How to Slay the Oil Price Monster

Leaders are elected in order to take decisive action to solve problems.   What is demanded from a leader is–after a careful weighing of costs and benefits–action that cuts the Gordian Knot of a seemingly complex reality.

President Aquino behaved in such a fashion when he pushed for the impeachment of Chief Justice Renato Corona, boldly taking a risk after assessing the pros and cons of such a course of action.  He likewise acted decisively when he pushed through the $39 billion Conditional Cash Transfer Program to alleviate mass poverty over the objections and hesitations of many of his allies in Congress.

The energy crisis awaits similar action from Mr. Aquino.  So far, inaction and contending views among his advisers and allies have marked the administration’s performance in this area.  Part of the reason may have to do with the conservative bent of some of the president’s key advisers.  Part of the problem may be a sense among them that, unlike the political sphere, the economy is a much more complex arena.  Whatever the source of the perceived inaction and indecisiveness of the government, the discourse of Mr. Aquino’s advisers and subordinates has increasingly defined the administration’s image in the face of mounting problems, and it is an image of the administration that “just says no”:  no to repealing the Oil Deregulation Law or other measures to discipline Big Oil, no to the abolition or reduction in the Value Added Tax (VAT) on oil, no to significant wage increases, no to consumer subsidies.

It is a posture that is increasingly indefensible as the price of gasoline is poised to breach the record price of P60 per liter that it reached in 2008, triggering inflation while at the same time threatening the return of recession.  Inability to effectively address the rise in the price of oil was one of the factors that eroded the legitimacy of the Arroyo administration.  Failure in this area may likewise sour President Aquino’s relationship with the citizenry despite his securing the conviction of Chief Justice Corona.

Market Forces or Monopoly?

Department of Energy (DOE) Secretary Rene Almendras is a well-intentioned person and he knows the energy sector inside out.  However, he has unfortunately come to personify the   administration’s impotence in dealing with the oil issue.  In his latest much-circulated text message, Almendras has taken to invoking President Barack Obama to justify his helplessness:  “Even the president of the United States acknowledged that he has no silver bullet to solve this global problem of fuel prices. That is from one of the world’s most powerful personalities.”

Whether they intend to or not, Almendras and other advisers to P-noy project the attitude that the Philippines is helpless in the face of  “international market forces.”  The reality though is that rising oil prices reflect mainly monopoly pricing or corporate greed.  True, the rise in the price of oil stems partly from the peak oil phenomenon, or rising demand in the context of declining supply, as well as from conjunctural political factors, like the threat of war over Iran’s nuclear program.  But the most significant contributor to the price rise factor is the monopoly mark-up.  Two of the three key players in the Philippine, Chevron and Shell, are subsidiaries of Big Oil, and the third, Petron, simply follows their lead.  There is no competition to speak of among the oil majors.  There is collusion, plain and simple, and the figures are emphatic:  the Wall Street Journal reported a few days ago that Big Oil (ExxonMobil, Shell, BP, Texaco and Chevron) altogether had a first quarter profit surge of 45 percent or $36 billion, which would place them on track to surpassing the $80 billion they made in 2011.  Contributing to that first-quarter surge have been the 10 oil price increases the oil majors triggered in the Philippines just in the first three months of 2012!

How do we deal with Big Oil?  First of all, get rid of the fear of retaliation.  Secretary Almendras evoked this fear when he said last year, in response to demands on him to discipline the oil companies, “What can we do when the oil companies tell us they want to back out?”  Let us not be naive:  these companies cannot afford to leave the Philippines, since it will remain a profitable market even if their superprofits are trimmed by government action.  A key rule in capitalist economics is, never, never leave a market you dominate.

Is there empirical evidence for this claim?  In late 2009, when there was a temporary freeze on the price of oil owing to Typhoon Ondoy, none of the oil majors withdrew, though they complained loudly.  Why?  Because the market was so profitable that they, the majors, still recorded significant profits. According to Petron Corporation, in fact, the company posted a net income of P4.3 billion in 2009.  No, withdrawal is simply not a credible option.

Second, get it into our heads that far from being helpless, we have the instruments to mount an effective response to the problem.  We may not be able to drive down oil prices, but if we only liberate our minds and imagination, we can slow their rise significantly, if not stabilize them.

Need for a Comprehensive Strategy

Of course, the long-run solution is to decrease reliance on oil as a fuel and shift to renewable fuel sources in both transportation and power generation.   But the short-run challenge is slaying the oil price monster.  What is needed is a comprehensive strategy to tame the oil majors.  So far, proposed solutions, while useful, have been advanced in a largely piecemeal fashion, and these have largely been defensive moves with limited impact.

Wage Increases

Raising the basic wage is critical to helping workers and their families contain the rapid erosion of their living standards.   In this regard, the increase in the basic wage proposed by Secretary Rosalinda Baldoz of 13 to 21 pesos is very inadequate to allow workers to deal with the acceleration in the cost of living brought about by the oil price rise.  At a minimum, workers should be granted a 100 peso increase either in the form of a minimum wage increase or an increase in the cost of living allowance (COLA) in order to allow them to at least recover a significant part though probably not all of their losses to inflation over the last year.

