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Local oil firms’ profits make up a huge chunk of fuel prices

You are currently viewing Local oil firms’ profits make up a huge chunk of fuel prices

GREED is really the engine of capitalism, global and local, as the current worldwide de facto oil crisis shows,  in which prices soared from $70 per barrel at the beginning of the year to last week’s $120. Everyone I know is shocked over the soaring, for instance, of the regular gasoline’s  price from P50 per liter in recent memory to P85 last week. 

What few people know is that while the country groans under the weight of fuel costs, the industry continues to making a killing. Its “industry take” – mostly net profits — account for 15 percent of diesel prices, 19 percent of gasoline, 22 percent of kerosene, and a scandalous 41 percent of LPG, the poor’s fuel,  according to a study of the Department of Energy. This is way above the 2.5 percent industry take in the US oil industry. (Taxes on the other hand (excise and the value-added taxes) account for 23 percent of gasoline prices, 15 percent for diesel, 17 percent for kerosene, and 14 percent for LPG.) \

No wonder that the newest players in the petroleum-distribution business, such as  Phoenix Petroleum owned by the Davao-based Dennis Uy have become unbelievably rich in just a few years. Ramon Ang’s Petron Corp., with the biggest market share of 26 percent  has generated profits way beyond the tycoon’s expectations. Dutch-owned Pilipinas Shell and Chevron Philippines (combined market share: 26 percent)  has been remitting hundreds of millions of dollars yearly to their headquarters.

This means that for every liter of gasoline, for instance, that you pay P86 for, P16 is the oil firm’s profits, while P19 goes to government as taxes.

The DoE attempted in 2019 to investigate why the oil companies have posted such high profit margins, by requiring them to disclose the components of their pump prices. The move was blocked through the Court of Appeals, which issued an injunction against the move. What are they hiding?

Duterte or the incoming president should persuade at least the the four biggest oil companies – Petron, Pilipinas Shell, Chevron and Phoenix – to moderate their greed, lower their prices and accept smaller profits. Consumers will, however, rush to their gas stations, eventually bringing down the prices for all companies. That is how the ‘hidden hand’ could be exploited for the good of the community.

Deregulation

This situation was the result of the Fidel Ramos’ administration’s 1998 Oil Deregulation Law that has all but placed the oil industry outside government control, a virtual autonomous republic. The name of the law makes it seem to be of noble purpose — prices are deregulated and put beyond the control of government, with the market being the unseen hand making it all efficient.

But as anybody knows if he buys groceries or tries to bid for a government project, the unseen hand of competition in the Philippines is seldom at work, resulting in only tiny differences in commodity prices or winning bidders determined beforehand.

The current situation of our energy sector is precisely what the father of incoming President Ferdinand (“Bongbong”) Marcos, Jr. addressed when he established the Oil Price Stabilization Fund in the 1980s.  Essentially it set up a mechanism by which the oil companies and the government set up a fund that would subsidize oil prices when they rise by a certain level.

While the current ruling corps of neoclassical economists have frowned on the reestablishment of such a mechanism, it doesn’t take rocket science to conclude that local fuel prices have gone beyond government’s control, when geopolitical events have push them to incredibly high levels that the argument could be made for a better, bug-free version of the OPSF to be established. That should be one of BBM”s priorities when he assumes office.

Geopolitics

Recent events indeed have shown that oil prices are so vulnerable to geopolitics and to the decisions of countries that dominate its production, that we really have no choice but to set up a mechanism to shield our industry from such external shocks.

US propaganda blames Russia’s invasion of Ukraine as the reason why oil prices, and therefore petroleum products, have rocketed to unbelievable levels in the past few months. That’s true, although it is the US and Europe that are to blame as it was they that banned their refiners from importing Russian crude and diesel as part of the sanctions that they thought would get Putin to stop his war. The strategy backfired as the resulting increase in oil prices, due to the reduction in  global supply, only allowed Russia to earn more even with the smaller quantity of exports.

But that is only one element in the rise of oil prices. It’s been a perfect storm, as the disruption of Russian supplies occurred at the time when the world, especially China, were recovering from the long lockdowns due to the Covid-19 pandemic and as Americans and Europeans started their summer mobility, pushing up demand for petroleum products for vehicles and for industry.

Taking advantage of the high oil prices, Saudi Arabia – the world’s largest oil producer — raised its oil prices, especially for Asia, a move actually intended to profit from the recovering mammoth Chinese economy.  However, right after the US President announced that he would undertake a state visit to Saudi Arabia in July, it exempted the US from its oil price hikes. Never mind that the US detests authoritarian governments, and that Saudi Arabia kills dissidents as Russia does.

Perhaps Duterte or Marcos Jr. should send a high-level diplomatic mission to Saudi Arabia to request that if it can exempt the US from its price hikes, it should extend the same privilege to us – since it is mostly Filipinos who are taking care of their ruling classes’ households and raising their children.


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This Post Has 3 Comments

  1. Walter A. Nunez

    If “local oil firms’ profits make up a huge chunk of fuel prices,” then what does that make of the goverment tax? Anything but huge! Considering that govern tax on oil constitutes a way much bigger chunk of fuel prices than the “local oil firms’ profit,” then by all measures that would make such margin of profit nothing but reasonable, wouldn’t you think? Certainly, far from being unconscionable and/or exorbitant. And given the volatile prices of oil, being all too sensitive to geopolitical conditions (e.g. Russian-Ukraine conflict) and fortuitous events (e.g. COVID-19 pandemic); not to mention that the same is being traded in futures market, where traders are uncertain, whether or not, they will loss or make a profit on oil purchases that they paid in the present time, but which fineshed products will be delivered and sold in the future (about three to six months time from the date that the futures contract is inked and sealed), then in the light of the said uncertainty that’s all the more reason that “local oil firms” are entitled to a decent and reasonable margins of profit. Needless to say that whatever losses those “local oil firms” may incur due to the inherent risks in such an enterprise and uncertainties in such a volatile futures market, as in the case when the COVID-19 pandemic hits, where oil prices went down at its all time low, the government and the people do not share their losses, because they are their own, and that goes with the territory.

  2. Arturo Arenas Lazaro

    Either way, send our representatives to Saudi Arabia or place an order to Russia… As correctly said in your column we should act now.. in fact it should have been yesterday..

  3. Dorina Rojas

    The US is blaming Russia for the situation but does not admit its role in literally starting the war. Now the whole world suffers and in the Philippines, oil companies get richer while people blame the govt. Let’s have the OPSF back for a good start.

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