Oil companies should demand audit

With oil prices on the rise, it is fashionable again for politicians to haul in oil company executives to face investigation and for leftist-inspired drivers’ organizations to have protest marches and threaten strikes. But both groups are only misleading the public on the nature of the problem. They are making an understanding of the problem more difficult.

The oil company executives, specially from the big oil companies, are willing victims. They are so used being punching bags, being burned in effigy that they don’t care anymore. The local oil companies should really clear themselves by demanding that the Energy department conduct an honest audit of their books as provided for under the oil deregulation law.

The public should know how much we are being affected by rising international oil prices quoted in US dollars in the era of the strong peso. While the oil companies have pretty low public credibility, I am almost sure that the more reputable of them have played it straight and the audit should show that. There are however oil companies that don’t even pay the right taxes, resorting instead to smuggling and we want to know who they are too.

Scrapping the oil deregulation law, as demanded by protestors, is surely not the solution. We have learned from experience that oil price control can only exacerbate problems in the economy. We are in fact ahead of many countries in abandoning oil price control. People forget that someone has to pay the portion of the world oil market price that some governments shield their domestic markets from.

In the end, that someone who foots the subsidy bill is government itself. When that happens, one wonders if spending money from the National Treasury to subsidize oil consumers is a better way of using tax money than allocating those funds to upgrade our perennially underfunded education and health care services.

Just in the past month, China found out the hard way that oil price control was a bigger headache. It led the two state-owned oil companies (Sinopec Group - parent of Sinopec Corp, a publicly listed firm and China National Petroleum Corporation -parent of PetroChina, which is also listed) to slow down their refineries because they lose money on every liter of fuel they sell.

The result: a fuel-supply crisis in many parts of the country. Rationing, long queues, bad tempers and violence have become commonplace at filling stations. And this was happening in China, a country still under the dictatorship of the communist party.

China raised fuel prices to “ensure the supply of domestic oil products and the promotion of energy conservation,” the National Development and Reform Commission said in a statement. Increasing gasoline and diesel prices by up to 10 percent is expected to encourage the government- owned oil companies to refine more oil and boost supply to consumers.

Things were supposed to improve after November 1st, The Economist reports, but widespread shortages continued to plagued the country. It was after all, not that easy to boost refinery production quickly. Besides, while the price increase helped bridge the gap between pump price and the price the oil companies paid for their crude oil in the international market, it was still not enough.

Other governments in Asia also started rolling back subsidies that have kept prices for gasoline and other oil-based fuels artificially low. In India, the government has been trying to phase out fuel subsidies for several years. It is estimated that India will pay the equivalent of $12.7 billion, in fuel subsidies in the fiscal year ending in March 2008.

India’s current fuel subsidies “could be unsustainable in the long term,” Abheek Barua, the chief economist for HDFC Bank in Mumbai told The New York Times. In the short term, the Indian government has been able to absorb subsidies, in part because revenue from corporate taxes is strong and there is plenty of cash flowing into the country from foreign investment. “If oil touches $100 and moves up even further, by early next year some adjustment in retail prices is inevitable,” Barua said.

In oil producing Malaysia, the trade minister, Rafidah Aziz, told the local news agency Bermama that the country might have to raise retail oil prices soon. Indonesia, another Asean oil producer had been raising pump prices and reducing subsidy at great political cost. The governments in Malaysia and Indonesia know the economic costs of keeping the subsidies would be far greater.

Asian economies need to deregulate state-administered or heavily subsidized domestic energy markets to cope with a likely slowdown in growth from permanently higher oil prices, the Asian Development Bank has said in a report on the region’s economic prospects. The bank said that state intervention was fostering inefficient oil use and causing ballooning budget losses, leaving many Asian countries vulnerable to a sudden spike in oil prices.

Bank officials say reform of domestic energy markets is “urgently” needed in many Asian countries. The main target of the bank’s concerns is the heavy subsidies across Asia for oil products like diesel used for transport and kerosene and liquefied petroleum gas used mainly for cooking. The bank also highlighted the huge losses sustained by state-owned oil companies because of price controls that set domestic prices well below international prices.

The bank prescribes a range of measures for governments including cutting subsidies, dropping price controls, allowing increased private-sector competition in oil markets and imposing additional oil taxes. It also advocates the development of urban transport and energy-efficiency policies to cut oil use and encourage the development of alternative fuels.

In fairness to our government, we are ahead of our neighbors in doing what governments ought to be doing in dealing with oil prices. We can do a lot more in the area of energy conservation. And in the development of alternative fuel, we can do with less hype on ethanol and jatropha and more work in the field to produce those biofuels.

But we have to be honest to our people that those biofuels while helpful if the programs are properly implemented, shouldn’t be expected to produce the relief from high priced gasoline and diesel any time soon. We have to accelerate our mass transport programs to produce greater efficiency in the use of energy in the transport sector.

The hundred dollar oil barrel is going to happen, most likely before the year is over. Neither the over promising press releases of government nor the angry manifestoes of the communist-inspired groups are going to be of much help.   We have to get our act together. Or suffer the consequences together.

Maybe, just in case world oil market prices go up faster than our economy can absorb, someone should be dusting off the rationing plans we have prepared during the oil crisis years of the late 70s. We were ready to implement rationing at that time not because there was no supply of oil but because we were worried oil’s world market price would go to a level beyond our economy’s ability to absorb. We are luckier today because of the strong forex inflow from OFWs.

But the nature of the problem is the same as it was over 30 years ago. Ay naku Kuya Eddie… parang kahapon lamang!

National heroes day

Here’s a Pinoy joke from PhilStar reader Fernando Duque.

TEACHER: Anong similarity nina Jose Rizal, Andres Bonifacio, Ninoy Aquino at Apolinario Mabini?

STUDENT: Ma’am, pagkaka-alam ko po, silang lahat ay pinanganak ng holiday!

Boo Chanco ‘s e-mail address is [email protected]