Cartel and the oil deregulation law

Depending on the person’s preferences, views on issues of common concerns will always be diverse. Despite these diversities, however, some differences are mended and bitter fights are ending in a truce. However, other disagreements are just so deeply rooted that even a tiny room for compromises is virtually unavailable. Undeniably, biblical and ideological differences are harder to resolve. The roots of other conflicting views, however, are just too trivial and are simply borne out of slight misunderstanding and huge pride.

Foremost in every filipino’s agenda is the retail price of oil products that have continued to soar. With the accusing fingers pointing at them, oil retailers passed on the blame to the lawmakers for their stubbornness in not lifting the Value Added Tax (VAT) on oil. Clearly, it has become a vicious cycle of passing on blames among selfish members in a circle of opportunists.

Apart from this endless exercise of buck passing, however, some sectors presented a different approach. They wanted a more serious effort from lawmakers of abolishing the Oil Deregulation Law. The main argument, oil companies have formed a cartel and are dictating the prices. In effect, such proposal means that we have to go back to the controlled era where prices are fixed and an Oil Price Stabilization Fund (OPSF) is set up.   While there is a big possibility that this proposal will gather steam and maybe popular in the end, its popularity may not be at all the solution we need. It can be recalled that the OPSF was set up in 1984. Then, as part of the policy, the OPSF was supposed to help protect consumers from fluctuations in product prices while providing refiners with adequate margins. In 1996, the OPSF was running a large deficit and was financed by taxpayers’ money to the tune of US$40 million a month. Knowing fully well that crude oil is the Philippines’ largest single import (which accounts for 7 percent of the country’s total import bill) the amount involved was just too material.   Then, President Ramos’ economic and finance ministers had seen enough. There was then a need to stop the bleeding. Thus, on April, 1998, President Fidel V. Ramos signed Republic Act 8479 otherwise known as the “Downstream Oil Industry Deregulation Act of 1998”. 

However, while deregulation is supposed to encourage competition, it may also be susceptible to cartelization. A cartel simply means an agreement among firms or companies, mostly manufacturers and distributors. Basically, these are firms that agree to coordinate production for the primary purpose of controlling prices. Cartels normally happen when there are too few players in the market for a particular product. Members in a cartel may agree on concerns like production output, allocations, price fixing, sharing of profits, bid rigging or a combination of these. Obviously, therefore, by mere definition, cartel is simply the glamorized jargon for collusion. The principal motive for such collusion is to increase individual member's profits by reducing or eliminating competition. Competition laws in highly developed countries forbid cartels. Identifying and breaking up cartels has been an integral part of their competition laws. However, despite their sophistications, they still encountered difficulties in proving the existence of a cartel, as firms are usually too careful in not documenting their agreements to collude on paper.

Some cartels are popular and their selfishness is more pronounced. One of these cartels is the Organization of Oil Exporting Countries (OPEC). Selfishly, they’ve been feasting on the world’s money for many decades by regulating production and dictating prices. Their only downside so far is the political turmoil that is obtaining today in most member countries. The country’s major oil distributors are undeniably forming a cartel too. Their greed was so evident in the rapidity by which they increase prices and the sluggishness in reducing them.   When confronted, their reasons run from the unbelievable to the unpalatable. As if, there is no way that a more understandable mathematical computation is possible. 

Truth be told, adopting a formula won’t be difficult. The Deregulation Act is very explicit on how oil prices must be pegged domestically. The Deregulation Act clearly stipulates that domestic fuel prices will be adjusted automatically based on the Singapore Import Parity, an average of costs at Singapore refineries, and in line with international prices. Singapore Import Parity (SIP) refers to the deemed landed cost of a petroleum product imported from Singapore at a free-on-board price equal to the average Singapore Posting for that product at the time of loading. Singapore posting on the other hand refers to the price of petroleum products periodically posted by oil refineries in Singapore and reported by independent international publications. Clearly, therefore, a base data is supposedly at hand for price determination purposes. Palpably, it is purely mathematical and is therefore an exact science. So that, arguments on prices are issues that are not suppose to surface.

Furthermore, while the general public accuses these oil companies of forming a cartel, the same act explicitly prohibits this practice. The Act defines cartelization as “any agreement, combination or concerted action by refiners, importers and/or dealers, or their representatives, to fix prices, restrict outputs or divide markets, either by products or by areas, or allocate markets, either by products or by areas, in restraint of trade or free competition, including any contractual stipulation which prescribes pricing levels and profit margins.”

Obviously, the law is broadly complete. However, some unscrupulous businessmen are just toying with it and have unduly taken advantage of the general public’s helplessness. Therefore, what is important now is for the Department of Energy to establish a “womb to tomb” formula that details conversions from the global prices to the oil company’s retail stations’ prices. 

However, if they should care to learn from other countries’ sophistication, they should take a look at the European Union’s competition law which explicitly forbids cartels and related practices in its Article 81 of the Treaty of Rome. Article 81 reads: “1. The following shall be prohibited as incompatible with the common market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market, and in particular those which: (a) directly or indirectly fix purchase or selling prices or any other trading conditions; (b) limit or control production, markets, technical development, or investment; (c) share markets or sources of supply; (d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; (e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.”

Just like the EU, we should craft laws that could prevent collusions. Learning from the EU and our sad experiences, we must institute statutes that regulate on the amount of fines for each type of cartel and a leniency policy by which if a firm in a cartel is the first to denounce the collusion agreement, it should be freed of any responsibility.

Still, even if we have to bring the law to perfection, there is no assurance that cartel may no longer exist. Truth to tell, we are known all over the globe as friendly and hospitable. Though such trait is admirable, its downside, however, is inexplicably outrageous. Our yielding nature has been a thorn as we give in so easily even to the most unethical proposition. Such submissive attitude is more often abused by people who are too selfish and too wanting to rule, dictate and dominate. Sadly, these are characteristics that happen to be requisites for a cartel to exist.

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