Letter to the Editor — Oil subsidy plan meaningless amid overpricing, deregulation

The proposal of Presidential Chief of Staff Michael Defensor to subsidize diesel products amid spiraling global oil prices is meaningless amid overpricing by oil companies and in an environment of deregulation.

Independent think-tank Ibon Foundation said that government will just use taxpayers' money in order to protect the bloated income of giant oil companies while petroleum products remain high and exorbitant.

An oil price subsidy is meaningless and a waste of resources if government could not first ensure reasonable domestic petroleum prices. But because of deregulation, oil firms particularly the local units of transnational oil companies have more freedom to pad the true cost of their products.

To illustrate, Ibon estimates show that from January 2001 to May 2006, oil firms have overpriced the consumers by as much as P4.91 per liter, with the overpricing in the first four months of the year pegged at 40 centavos per liter.

For a price subsidy to truly benefit the people, government should first order the oil companies to rollback their pump prices across-the-board to recover the overprice. This will bring more real benefits unlike Defensor's proposal that is even limited to diesel discount at selected pump stations in the country. But unfortunately, government abandoned its responsibility to guarantee fair pump prices under its deregulation policy.

While Ibon supports an oil price buffer fund to cushion the impact of sudden and drastic increases in pump prices, it argues that such mechanism is only workable within a regulated downstream oil industry. Such fund is different from the Oil Price Stabilization Fund (OPSF). The OPSF was not used as a buffer fund in the strictest sense of the word but merely served as a mechanism to protect the profits of the Big Three (Petron Corporation, Pilipinas Shell, and Chevron Philippines) during oil shocks.

Under the old set up, oil companies replenished the OPSF when their pump price was higher than world prices and withdrew from it when the opposite happened. To ensure that the OPSF did not dry up, government delayed rolling back the pump price even if world prices fell. Thus the burden of replenishing the OPSF and ensuring company profits during drastic increases in global prices was imposed on the consumers.

Unlike the OPSF, Ibon's proposed buffer fund would be used exclusively to mitigate the impact of sudden increases in world prices and would be replenished by government earnings from its centralized procurement, refining, and retailing activities under a regulated oil industry.

Policy makers should realize by now that the increased volatility of global oil prices in recent years makes it urgent more than ever to design and implement oil policies outside the deregulation framework.

(Ibon Foundation, Inc. is an independent development institution established in 1978 that provides research, education, publications, information work and advocacy support on socioeconomic issues.)

Rhea Veda Padilla
Ibon Foundation Inc.
Ibon Center 114 Timog Ave., Quezon City, Philippines