INVOKING ITS EMERGENCY POWERS granted by law to impose price ceilings in times of calamity, the government has pegged petroleum product prices at their mid-October levels.
The move has elicited strong reaction from the oil companies, much of the business community and, most recently, the Bangko Sentral ng Pilipinas (BSP). All have raised the specter of adverse longer-term consequences that may lead to the cure ultimately being worse than the disease itself.
National Economic and Development Authority (Neda), the country?s highest economic policymaking body and the one entity naturally expected to speak authoritatively on the issue, has maintained an uncomfortable?but given recent events, unsurprising?silence on the issue (more on this below).
Natural law
The rationale behind this power is to prevent abusive merchants from taking undue advantage of consumers during the abnormal times brought about by calamities, by jacking up prices to unjustifiably high levels. The crux of the issue lies in the question: When are price increases justified, and when are they not?
Undue profiteering is what emergency price controls are meant to address. Such behavior is easy enough to spot on the part of retailers, when they jack up prices overnight on old stocks that were obtained at previous normal price levels. But for primary commodities such as farm products, a calamity is bound to lead to reduced supplies at the source, and the law of supply and demand?a natural law that cannot just be ?repealed??will inevitably lead prices to rise.
Surely, we would not want to prevent a farmer who lost half of his crop to attempt to recover at least part of his losses by asking a higher price for what remains of his produce. To freeze prices on farm commodities beyond the first few days after a calamity (i.e., beyond normal storage life) could thus be unfair to producers and sellers.
Rising prices on farm commodities, which supplies have been disrupted by a natural disaster is a normal consequence of market forces, just as depressed prices on fish suddenly made abundant by overflowing lakes due to floods.
Outside forces
Oil product prices are, of course, something else. Prices in this case depend primarily on the price of the basic raw material, crude oil, which price is determined well beyond our own shores. And what riles the oil firms with the recent price freeze is that it comes at a time when world crude oil prices have actually been rising. That price had risen from $70 a barrel to $79 in recent weeks, amid apparent renewed instability in world oil market conditions. Hence, forcing a price freeze now could indeed lead to losses that would have to be recouped later on through even higher prices than would normally be warranted then.
We are additionally warned, by the larger business community and the BSP this time, that such misplaced price fixing will be a deterrent to future investments by both domestic and foreign investors. And this kind of signal is the last thing we need at this time when an unusually low rate of investment (i.e., compared to our neighbors) has been the single biggest barrier to the economy?s ability to create more jobs for our teeming (and still rapidly growing) working population.
Recto?s revenge?
Could the price freeze be justified on the basis of ?correcting? the alleged overpricing of domestic fuel products argued in recent months by former Neda Secretary Ralph Recto? He had argued that the normal spread between world crude oil prices and refined fuel prices had unjustifiably grown by up to P8 since 2005.
After writing on that issue last August (?Are oil products overpriced?,? NFL 8-17-09), I got a letter from another Recto?Eric O. Recto, president of Petron, this time?disputing his namesake?s claim that current fuel price levels have been higher than they should be. He presented data showing that domestic diesel prices have tracked the ups and downs of world crude prices quite well; the former even continued to drop early this year when the latter had leveled off.
Similarly, domestic fuel prices have been tracking corresponding regional (Asian) market prices as regularly reported by Platts (Mean of Platts Singapore or MOPS basis). He also asserted that the domestic market is now highly competitive, with imported refined products accounting for nearly half of domestic supply.
He further pointed out that the cost of converting crude oil to the finished products has risen due to normal inflation, higher operating costs and the need to blend more costly biofuel additives as now required by law. And he presented data showing that Petron?s return on sales had been much higher during the regulated era than after deregulation.
All this sounds convincing enough, but as they say, the devil could be in the details. And unless more detailed data on costing and price formulation are made available by the oil companies, it is hard for anyone to tell if the government is, indeed, entirely wrong on this issue. It bears repeating that more transparency is what we need, and this goes for both the oil companies and the government.
What I do know is that we need a far more credible government than this one if market regulation can be made to work to everyone?s benefit, in both the short and long term.
Comments welcome at chabito@ateneo.edu
