Philippines: Dealing with the oil crisis

June 21, 2008

Our dependency on oil has never been more excruciating than it is today.

The price of fuel has reached unheard of heights. The price of crude went above US$139 a barrel recently, before easing. At the pump, the price of unleaded gasoline in the Philippines has gone beyond P56 and diesel above P49. We are now consuming over 120 million barrels a year, and 90% of that is sourced outside the country.

What is causing this unprecedented rise in global oil prices? The key factor seems to be that the demand for oil is rising much faster than its supply, and this is due fundamentally to the fact that the few old oilfields on which the world relies for most of its oil are being depleted and no new fields have been discovered that can match their production and reserves.

Peak oil, which was viewed just a few years ago as an outlandish theory, is now being treated as fact.

The second factor pushing up prices is the rush to buy oil futures contracts, a development that is partly determined by the fear that available oil will increasingly become scarce,
partly by the desire of investors to park their wealth in oil instead of the declining dollar.


We ought not to be completely helpless, however. What is so shocking about the current state of affairs is that our capacity to influence developments in oil has deteriorated from 25 years ago. Then we had a pro-active energy strategy, we had a government energy complex working to diversify our energy sources and we had mechanisms to influence the domestic price of oil.

Today, in the era of oil deregulation, we are 100% at the mercy of Chevron-Caltex, Shell and Aramco, which controls Petron — the Philippines formerly state-run oil company. The OPEC countries that dominate the production of crude are often cast as the villains, yet the last few years have been years of record profits for the oil majors.

In the first three months of this year, the five largest US oil companies made a record $36 billion in profits, prompting the Democrats in Congress to push a bill to impose a 25% tax on "unreasonable profits".

In the Philippines, the subsidiaries of the majors have been doing very well. In 2007, Shell's net profit rose 54% over 2006, from P4.12 billion to P6.36 billion. Petron's net profits rose 6.3%, from P6.02 billion to P6.4 billion. These are the reported figures, not necessarily the real profits, which are most likely higher.

The major oil companies act as a cartel and pretty much set whatever price they agree on, with no government intervention and little monitoring. All our officials can do is to exercise what economists call "moral suasion", but we still have to find an oil company that will allow itself to be swayed by morality.

In the US, it takes four to six weeks before a rise in the price of crude is reflected in the pump price. In the Philippines, with the rapid succession of pump price rises, the truth is we no longer know how prices are being determined.

We don't know if prices are being determined in response to actual past rises in crude prices or in anticipation of future price rises. Non-transparency is the rule in the oil industry.


Former dictator Ferdinand Marcos was guilty of many crimes, but, as they say, we must give the devil his due. His regime did have a pro-active energy strategy and an effective energy bureaucracy.

The fact that it blundered big-time in the case of the Bataan nuclear plant should not blind us to the positive aspects of the regime's approach to energy. Instead of building on these positive aspects, succeeding regimes, in the name of the free market, committed three major blunders: Cory Aquino dismantled the state energy complex and deregulated oil, and Fidel Ramos sold a controlling interest in Petron shares to foreign interests.

Petron was more than just a very profitable enterprise, the crown jewel of the state corporate sector. Being involved in nearly all phases of the oil business, Petron knew what reasonable prices and profits were. Controlling 40% of the market, Petron set its price and the oil majors tended to follow.

Today, what power the government has was summed up by energy secretary Angelo Reyes: "It has to be the market that dictates the price. [But] we can't be helpless and not act when there's unreasonable pricing. That's our job, monitoring prices and dialoguing" with the oil majors. I guess this is
what is called moral suasion.

So given this self-inflicted, grim scenario, what should we do?

Whatever it is, we can't let it be a piecemeal and largely reactive response, like passing out a one-time P500 to poor families. It must be comprehensive, with short-term and long-term components.

Let me share some suggestions with you, and here I take no credit for originality, having lifted these recommendations from different people. Also, let me say here that these suggestions do not constitute official Freedom from Debt Coalition recommendations, but are my own thoughts.

First the short term. There are several important proposals that are worth considering. One popular one is that the value added tax (VAT) be abolished on fuel.

This would certainly result in significantly lower prices and thus benefit the consumer, but only if pricing is being done in a transparent manner. The problem is that with a cartel that is extremely non-transparent in fixing prices, we have no way of checking if the removal of VAT is being reflected in the pump price.

Thus the removal of VAT should be accompanied by a measure of re-regulation. The oil companies must obtain the government's permission to raise prices. To determine whether the proposed price increase is fair and reasonable, the government must have access to the oil companies' costing data.

The objective is not to control prices, but to correct the current situation of windfall profits and make the oil majors share the burden of the rise in the price of crude with the consumer rather than passing this all to the latter.

Public transport

There are other short-term measures, among them the designation of service stations where public transport vehicles can purchase oil at subsidised prices, with the subsidy being financed by money re-channelled from debt servicing.

There are said to be over 1000 designated stations at present. They should be increased.

Among the more strategic moves we can undertake is to undo one of our biggest mistakes. The government, which currently owns 40% of Petron, must regain a controlling interest and management control of that firm. This will mean a quantum leap forward in bringing price rises under control, since it will mean state influence on some 35-40% of the market. Petron can again be the price leader.

There are fears that this will invite retaliation from Saudi Arabia, but I think these are overblown. The Saudis will talk if the price is right and repurchasing Petron can also be financed from re-channeled debt service payments. A "re-Filipinised" Petron will be able to diversify our oil sourcing and make preferential deals with countries like Venezuela, which is now selling oil to certain counties at 40% off the world market price.

Another strategic move is to begin to radically shift from oil to electric power in transportation. Priority must be placed on enlarging the electricity-run train and bus transportation system, with the necessary investments coming from resources that would otherwise go to debt service payments.

This expansion could be coordinated with the popularisation of the use of bicycles for relatively short distances from stations to residence or the office. Where the shift from oil to power is not yet feasible, we must move to convert a significant part of the bus and jeepney fleet from gasoline and diesel to cheaper CNG and LPG. Incentives should also be put in place to convert private vehicles into CNG and LPG.

Finally, we should reconstitute the Department of Energy, one with real power in comparison to the monitoring agency now headed by Angelo Reyes. A re-Filipinized Petron could form the core of this new reconstituted agency that would be tasked with comprehensive planning to bring down energy prices, diversify our energy sources and manage our energy consumption to mitigate climate change.

[Walden Bello is the president of the Freedom from Debt Coalition and senior research associate of Focus on the Global South.]

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