ROLLBACKS NOT ENOUGH: DIESEL OVERPRICED BY P6.45 PER LITER FROM JAN-SEPT 2008

The series of oil price rollbacks on diesel implemented by oil companies this month are not enough because diesel prices are overpriced by a total of P6.45 per liter from January to September this year, according to research group IBON Foundation.

This estimate was the cumulative overpricing over the January to September period, computed based on the monthly movement of Dubai crude, diesel and pump prices, and the foreign exchange (forex) rate.

According to IBON research head Sonny Africa, the worst overpricing happened in June to August when oil firms used record Dubai prices to increase pump prices, and then rollback pump prices to less than what is justified. Overpricing in those three months amounted to a total of P13.50. Although there was underpricing recorded in some months since January, the price of diesel was still overpriced over the nine-month period.

Africa noted that this pattern has continued since the start of deregulation where diesel pump prices increased 1.7 times faster than Dubai crude prices in peso terms. The cumulative overpricing only shows that big oil firms use their monopoly over pricing to dictate pump prices that are beyond what can be justified by global crude oil price movements.



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Gov’t to sell remaining Petron stake

MANILA, Philippines — The government has decided to sell its 40-percent stake in Petron Corp., the country’s biggest oil refiner, and is looking to get about P25 billion ($530 million), the finance secretary said.

London-based Ashmore Group, which owns slightly over 50 percent of the company, has right of first refusal, Margarito Teves told reporters late Tuesday.

“The Privatization Council approved the sale on Tuesday,” he said. “Hopefully, we can book the proceeds by December. Hopefully we can get P25 billion.”

SEA Refinery Holdings BV, owned by Ashmore Investment Management Limited, agreed to buy a 40-percent stake in Petron from Saudi Aramco for $550 million earlier this year.

In June, it offered to buy the remaining 60-percent stake, or 5.63 billion shares, in Petron at P6.531 per share.

Under Philippine corporate laws, an entity buying a 30-percent stake in any company must make a tender offer for the rest of the company.

At the end of the tender offer in July, SEA Refinery received tenders for a total of 990.98 million common shares, or a total of P6.5 billion, from minority shareholders, the company said in a statement to the stock exchange.

At the time, the government did not participate in the tender, saying it was hoping for a better price. Ashmore’s holding in Petron is now at 50.57 percent.

($1 = P47.26)MANILA, Philippines — The government has decided to sell its 40-percent stake in Petron Corp., the country’s biggest oil refiner, and is looking to get about P25 billion ($530 million), the finance secretary said.

London-based Ashmore Group, which owns slightly over 50 percent of the company, has right of first refusal, Margarito Teves told reporters late Tuesday.

“The Privatization Council approved the sale on Tuesday,” he said. “Hopefully, we can book the proceeds by December. Hopefully we can get P25 billion.”

SEA Refinery Holdings BV, owned by Ashmore Investment Management Limited, agreed to buy a 40-percent stake in Petron from Saudi Aramco for $550 million earlier this year.

In June, it offered to buy the remaining 60-percent stake, or 5.63 billion shares, in Petron at P6.531 per share.

Under Philippine corporate laws, an entity buying a 30-percent stake in any company must make a tender offer for the rest of the company.

At the end of the tender offer in July, SEA Refinery received tenders for a total of 990.98 million common shares, or a total of P6.5 billion, from minority shareholders, the company said in a statement to the stock exchange.

At the time, the government did not participate in the tender, saying it was hoping for a better price. Ashmore’s holding in Petron is now at 50.57 percent.

($1 = P47.26)

SPECULATION: A CLOSER LOOK AT OIL PRICE HIKES

(First of a series)

Skyrocketing oil prices have become a global concern and a source of much debate as to what really lies behind them

IBON Features– The market price of crude oil has more than doubled over the past year to reach record-high levels of over US$147 per barrel last July. And oil prices continue to fluctuate, with industry players blaming a number of factors, including jitters caused by the current financial crisis in the US. Skyrocketing oil prices have thus become a global concern and a source of much debate as to what really lies behind them.

Executives from the major oil companies who were recently grilled before the US Senate Judiciary Committee once again attributed record-high oil prices to “the fundamental laws of supply and demand.” But while such market factors are responsible to a certain extent for high prices, they do not take into account other factors, such as speculation. Crude oil, also known as petroleum, is the most actively traded commodity in the world, with the largest markets in New York, London and Singapore Exchanges. Prices commonly quoted are those in spot markets (Dubai for crude and MOPS forrefined petroleum products).

In an article that appeared in BusinessWeek in May, Larry Chom, chief economist for Platts (the world’s leading provider of energy information), said that the actual costs in producing the most expensive barrel of oil is only around $70 or $80 a barrel, with the remainder the “market’s risk premium plus speculation”. This implies that the current price of US$147 a barrel is inflated by some $67 to $77 a barrel due to speculation.