Targeted Subsidies

Like wage increases, “targeted subsidies” are a good idea.  When it comes to the transportation sector, they are much better than mandating fare hike increases.  In this regard, the administration says that it has renewed the Pantawid Pasada program, providing this time around a 1,200 peso subsidy for jeepneys compared to the 1,050 pesos given in 2011.

While a good idea, the implementation of the Pantawid Pasada program suffers from two defects.  The first is that it mainly benefits the owners of jeepneys because it awards the cards only to owners who can produce the franchise, original registration certificate, and route designation.  The owner would merely calculate the 1,200 pesos into his “boundary,” and this would amount to two days worth of owner’s income in one month.  The second is that the 1,200 pesos is too small in the context of rapidly rising oil prices, being a one-time subsidy.

A more effective approach would be for the administration to 1) set up an ID system that would allow jeepney drivers, not the owners and operators, to claim and calculate the 1,200 pesos into their boundary; and 2) renew the subsidy every three months should oil prices continue to rise.  Currently, the program costs the government $125 million.  Raising the program to 500 million pesos to cover four reloads in one year would not be too much of a strain on the government, considering that there are as yet untapped government to absorb the added costs, as we shall see below.

Suspending or Eliminating the VAT on Oil Products

Eliminating, suspending, or reducing VAT on oil is a suggestion that has increasingly been floated by a diverse set of people, including Vice President Jejomar Binay, Senator Ralph Recto, University of the Philippines Professor Ed Diokno, and Finance Secretary Cesar Purisima.    Immediate relief may indeed be the result of such a move, with some, like Ibon Research, calculating that the price of oil could go down by as much as 6 pesos a liter with VAT’s elimination.

Palace spokespeople like Abigail Valte have responded by saying that eliminating or reducing VAT will mean a drop in government revenues that could negatively affect many programs of the government.   This is not convincing since, as Senator Recto has pointed out, the revenue lost by reducing VAT can be offset by revenues from the government’s “off-budget” agencies such as the Philippine Amusement and Gaming Corporation, Philippine Charity Sweepstakes Office, and the Malampaya project.  Indeed, freezing and rechanneling even a minute fraction of 20 per cent of the 1.8 trillion peso government budget that the administration now allocates for paying for foreign debt that is already paid many times over would more than make up for the revenue foregone by eliminating VAT.

To be effective, however, there must be a foolproof method to determine that the reduction or elimination of VAT on oil is reflected in the pump price, a task that must not be underestimated given the sophisticated collusive practices of the oil majors.  More critical is the fact that while reducing or eliminating the VAT on oil might bring instant relief and double consumers’ savings if prices go down, that relief will only be temporary when prices are on a sharp upward trend.   The savings will be wiped out sooner rather than later.  In short, intervening in some way to directly contain the rise in the price of oil cannot be avoided in any viable solution, and this course of action will necessitate more than the Department of Energy examining the books of the oil giants, a concession that, to his credit, Mr. Almendras appears to have wrung from the oil majors.

The Need for Flexible Price Management

Given this need for government intervention, we propose the establishment of a flexible price-setting mechanism and complementary measures that will bring significant downward pressure on oil prices.

1. Fair Oil Price Setting Mechanism

Government must establish an oil price setting mechanism that will keep oil prices within a range or band that is fair and affordable to consumers, while allowing oil companies a reasonable level of profit. The range of the price band should be computed based on three main factors, namely: the purchasing capacity of consumers (e.g., an indicator based on a predetermined ratio of oil-related expenditures to total household expenditure), an approximation of a fair and reasonable level of profit for oil companies, and the prevailing price of oil in the international market.   The price band must be reviewed and reset on a monthly basis.

President Aquino must create a committee that will set and review the price band.  The committee should be convened by the Department of Energy, and should be composed of representatives of government, consumers’ groups, the oil companies, and three independent experts.

For this mechanism to work, the oil majors will have to bare their books—which, as Secretary Almendras says, they have already assented to.  Should the monthly balance sheet of the oil corporations reflect a loss, the government will not be held accountable for reimbursing this loss.  Should the balance sheet reflect a more than moderate rise in profits—say, for the sake of illustration, 2 per cent and above—this surplus should be subjected to a windfall profits tax that goes to fund government economic relief programs.

2. Setting up a Strategic Oil Reserve

To protect itself from price and supply volatilities of oil in the international market, government must seriously consider building oil reserves as a strategic objective, a proposal that was earlier suggested by Secretary Almendras though he seems to have been quiet about it recently.   Establishing a strategic oil reserve will help provide government the capability to cushion oil consumers from the vagaries inherent in the oil market, and also provide it with the necessary stocks to influence prices.

President Aquino must direct the DOE to create a blueprint for the establishment and management of such reserves, including identifying sources of funding for building the country’s oil stocks. The DOE can look at tax revenues from oil companies as possible sources of funding for the creation of the reserve.

Establishing an oil reserve might require legislation, but it would be best if the initiative is be put in motion immediately by invoking the charter of the Philippine National Oil Corporation (PNOC).

