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 .



Lifting the reformed value-added tax (RVAT) on oil would deliver more direct and indirect benefits to millions of poor Filipinos through lower prices, according to independent think-tank IBON Foundation.

IBON research head Sonny Africa said that removing the RVAT on oil products would result in lower prices that would immediately benefit nearly one million jeepney and tricycle drivers and their families, as well as almost nine million households using liquefied petroleum gas (LPG). Also gaining will be at least three to four million farmers and fishermen and their families paying for irrigation or fuel for fishing boats. He added that other sectors would also indirectly gain as the effect on inflation caused by skyrocketing oil prices would be moderated.

Africa pointed out that the government subsidies funded by VAT earnings do not reach this many people in as sustained a manner. Africa pointed out that VAT earnings are barely used to subsidize pro-poor projects as P6 for every P10 immediately go to servicing the burgeoning debt.

The bottom line is that the VAT, no matter how small the government says the burden is, is anti-poor and already unbearable, Africa said.

If government needs additional revenues, there are other sources that will not unduly burden the poor, Africa said.  These include a genuine and sustained crackdown on corruption which underpins some P140 billion in VAT and income tax evasion annually, reversal of trade liberalization resulting in foregone tariffs of some P100 billion every year, and higher taxes on corporate incomes and luxury goods.

The difficult economic times also underscore the urgency of cutting back on debt service and strengthen arguments for stopping automatic appropriations for debt payments. There could be around P130 billion in savings if even just 20% of total debt payments of P634 billion in 2008 are suspended, Africa said.


Independent think-tank IBON Foundation estimates that as much as P31 per liter of the pump price of oil products may be windfall profits of transnational oil firms. This is based on IBON’s estimate of the real cost of oil at only US$31-US$32 per barrel, consisting of exploration cost, production cost and royalties to the Organization of Petroleum Exporting Countries (OPEC). Subtracting this from the May 2008 average Dubai spot price of US$117 per barrel means that the oil firms may have already earned windfall profits of US$86-US$87 per barrel of crude oil. Applying this figure to local pump prices (at 159 liters per barrel and an exchange rate of P43: US$1) and prevailing prices as of June 14 would reveal that for every liter of unleaded gasoline, P26-P31 goes to total windfall profits. For diesel, P23-P27 per liter goes to profits. This means that oil firms’ profits account for 47% to 54% of the retail price. The total windfall figures were obtained by combining profits from crude oil price, applying the US energy department’s data that crude oil accounts for 48% to 58% of the local pump price, and that 12% of the retail price goes to profits (which includes 3% that used to make up oil tariffs). This profiteering only proves that oil prices are artificially bloated at international and local levels because of the dominance of transnational oil firms over the industry, which gives them the upper hand to practice monopoly pricing and speculation. But although the government cannot control the activities of oil firms at the global level, it could minimize the impact of their profiteering and control excessive oil prices by implementing strict regulation of the domestic market.


The recent announcement by local oil companies that they would need to increase oil prices by as much as P10 to P11 per liter highlights the urgency of reinstating regulation of the oil industry, according to independent think-tank IBON Foundation.

IBON said that deregulation has not affected the domination of the three major oil companies (Shell, Petron and Chevron) of the local petroleum market. Instead, it has merely given the oil giants more room to manipulate pump prices since their transactions with their parent companies abroad have become even less transparent with price adjustments no longer subject to public hearings. The unregulated environment gives oil firms greater freedom to overprice and engage in transfer pricing.

The think-tank further pointed out that the recent P1.50 hike in pump prices implemented at the end of May was the largest hike since October 2001 when average retail prices went up by P1.20 per liter. It added that the oil companies are threatening even higher weekly hikes of P2 per liter allegedly to speed up recovery of their costs.

Data from the Department of Energy show that the three major oil players continue to control the bulk of the downstream oil market since the 60 new entrants that have entered the sector since 1998 accounted for an average of only 12% of total market share since the oil industry was deregulated.

IBON added that high world oil prices remain a result of the dominance of a few giant oil transnational companies – such as Royal Dutch Shell, Chevron Texaco, Total and Exxon Mobile – over the global oil industry. Oil prices are pushed up further by unhindered speculation in global oil futures markets. The monopoly of the oil giants over the downstream and upstream levels of the industry makes them immune to the effects of supply and demand and allows them to dictate the prices at which they sell their products independent of changes in crude oil production.


By imposing tariff cut recently, the cash-strapped Arroyo government has not only failed to address high pump prices but defaulted on its responsibility to collect revenues, all in favor of the oil companies.

Government had already imposed tariff reductions in the wake of high prices through Executive Order (EO) 527. The automatic tariff mechanism imposed under the EO may be viewed as a compromise after government removed VAT exemptions on petroleum products. The VAT on petroleum products has since become one of the largest sources of revenue for the cash-strapped Arroyo government.

Under EO 527, the current oil tariff scheme of 3% would be lowered to 2% up to 0% based on certain triggers indexed to oil prices in the world market. The expectation was that the tariff cut would soften the impact of global oil prices on the economy. Under the EO, government had reduced the tariff on oil products at least twice, but the move has not had the desired effect. Instead of addressing high oil prices, it only delayed price hikes on diesel by several days while easing the tax burdens of the oil companies.

“By choosing to remove tariffs on oil imports as a solution to high oil prices, government is protecting the interests of the oil firms at the expense of potential revenues that should be used to fund vital social services such as health and education,” said IBON executive editor Rosario Bella Guzman.

A more effective solution to the problem of high oil prices would be the lifting of VAT on oil products, she said. But the only permanent solution to high oil prices is nationalization of the local oil industry, starting with the repeal of the oil deregulation law. “The oil industry is vital to the country’s economic development, and as such should be regulated by government,” said Guzman.


The public is facing higher cost of living and more eroded wages and income this year as oil prices continue to spiral, according to independent think-tank IBON Foundation.

Jeepney drivers, for instance, will have to work doubly hard to earn a decent income for their families with unabated diesel price hikes. Last year alone, a jeepney driver’s daily expense for diesel increased by P147.30 as the prevailing pump price of diesel jumped by P4.91 per liter between January and November 2007. (Based on transport group Piston’s estimate that a jeepney driver consumes an average of 30 liters of diesel per day)

Diesel costs jeepney drivers around P1,125.90 per day and has to hand over between P600 to P900 (depending on the unit’s seating capacity) as daily “boundary” to the jeepney owner or operator. This means that he can only start earning for his family if he has already made P1,725.90 to P2,025.90 to cover for the diesel cost and the operator’s share.

Ordinary households, meanwhile, are spending P76.94 more for a regular LPG tank (11-kg cylinder) as the prevailing price of LPG jumped by P3.91 per liter between January and November 2007. Again, this further undermines the budgets of most Filipino families who also face higher water and electricity monthly bills as well as increased prices of basic goods.

IBON welcomes the proposal of several senators to suspend the 12-percent value added tax (VAT) on petroleum products because this will offer a temporary respite for the public. Diesel pump price, for example, could immediately go down by around P4.50 per liter without the VAT.

However, the situation calls for drastic but doable measures that are more effective and stable such as the permanent lifting of the VAT on oil products and the immediate repeal of Republic Act 8479 or the Oil Deregulation Law.

IBON will present its assessment of the economic and political situation at the Yearend Birdtalk on January 14, 1 p.m. at the UP Balay Kalinaw, Diliman, Quezon City.