Oil price spiral

While much attention is being directed at the impeachment trial of Chief Justice Renato Corona, oil prices are threatening to go through the roof. As of March 14, a liter of gasoline cost P54.35 to P61.02; diesel, P45.70 to P48.70; and an 11-kilogram tank of liquefied petroleum gas used for cooking, P835 to P919. At the start of the year, gasoline was selling at P48.78 to P55.70, diesel at P42.84 to P46.43, and LPG at P691 to P765.

The surge in prices of imported oil has been attributed to increased political risks mainly in the oil-producing Middle East and North Africa and the growing demand of large economies like China and India. The oil price benchmark used by the Philippines, the Dubai crude, cost $123.65 a barrel as of March 9. (For perspective, the Aquino administration assumed that oil prices would average $100 a barrel when it set economic targets and drafted its budget for 2012.)

For an import-dependent country like ours, there is no question that crude oil is the lifeblood of the economy. Oil is the source of gasoline to run cars, of diesel for public transport, of aviation fuel for air transport, of bunker fuel to generate electricity, and of LPG for households, among others. Oil is so important a commodity that runaway prices can trigger a vicious cycle: the transport sector seeking fare increases, power utilities demanding higher electricity rates, producers raising prices, and battered consumers clamoring for higher wages to keep up with the rising cost of living.

The spiraling fuel prices have indeed been a major blot on President Aquino’s high positive rating card. In a December 2011 SWS survey, his administration got a negative 3 percent when people were asked if it was “ensuring that oil firms don’t take advantage of oil prices.” The SWS findings indicated public dissatisfaction with the Aquino administration’s very limited response so far to the problem of high oil prices. That response included the stop-gap Pantawid Pasada program to help jeepney drivers by subsidizing their diesel purchases and the setting up of an independent panel to review “the books of oil companies to ensure transparency in fuel pricing.”

A number of measures have been put forward by the private and public sectors to address the issue.

Reforming the petroleum industry is on many experts’ minds. Some legislators have sought to amend the Oil Deregulation Law or Republic Act 8479. Pending at the House of Representatives are at least seven bills proposing to repeal or amend the law, five resolutions to investigate oil pricing, and a resolution to provide the President emergency powers to address the oil crisis. Three bills seeking to amend RA 8479 are pending in the Senate.

There are other long-term measures that can help oil-importing countries like the Philippines mitigate the impact of surging crude prices. On top of these are policies to restrain oil demand and to make use of solar, wind and hydro energy.

Among the current proposals, the one that stands out is the scrapping or suspension of the 12-percent value-added tax (VAT) on oil, and bills to that effect have been filed in Congress. Considered an easy fix to the grave problem, the removal of the VAT on petroleum products is estimated to lower pump prices by P6-P7 a liter; its suspension is seen to at least soften the impact of the price increases.

The problem, however, is that President Aquino has rejected calls not only for the scrapping but even for the suspension of the VAT on oil. His administration’s main argument is that the revenues are needed for various social projects.

What we need now is government action with immediate effect, but scrapping or suspending the VAT on oil may be too drastic as far as government collections are concerned. Why not adopt a proposal by University of the Philippines economist Benjamin Diokno? In essence, the former budget secretary says that the government can bring down the VAT to 10 percent when international crude oil prices reach $120 a barrel, and further reduce it in case crude oil prices reach $150 and beyond. Conversely, if prices fall to, say, $80 a barrel, then the VAT can be raised to 15 percent from the current 12 percent. In this way, according to Diokno, the government will not be enjoying a windfall while consumers reel from high fuel prices, and projects for education, social services and infrastructure can still be financed.

This may be the win-win solution to the impasse on the VAT on oil.