3. Strategic plan to regain control of Petron

President Aquino must begin developing a medium-term plan to regain control of Petron, as a strategy to increase government’s capability to intervene in the market and break the oligopolistic tendencies of oil companies. Petron’s share in the domestic oil market is about 38 per cent, giving it the clout to effectively lead and influence oil prices in a downward direction, as it did prior to its being privatized.  Buying back Petron would also bring back to the government’s control one of the state’s most profitable companies before it was privatized, a move that would undo probably the worst mistake of the privatization program.

Regaining control of Petron can be achieved by government buying back at least 51% of Petron shares, or by a combined action of acquiring a substantial share of Petron and leveraging its share in the San Miguel Corporation Board, which now controls the oil company.   The President must direct the Department of Finance, the Department of Budget and Management and the Department of Energy to lead this planning process, in consultation with relevant members of the Cabinet.

While this process is in motion, the administration must exercise “moral suasion” on Petron, which is now majority Filipino-owned, to serve as a price-setter.  Industry insiders still see as a model of effective moral suasion the pressure exercised by former President Joseph Estrada’s Energy Secretary Mario Tiaoqui in keeping down prices.  These tactics included the threat of imposing negative sanctions.

Separate but related to these considerations is the issue of who controls Petron at present.  The president should direct the Securities and Exchange Commission and Department of Justice to investigate who actually controls Petron at present, and if it is true that it has indeed fallen under the control of a predatory family, then it is all the more important for the government to put in motion a process of regaining control of the firm, perhaps through sequestration using Republic Act 1379, the “Forfeiture Law,” which allows government to confiscate the ill gotten wealth of public officials.

4. Support UN Advocacy for International Oil Price Controls

The Philippines must support the United Nation’s call for an international negotiation to determine a fair cost of oil, and to limit international oil price movements within a certain band.  However, this should not be a conference limited to OPEC and the G 20 but a UN-sponsored meeting bringing together the oil-consuming and oil-producing nations, along with the oil majors.

The Philippines must actively lead in creating an international coalition of governments to support a price control system.  This advocacy can begin by promoting a united front on the issue in the Association of Southeast Asian Nations and the East Asian Summit.

Legal Considerations

This is all fine and good but would not interventionist acts like those proposed above be, in fact, precluded by law?  Is not the government powerless to act owing to the Oil Deregulation Law (Republic Act No. 8479)?  The answer is no.  The president can invoke Section 14 e of the law as the former administration did, under popular pressure, with EO 839 on Oct 23, 2009, to protect consumers against predatory pricing by oil companies in the aftermath of Typhoon Ondoy.  Section 14 e reads: “In times of national emergency, when the public interest so requires, the Department of Energy (DOE) may, during the emergency and under reasonable terms prescribed by it, temporarily take over or direct the operation of any person or entity engaged in the industry.”

By any definition, a situation of unregulated, sharp price increases at the pump brought about by a more than 400 per cent rise in the price of crude in three years, which sparks inflation and brings an economy to the edge of recession at the same time, qualifies as an national emergency.

However, to enhance the effectiveness of temporary government intervention, it will be necessary to amend the Oil Deregulation Law, if one cannot scrap it altogether.   In other words, Congress must review and amend RA 8479 with the goal of introducing provisions that will (1) institutionalize flexible intervention in the market to protect the interest of retail oil consumers through methods such as the Flexible Oil Pricing Mechanism, (2) integrate the purchasing capacity of consumers as an important factor in considering the operation of the Flexible Oil Pricing Mechanism, (3) formally define a condition of national hardship brought about by extreme oil price volatility as an emergency, and (4) allow better monitoring and ensuring the compliance of oil companies in providing reports on, among other things, oil price and supply as well as on their revenues to the DOE.

Conclusion

The foregoing program, which combines subsidies and tax reductions with mechanisms to moderate the rise in the price of oil, if implemented with sensitivity cum determination, will achieve two things: 1) it will significantly slow down the erosion of people’s living standards by lowering inflation; and 2) it will eliminate the chaos induced by oil prices that rise arbitrarily and thus allow households and firms to more rationally plan their production and consumption.

That there is no smooth road to containing the drastic rise in the price of oil.    While reasonable, these measures will provoke much lightning and thunder from the oil majors and their propagandists. There might even be threats of supply disruption emanating from them.  Such threats must, however, be expected from them.  Carrying them out is another thing, for this will cross the line to illegality, and the oil majors will find it difficult to take this course on pain of courting both popular condemnation and legal action from the government that would significantly affect the future profitability of their operations in the Philippines.

The flexible price-setting mechanism and its associated components outlined above are reasonable. They will not harm the oil majors’ interests; they will simply encourage them to be satisfied with moderate profits.

The deepening of the energy crisis must put an end to the discussion and debate on strategy among the president’s advisers.  It is time the president intervened and rallied the country against the economic crisis in the same way he has rallied it against corruption. He needs to cut the Gordian Knot of the seemingly intractable problem that is the oil price conundrum.  The comprehensive strategy we propose may not be perfect, but it provides a sword that he can wield to get to the heart of the problem.

*Inq.net columnist Walden Bello represents the party-list Akbayan in the House of Representatives.