Local oil products overpriced by ‘international standard’

I sent Sen. Sergio Osmeña a letter last Oct. 15. In that letter, I said that the oil companies are overpricing their products and are making excessive profits. I thus contradicted the position of the Department of Energy and the three commissions which have made studies on the issue of overpricing and excessive profits. Also, I quantified, based on the science of temperature compensation, the amount of the overprice.

Temperature compensation  is the practice of using a reference temperature of 15 degrees Celsius in all international oil transactions to remove inequities resulting from temperature changes which affect the quantity and quality of oil products. I gave as an example an oil company which bought 10 million liters of diesel from the Middle East. This shrunk in volume to 9.86 million liters upon reaching our country owing to the drop in temperature. The oil company could have incurred financial losses due to the diesel’s volume contraction, but temperature compensation shielded the company from incurring losses since it only paid 9.737 million liters (the volume at 15C) for the 10 million liters.

On the other hand, because of our country’s hot climate, consumers face the problem of “less energy and fewer miles to a gallon” to borrow the words of the California Energy Commission. It is of course the energy in the fuel that consumers pay for. It is this energy that runs cars, power plants, ships, etc. Therefore, consumers are shortchanged and pay more for less.

Since it is the energy in the fuel that consumers pay for and this energy does not expand as the volume expands with the rise in temperature, it is therefore the volume at the reference temperature of 15C that should be the basis of payment by consumers. For instance, if a consumer buys 10 liters of gasoline which is at 30C, a volume correction factor of 0.9814 is applied on the 10 liters to arrive at the volume at the reference temperature of 15C of 9.814 liters. If the price is P50/liter, the consumer should only pay 9.814 liters x 50 = P490.70, not P500 (an overprice of P9.30).

I limited my presentation to gasoline (unleaded) and diesel which account for about 61 percent of the total oil consumption. I also used Metro Manila prices (average) for both products. I used the price net of specific tax (P4.35/liter for gasoline, none for diesel) and 12-percent value-added tax. The VAT and the specific tax are shouldered by consumers, but oil companies advance these fees to the government and therefore the oil companies should recover these fees intact.

On a peso-per-liter basis, the overprice is higher for gasoline than diesel because gasoline is lighter and expands and contracts more easily than diesel. Over a 10-year period (2000-2009), using the volume available from the DOE website, consumers overpaid the oil companies by more than P40 billion.

Using Metro Manila prices of P43.20/liter for gasoline and P39.6/liter for diesel as of Oct. 24, 2013 (net of specific tax and 12-percent VAT), the overprice was P0.94/liter for gasoline and P0.58/liter for diesel, meaning, consumers paid about P7 billion in overprice in 2013.

—ERNESTO M. ADAYA,

Digos City, Davao del Sur,

ernie_adaya@yahoo.com