Speculation artificially increases oil prices because most oil is not traded in spot or futures markets but through long-term supply contracts. Because ofvertical integration, most oil traded is between TNCs divisions (intra-TNC transactions) and do not need a spot market, yet the amount or the volume of trading in the commodity markets has substantially influenced pricing.

It should be noted, however, that oil transnational corporations, while they may not be directly engaged in speculation, do benefit from it. At the Senate hearing, John Hofmeister, president of Shell Oil, the US arm of Royal Dutch Shell, admitted that his company could be successful with oil prices at $35 to $65 a barrel. A mid-2006 report released by the Bank of Kuwait said that in Saudi Arabia, the break-even point on a barrel of crude is US$33, while in Kuwait it is only US$17. 

Thus, the current US crude-oil futures price represents record windfall profits for the oil companies. Exxon Mobil, the largest oil company, reported record 2007 profit of US$40.6 billion while Royal Dutch Shell reported the largest earnings of any company in Britain of some US$31 billion.

But speculation itself is not enough to explain high oil prices. For that, the structure of the global oil industry itself must be scrutinized. Historically, the global oil market has never enjoyed genuine free competition since it has constantly been dominated by a handful of American and European oil giants. The current term for these oil giants is
“supermajors,”  meaning vertically-integrated private-sector oil and gas companies engaged in all stages of the oil industry– exploration, production, refining, trading, marketing, and, sometimes, transportation.

The six “supermajors” are: ExxonMobil (US), Royal Dutch Shell (UK-Netherlands), British Petroleum (UK), Total (France), Chevron Texaco (US) and Conoco Philips (US). These six firms jointly account for US$1,482 billion in revenues and US$134 billion in profits as of 2006 according to Fortune magazine. They can also produce more than 80 million barrels per day of crude and refine more than 112 million barrels per day of various petroleum products.

The monopoly control the oil firms exert over the market allows them to manipulate prices. In 2006, for example, the US Commodity Futures Trading Commission filed a civil lawsuit against British Petroleum (BP) North America, alleging that BP traders– with the consent of senior management– “purchased enormous quantities of propane” to establish a dominant position in the market and then withhold fuel in order to drive prices higher.

It is also a myth that the Organization of Petroleum Exporting Countries (OPEC) dictates world oil prices. Although the OPEC member-countries account for two-thirds of the world’s oil reserves, and, as of March 2008, 35.6% of global oil production, the supermajors still control the infrastructure needed to transport and refine crude oil, and market and retail refined oil products. The supermajors in fact currently account for one-third of global refining capacity.

Meanwhile, Big Oil has also been blaming state-owned oil firms such as Gazprom (Russia) and the National Iranian Oil Company (Iran) for high prices by claiming these firms deliberately maintain low production in the same way OPEC does. In fact, the largest state owned oil firms have been lumped together by analysts as the “New Seven Sisters,” a reference to the seven largest oil firms that controlled the industry in the mid-20th Century. State-owned oil monopolies reportedly account for more than 90% of the world’s oil reserves.

But these claims may only be a ploy to pressure these oil monopolies to allow more investments by the supermajors. Mexico’s constitution since the 1930s has prohibited any foreign investment in the local oil sector. Venezuela, Russia and Ecuador closely collaborated with Western firms in the 1990s but recently started seizing their assets through a series of privatizations. Peter Robertson, vice chairman of Chevron Corp., has said if major oil companies had access to the vast resources of these countries, they would be using their ample profits to pump more oil at cheaper prices.

Locally, the Big Oil TNCs use their monopoly position to manipulate prices. Since oil firms’ purchases are actually under contract arrangements, this provides room for the local subsidiaries of Big Oil to generate more profits by jacking up pump prices whenever the spot market prices goes up, even if their oil prices have been negotiated long before with lower prices. This explains the weekly oil price hikes that have followed in the wake of upward movements in the oil spot market. 

Locally under a deregulated environment, consumers are left with no choice but to bear the brunt of the increases in domestic pump prices caused by speculation and wild price hikes in the global oil market. Meanwhile, speculators and the giant oil companies rake in billion of dollars in profits. 

While it is true that the Philippine government cannot control the activities of the speculators and the giant oil corporations, it can intervene at least in the local oil industry to protect the Filipino consumers. Unfortunately, amid the hardship that Filipinos face because of high oil prices, government continues to waive its authority to regulate the local oil industry.

DESPITE ROLLBACK, REAL TRANSPARENCY REMAINS URGENT

The urgency for real transparency in the domestic oil industry remains despite the recent rollback in oil prices, and vital information needs to be disclosed for the public to be assured that the monopolized domestic oil industry is not profiting at their expense.

According to independent think-tank IBON Foundation, the public has been put at the mercy of the oil firms and their mysterious pricing schemes, and is left to take the oil companies’ word that their prices are fair and their profits reasonable. It enumerated the data that oil firms need to disclose to ensure the public that their welfare is not being jeopardized.

