OPSF

It was a system developed during the first oil crisis to blunt the full impact of fluctuations in international oil prices on consumers. The bare concept is pretty simple.

During times when oil prices are down, oil companies contribute to the fund. When prices go up beyond a level set by the regulator, oil companies are paid by the fund to keep the pump price more or less constant.

The implementation however gets complicated. There are other factors affecting the price of oil like the peso exchange rate. The oil companies also get reimbursed if the exchange rate goes up.

The concept falls apart as there are more times when prices went up than down. The fund was almost always depleted and the taxpayer had to chip in. Eventually, it became an obvious subsidy to the consumers.

I had a front row view of those developments when I was with the Philippine National Oil Company. Even if media and public expression of opinion were restricted in those days, we thought we desperately needed something like the Oil Price Stabilization Fund or OPSF to show the public something was being done.

But the OPSF was an inconvenience for the government and the oil companies. It might have been simpler to just give an outright subsidy by cutting the taxes but we were being closely watched by the IMF at that time.

So we kept the fiction that the OPSF was not a subsidy. Our press release claims it was essentially a consumer fund the government managed to smoothen the fluctuations in international oil prices. Surely, the IMF folks must have rolled their eyes but allowed it anyway.

The folks calling for the revival of the OPSF most likely do not know it is useless at best. PIDS, the government’s think tank, produced a recent paper that concluded it shouldn’t even be considered.

The study, written by Adoracion M. Navarro is a must-read for policy makers thinking of how to deal with our current dramatic rise in fuel prices.

“The history of the OPSF presents important lessons for policymakers… When faced with political pressures, policymakers also lacked discipline in sticking to the price stabilization purpose of the OPSF, such as failing to implement the increase in the regulated price when the magnitude was large and allowing the use of the fund for something not directly related to price stabilization…(e.g. government equity contribution in National Power Corporation)”

OPSF rules also created price distortions among products. The regulated price for premium gasoline was set higher than the computed price to keep the price of diesel low. This was supposed to support the consumers of diesel such as those using public transportation vehicles, delivery trucks, fishing boats, farm machinery, and others.

But this cross subsidy, called socialized pricing, had the unintended result of encouraging a shift in diesel fuel use. The cross-subsidization also created mismatches between user demand and the ability of oil refineries to produce the additional diesel needed because they were not configured to do so.

Worse, low diesel prices became an incentive to smuggle our diesel to neighboring countries for a big profit. We ended up subsidizing the diesel used by consumers in nearby countries.

The PIDS paper argues against turning back on oil industry deregulation.

“This call for the revival of the OPSF is worrisome as it implies a reversal from the current deregulation policy regime to a highly regulated one… The temptation to reverse the downstream oil industry deregulation is partly due to pressures from populist demands.”

If we really want to help the poor cope with the impact of rising oil prices, the paper suggested “having targeted assistance programs that facilitate direct income transfer to the poor is preferable to the OPSF…”

The PIDS paper also frowns on cutting taxes on fuel products. It cited statistics showing that “fuel expenditure of the 20 percent richest families (whose incomes represent 48.80 percent of the total family income in the economy) is 50.61 percent or more than half of the total fuel family expenditure in the economy, while that of the 20 percent poorest families (whose incomes represent only 5.93 percent of the total family income in the economy) is only 4.06 percent of the total fuel family expenditure in the economy.

“Clearly, those who can very well afford fuel price increases will stand to benefit more from fuel price declines when fuel excise taxes are suspended. Because of this, targeted subsidies are preferable to fuel tax suspension.”

Furthermore, the paper says “Reviving the OPSF will be anti-poor in at least three respects.”

“First, price smoothing through the OPSF will not send the correct signal that consumers should reduce their consumption during seasons of very high international petroleum price, and given that it is usually the rich who consume a higher volume of petroleum, the subsidy from the OPSF will disproportionately benefit the rich more than the poor.”

“Second, based on the country’s experience, we have seen that the government is not good in getting the right smoothed price (e.g., the government cannot stick to the correct price when political pressures mount), managing the fund, and controlling the deficits of the fund.”

“Reviving the OPSF will likely result in the national government having to bail out the special fund using the general fund, displacing funding for anti-poverty programs in the process.”

“Third, as there are many players now in the downstream oil industry, unlike during the OPSF days when there were only the “Big Three,” administering the OPSF will be very costly, and the huge cost will be disproportionately borne by the poor, again because of the to-be-displaced funding for social programs for the poor. “

“The likely delays in reimbursing oil companies may even reverse the competition gains in the medium to long run and discourage investments in expansion or encourage withdrawals of investments, thereby restricting access of the general population to competitively priced petroleum products.”

Small oil industry players are essentially traders with limited capital and cannot survive the extended period it takes government to reimburse out of a fund like the OPSF.

Study the history of OPSF before calling to revive it.

Boo Chanco’s email address is [email protected]. Follow him on Twitter @boochanco