper than the oil brought by the oil TNCs in the Philippines, which is subject to transfer pricing and padding, or oil brought at the international futures market, which is subject to speculation.

b. Diversification of Oil Sources – The Philippine government must begin to diversify away from Saudi Arabia (ARAMCO) and Iranian (NIOC, INOC) oil, and must begin to negotiate with other oil exporters, such as Venezula’s PDVSA.

c. Maximization of Non-traditional Trade Arrangements such as Oil to Commodity Swaps. This may involve procurement of imported oil in local currency from an oil exporting country, which the oil exporter may use to buy imported commodities from the Philippines.

Why not Centralized Procurement? One of the strengths of the market is the ability to source supplies for its production and distribution needs. In a time when sources of oil are becoming scarcer and scarcer, the oil importation market acts as a support system if and when the government fails to source the needed crude oil. Centralized importation would burden the government with the tremendous responsibility of solely assuring a continuous supply. Government intervention is necessary, most likely through an SOE engaged in the market, but it should share the burden of supplying the consumers with the private sector.

3. On the Oil Refinery Industry – Diversify the oil refinery industry through encouraging, via bilateral negotiations, investments from other countries.

Why do we still need foreign investments in oil refining? Oil Refining is a technology-intensive industry, and it needs research inputs in order for it to become more productive and efficient. Of course, this is on top of encouraging domestic investment, private and public (government), on the industry 1) to ensure that the interests of Filipino consumers are protected, and 2) to maximize technology transfer from foreign companies.

4. On the Oil Marketing Industry – Promotion, through government investments and credit, of participation of domestic players in the oil marketing industry, with the end goal of reducing the influence of foreign oil players in oil marketing and limiting them to the refinery industry.


Demand-side Management

1. Eliminate energy dependence on oil through continuing and strengthening the policy of developing indigenous sources of energy, with preference on renewable energy, and mobilizing domestic investments for that purpose. Fortunately, the government is on the right track at this, having set up a state energy complex during the Marcos era that is prepared to tap geothermal, hydro-thermal, and other non-conventional energy sources. However, the current track of privatization is putting energy-dependence back into the hands of the speculative foreign market, which is more interested in short-term gains than strategic concerns.

This also involves decoupling energy concerns with oil concerns. Incidentally, the privatization of PNOC-EDC achieves this, although through a wrong means. PNOC-EDC should be brought back at the hands of the government, but must be operated as a separate SOE altogether.

2. Implement a Long-term Strategic Framework for the Transportation Industry, with the end goal of rationalizing oil consumption. The framework should include:

a. Streamlining and Regulation of the Road-based Transportation Industry

i. Regulation of the volume of new motor vehicle production and procurement – The ever increasing volume of new motor vehicles is straining and congesting our traffic management and urban environmental management systems.

ii. Gradual phase-out of certain segments of the road-based transportation industry and implementation of a social restructuring plan for affected sectors such as the labor sector within the Public Utility Vehicle (PUV) industry and informal transport industry.

b. Facilitation of non-oil-based technology for newly manufactured cars. Better yet, the government can develop its own home-grown car manufacturing industry, such as the Proton of Malaysia, but at the same time incorporating non-oil-based, alternative propulsion technology.

This would, of course, require an industry that would be able to supply non-oil substitutes. The Philippines is, in fact, not an amateur at this. The PNOC, more than two decades ago, already experimented with alternative fuels for transport, what it dubbed as non-conventional fuel such as the alcogas and the cocodiesel. In 1980, PNOC even created the PNOC-Alocohol Corporation to support the Alcogas Program. The model had been Brazil’s alcogas strategy, which had been very much successful.

c. Promotion of a Modernized and Efficient Centralized Intra-urban and Rural-to-Urban Mass Transit Systems - The current administration's Strong Republic Transport System (SRTS) is a way to go, but it needs to be fast-tracked. While Public-Private-Partnership (PPP) can be plausible mode of investment in such a system, given its huge capital requirements, it must be rid first of dependence on anomalous loans (as much as possible, there should be domestic financing) such as those involving the Chinese EXIM Bank, and onerous government guarantees (like Take-or-pay, fuel cost, currency exchange cost, sovereign guarantees on loans etc.) so as to force the private sector to take a share of risk and the burden.

Why is a centralized mass transit system needed? For one, mass transit systems enjoy the economies of scale – more people and goods are transported with the same fuel consumption than with a decentralized transportation system (more likely than not, motor vehicle based). Also, if we are going to streamline the transportation demand, we must be able to provide would-be motor vehicle users an alternative means of commuting.


Extra: I have prepared a presentation (in Filipino) for the PMT on a discussion on oil deregulation law, which can give us some sort of a context on the proposals. Here it is:

View more presentations from jmmiraflor.


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