Among others, this information includes: 1) the retail pricing formulas and strategies of the oil firms domestically and as they relate to their foreign mother corporations; 2) the overseas supply sources and the terms and periods of their supply contracts; 3) any payments local firms make to mother firms whether as profit shares, charges for technologies or services, fees and other payments; 4) refinery stocks and capacity; 5) inventories and storage capacity; 6) local sales and distribution to direct buyers, retailers and other oil firms.

While some of this information is already reported or otherwise available, others such as supply contracts have unfortunately been claimed as “confidential” by the oil companies. This information will not just address legitimate public doubts but also be vital in assisting policy makers and legislators in developing responsible energy policies.

IBON believes that the oil deregulation law has clearly failed to introduce effective competition in the downstream oil industry which remains subject to monopoly control and domination by the Big Three oil firms. It has merely allowed the global oil monopolies to freely pass on inflated crude oil prices and given the domestic oil firms license to price as they see fit, at the expense of Filipino consumers. 

Oil is a critical sector with far-reaching impacts on the public welfare and cannot be allowed to operate on a largely profit-maximizing basis, said the think-tank. Real transparency is thus crucial for public interest to prevail

LIFTING OIL VAT COULD HAVE MITIGATED HIGH INFLATION -IBON

As inflation in the country rose to its highest in nearly 17 years, independent think-tank IBON Foundation says that while unavoidable, inflation could have been moderated if government had not insisted on taxing the people through the oil value-added tax (VAT).

The National Statistics Office reported that high fuel costs drove the inflation rate to a 12.5% high in August. According to IBON, the removal of VAT on oil would have immediately brought down the cost of fuel prices by 12 percent. Pump prices are estimated to go down by P4 a liter and liquefied petroleum gas (LPG) by P60 per 11-kg cylinder without the VAT on oil. These could have brought immediate relief to millions of Filipinos through savings on their fuel bills, while bringing down production costs of fuel-intensive establishments.

High prices of commodities could also have been mitigated if government had not surrendered control over the oil industry by maintaining oil deregulation.

Inflation bears most heavily on the poor who already struggle with record joblessness and falling incomes. But government continues to implement the VAT in its obsession to reduce the budget deficit and continue servicing its public debt. For the people, however, all these have only meant higher prices and drastic cuts in income, consumption and welfare.

ROLLBACKS WELCOME BUT PRICING TRANSPARENCY STILL NECESSARY

The recent series of petroleum pump price rollbacks are welcome but independent think-tank IBON Foundation believes that oil firms should be transparent with their pricing particularly in the wake of windfall profits earned by oil firms due to record-high world crude prices.

According to research head Sonny Africa, how the oil firms determine pricing and the amount of rollback remains a mystery. Unless these firms reveal their pricing structure, the public remains captive to the whims of oil companies and dependent on the government’s “moral persuasion”, he added.

IBON pointed out that because of the practice of transfer pricing by global oil firms, it has become increasingly difficult for the Department of Energy and other stakeholder groups to determine how much local pump prices should move in relation to global oil prices and the peso-dollar exchange rate. Through transfer pricing, oil transnational firms are able to artificially bloat the price of oil as it passes through the different stages of production and distribution chain which they control.

IBON further pointed out that global oil prices whether Dubai spot crude or Mean of Platt’s Singapore , which are the benchmark that oil firms use in determining local pump prices, are unreliable as they are bloated by speculation. A 2006 study by the US Senate showed that 30% or more of world crude oil prices are driven by speculation. Locally, IBON estimates that prevailing pump prices of unleaded gasoline are overpriced by 23% because of speculation.

Oil firms have been allowed to further achieve monopoly control over the industry because of deregulation, which makes urgent the need for government regulation and control over the local oil sector to help ensure transparency in pricing, said Africa .

9 OUT OF 10 METRO RESIDENTS WANT OIL VAT SCRAPPED

In spite of aggressive government efforts to justify the 12% value added tax (VAT) on oil, almost nine out of 10 Metro Manila residents still feel that the said tax must be scrapped.

In a metro-wide survey conducted by IBON Foundation on July 12-13, 87.33% of respondents agree with the proposals to scrap the VAT on petroleum products.

President Gloria Macapagal-Arroyo is expected to highlight the supposed benefits of the people from government’s growing collections from the VAT in her State of the Nation Address (SONA) on Monday.

Various groups have been calling for the cancellation of the VAT on oil in the face of escalating pump prices with several legislative proposals implementing the said measure currently pending in the House of Representatives and the Senate.

The Catholic Bishops Conference of the Philippines (CBCP) has also called for at least a review of the oil VAT. Estimates show that at current price levels, removing the controversial tax can reduce pump prices by more than P7 per liter.

IBON’s special survey was conducted across NCR and has a margin of error of plus of minus three percent.

Below is the tabulation of results of the respondents’ perception on the removal of the  value-added tax on petroleum products.

Do you agree with the proposals to remove the VAT on petroleum products?
Yes 324 87.33
No 31 8.36
Don’t Know 16 4.31
371 100.00