Renationalize

There is that certain glint in Ramon Ang’s eye that tells you he means what he says and says what he means.

Earlier this week, he offered to sell Petron Corporation back to government, even on a five-year installment plan. He asked the energy authorities to make a valuation of the oil giant and prepare an offer sheet.

The energy authorities were, of course, stumped. They have yet to officially respond to Ang’s public offer.

Ang’s offer to sell Petron back to government was precipitated by the usual brainless babbling of leftist party-list representatives in Congress. Regurgitating old and ridiculous dogma, they proposed government buy back Petron.

The buyback proposal is premised on a long discredited theory that if government controls one of the oil giants, bureaucrats can influence the pricing of fuel products. Basically, they are asking government to get the price wrong.

This is not a formula for bringing down fuel prices. This is a formula for bankruptcy. Getting the price wrong is something that happens only in the central planning wonderland of communist regimes. All of those regimes have gone extinct.

The two main drivers that brought us to the devastating debt crisis of the early eighties were heavy public subsidies for power and oil. The authoritarian regime sought to buy popularity by subsidizing power and fuel. In short, by getting the prices wrong.

Consumers, receiving the wrong pricing signals, consumed both power and oil like there was no tomorrow. Taxpayers paid for commodities used mainly by the rich. Government borrowed to keep up with the subsidies. The country went bankrupt and endured over two decades of severe austerity before the rest of the world accepted us as credit-worthy. Before that, we paid the highest interest rates for the money we needed to borrow to keep government going.

The most notorious driver of our indebtedness then was the Oil Price Stabilization Fund (OPSF) that dictated the price of fuel products. The OPSF, that latter-day leftists want restored, was always on a deficit. It was a massively bleeding entity because prices were dictated by politics and not by the market. Government was forced to borrow massively to support the OPSF subsidy machine.

There is no way acquiring what we love to call the “oil giants” can influence fuel pricing.

First, the country consumes only a tiny fraction of total global oil use. We cannot break OPEC’s stranglehold over this commodity’s pricing.

Second, our “oil giants” are involved only in a minor part of the complete oil value chain stretching from exploration, drilling, conveying, transporting, refining and retailing. Our largest oil companies were involved only in refining and retailing. Today, because it is cheaper to import refined oil from Singapore’s state-of-the-art refineries, they are involved only in retailing.

Whoever thinks our puny oil industry can dictate commodity prices for oil must be hallucinating. If we renationalize the oil companies and resurrect the OPSF, they will be merely mechanisms for the most massive and most unjust subsidy programs.

Business-wise

Sitting on the captain’s chair of the nation’s largest conglomerate, it makes perfect business sense for Ang to sell Petron back to government. The oil company is possibly the least efficient use of conglomerate capital.

Last year, with much of the world under lockdown, oil demand and fuel prices fell to their lowest levels in memory. For 2020, Petron absorbed P18 billion in losses. If it were not part of the robust and highly diversified San Miguel conglomerate, the oil company might have tilted over and died.

Over the past few years, the “oil giants” have been losing market share to the small oil companies. In order to cut losses, they whittled down inventory costs and shuttered their refining capacity. As a result, the country now has no strategic oil reserves and no refining capacity.

The small oil companies are like piranhas nibbling on the flesh of the “oil giants.” They scale their operations to be able to sell as soon as supplies are delivered. They maintain no large storage facilities because keeping inventories is an avoidable cost.

They do no refining because it is cheaper to buy finished products from the high-tech Singaporean refineries. We do not have the market volume to ensure proper returns on any investment in updating our refinery technologies.

The “oil giants” cannot long compete against a horde of piranhas. The fuel being sold by big oil companies are tightly policed for quality and tax adherence. The smaller companies have looser quality standards and some probably avoid the taxes, enabling them to sell lower than the big companies at the pumps.

When deliveries do not arrive, the smaller companies simply close down their stations. They have no compulsion to maintain a national stockpile of a strategic commodity. They have no compulsion to make long-term investments in refining capacity.

Maintaining a strategic stockpile and an independent refining capacity are not profitable business propositions. Should Petron be renationalized, the two other big oil companies will probably fold and sell. We will be left with the unreliable piranha oil companies and a bankrupt Petron.

Clearly, we need to reform the policy framework for our oil industry. But these reforms should be aimed at maintaining independent strategic supplies of the commodity and not at making people happy with the illusion of cheap oil.

Oil must be expensive. Because it increases our carbon footprint and cause people to be sick, they must be taxed to the max. Direct users must pay for that.

The Stalinists will not understand this. Their minds are in another universe.