Keep oil industry deregulated

The imbroglio over Malacañang’s attempt to put a cap on petroleum product prices may be over but the debate on how to handle the industry isn’t. Senators and congressmen will try to win brownie points as they advocate the repeal of the oil deregulation law. People who want this to happen don’t realize the implications of what they are wishing for. Or maybe, they don’t care.

There are two commodities that are highly political in this country: rice and oil. A crisis in the form of limited supply and escalating prices can have serious political implications. A long line of people trying to buy rice and a long line of cars trying to load gasoline or diesel reflect badly on any administration. It is common for administrations to act in panic.

Today, we are handling these commodities differently. Oil is deregulated with government essentially out of the business. Regulation is minimal. But the threat of the heavy hand of government interference in the industry is always there as we all saw in that ill thought out EO of Ate Glue.

Essentially, oil deregulation has worked for us. Regulation would require massive government subsidies to keep oil retail prices low. Our National Treasury simply cannot afford this. Even our neighbors in the region like Malaysia and Indonesia, both oil producers, have started to phase out their policy of subsidizing the retail prices of petroleum products.

Can anyone imagine how more difficult our situation would have been over the past few weeks if government had the power to dictate retail prices of petroleum products? No politician would have been able to resist the pressure from the noisy transport sector, among others, to keep petroleum retail prices down even as international prices are going up.

The only way government can keep prices down and keep the oil products flowing into the country is to subsidize. This is what Ate Glue did in the case of power rates some years ago. She artificially kept Napocor rates down, well below the cost Napocor incurs to produce power. The difference was charged to the National Treasury. Up to today, the National Treasury is still paying the costs of that politically inspired folly.

Ate Glue, given her track record, could be expected to try that Napocor approach to oil prices if the industry were regulated. That would have ballooned our already worrisome fiscal deficit problem, which has already swelled to P237.5 billion during the first nine months, just P12.5 billion short of the full-year ceiling of P250 billion. That would force the rating agencies to downgrade our sovereign risk rating to the point that would also make the country’s private sector suffer high borrowing rates from abroad.

In the case of rice, the subsidy of the National Treasury to the National Food Authority has been growing in leaps and bounds. PhilStar Business reporter Iris Gonzales recently reported that the National Government will allocate P8 billion next year to subsidize the money-losing operations of the National Food Authority (NFA).

Next year’s subsidy for NFA, Ms. Gonzales reports, is twice the P4 billion programmed for this year and four times the P2 billion given to the agency in 2008. The grains firm expects to incur losses of P30 billion from its operations this year, same as in 2008.

The financial statement of NFA is probably worse than Napocor’s. To date, NFA has total outstanding debt of P115 billion comprising mostly of short-term liabilities. NFA recently successfully raised P9 billion from the sale of 10-year Treasury bonds. The proceeds will be used to refinance its maturing debt.

Subsidies disbursed by the National Government to GOCCs such as NFA have reached P12.56 billion as of end-September. Disbursements for the whole of 2009 would likely exceed total subsidies released last year amounting to P13 billion. Anyone can imagine how the situation would have been rendered untenable if subsidies for oil products were included to this already bloated obligation!

In any case, Gov. Joey Salceda has debunked the notion that such subsidies for oil will help the poor. He pointed out that we should not be subsidizing the rich, which is the end result of keeping domestic oil prices lower than world market. Contrary to the common notion, Gov. Salceda pointed out the oil price freeze disproportionately benefits the wealthy families of Forbes, Magallanes and Urdaneta who own cars over the welfare of and at the expense of the informal settlers in Tondo, Payatas and Lupang Arenda.

Using the 2006 (latest) Family Income and Expenditure Survey (FIES), 82 percent of the savings on fuel, light and water arising from the oil price freeze and a monstrous 90 percent of the savings on transportation and communications are being savored by the rich (those earning over P100,000 per year). If we must subsidize the poor, undertaking those conditional cash transfer programs would have a more effective and direct effect.

There is one other reason why the oil deregulation law should be kept. It really provides competition to the Big 3. This may not be very obvious to many of us in Imperial Manila but I just found out that in at least this one particular case, the deregulation law enabled this provincial dealer to beat the Big 3.

I first met this dealer, whose name is a generic Joe Santos, some 25 years ago in the course of a market inspection trip I undertook while I was working for Petron. Joe Santos was a gasoline dealer in Iloilo for Petron and he also had a station each for Shell and Caltex.

Last week, he went out of his way to get in touch with me and we had lunch. Joe told me that from the three stations he had 25 years ago, he now has some 40 stations, all over the island of Panay. He also has a business retailing LPG that goes all the way to Bacolod. He has a bulk plant in Iloilo that’s larger than any of the Big 3. He said he wouldn’t have been able to do it if we didn’t have a deregulation law.

Petron was so threatened by Joe Santos that they took his station away. He said Shell is threatening to do the same. But he is no longer afraid of the Big 3 because at least in the island of Panay, he is the Big 1. He runs service stations for Total but mostly for his own company SPC, which I thought was Singapore Petroleum but was Santos Petroleum instead.

He couldn’t have done it he kept on saying, without the Oil Deregulation Law.

This brings me back to what I have been saying. There is nothing wrong with the Oil Deregulation Law. The only thing wrong with it now is that it makes oil smuggling easier, but that is an enforcement and governance problem for government.

If government wants to be a better informed regulator under this law, it should buy again the 40- per cent share of Petron it sold to that British investment company who later resold it to San Miguel. By being in Petron again, government will have access to industry trade secrets and thus have the means to keep the rest of the industry honest. It will also have the capacity to influence retail prices using the market pricing mechanism rather than disrupting EOs.

And because government will have a private sector partner and Petron is listed in the stock exchange, it cannot use Petron for populist moves that destroy the market and lose money for the National Treasury. It will accomplish the objective of regulating this political commodity without creating the fiscal deficit problems of the National Food Authority.

Best of all, by being in Petron, government will have the option of importing supply, through government to government contracts, if needed. Government would no longer be as helpless as it was last week when the oil companies started to cancel importations and was well on the way of making good the threat to run the market dry.

Junking deregulation is not the solution. It will just make our situation worse. If only our politicians and policy makers start using their brains before they speak, the stupid circus of the past few weeks wouldn’t have happened.

Advice to the wise

A reader sent this observation.

Women like silent men, they think they’re listening.

Boo Chanco’s e-mail address is [email protected]. This and some past columns can also be viewed at www.boochanco.com