GLOBAL OIL GIANTS AND LOCAL BIG 3 PROFITING FROM PRICES BLOATED BY SPECULATION

World oil prices are bloated by speculation in oil markets, and local firms Petron, Shell, and Chevron Philippines which are domestic agents of the global oil monopolies are passing on this overpricing to consumers. This has resulted in record oil industry profits at the expense of hyper-inflation.

It is hard to quantify how much of the recent oil price increases are due to speculation but the steepness of increases in the past year in the absence of correspondingly large shifts in supply and demand fundamentals suggest that this is significant. A 2006 study by the United States Senate Permanent Subcommittee on Investigations for instance had already estimated that as much as 30% or more of the prevailing crude price at the time was due to speculation-driven purchases. Applying this to how the cost of crude oil accounts for around 75% of the local pump price of fuel (based on the DOE estimate of crude/product costs in diesel and gasoline prices of the oil industry and importers) implies that over 20% of local pump prices are due to speculation-driven overpricing.

The monopoly oil transnationals already rake in billions of super-profits from inflating the price of their oil. This monopoly pricing has been further bloated since last year by increasing speculation in world oil market. The deepening financial and economic crisis especially since mid-2007 has seen big financial investors, especially oil firms recycling their accumulating profits, shifting money into commodity markets particularly in oil, food and gold.

It is likely that the current bloating of oil prices due to speculation today will be even more than estimated by the 2006 US Senate report inasmuch as speculative investments in energy commodities today are double the US$100-150 billion levels around the time the report was made. This has already been acknowledged by among others even the Saudi Arabian and German governments, US government officials and the International Monetary Fund (IMF).

Thus, any effort to address the global problem of high oil prices has to squarely address the monopoly domination and price manipulation of the big oil corporations. The energy industry is too critical and strategic to be left in the hand of private profit-maximizing interests. The ease with which local oil firms can pass on this manipulated increase in global oil prices on top of built-in overpricing underscores the need for genuine regulation of the domestic oil industry to, at the very least, rein in such excessive profiteering at the people’s expense.

DESPITE CLAIMS OF UNDER-RECOVERIES:BIG THREE RAKE IN BILLIONS IN GLOBAL OIL PROFITS

While the Big Three oil firms in the Philippines claim losses due to under-recoveries, their mother companies abroad continue to report record billions in profits, according to independent-think tank IBON Foundation.

Royal Dutch Shell, the mother company of Pilipinas Shell, posted net income of $27.6 billion in 2007, making it the second most profitable company in the world next to oil giant Exxon Mobil. During the same year, Pilipinas Shell recorded profits of P4.12 billion.

On the other hand, Chevron, mother unit of Chevron Philippines (formerly Caltex), reported net income of $18.7 billion in 2007, 9% higher than in 2006 and enough to rank it the eighth most profitable company in the world. Its local unit in the country reported P2.75 billion in profits in 2007.

Petron, which is co-owned by government and by Saudi Aramco, recorded profits of P5.94 billion in 2007. Its net income has been progressively increasing in the last three years, posting P5.76 billion in 2006 and P3.42 billion in 2005. Aramco, unlike Shell and Chevron, is an unlisted company that is not obliged to report its financials, but its profits in 2007 are likely about $15 billion.

Domestic profits do not even genuinely reflect the oil monopolies’ overall profits because the transnational oil firms’ local subsidiaries are merely booking their profits abroad through the deceitful practice of transfer pricing to deflect criticisms of their massive windfall profits.

At any rate, the Big Three oil firms are clearly still making billions of pesos in profits, and thus any claim of so-called under-recoveries does not mean that they are taking any losses.

The monopoly oil transnational firms abroad normally already inflate the price of their oil to get their super-profits. This overpricing has even been extremely bloated since last year by increasing speculation in world oil markets. “Transfer pricing” however refers to oil firms’ practice of further padding the price of oil they sell to their subsidiaries to shift recording of profits from subsidiaries to mother corporations. The net result of this transfer pricing is that the seemingly lower profits of the subsidiaries, because of higher costs of oil imports, are actually off-set by higher profits of the mother companies.

Oil transnational firms are able to engage in transfer pricing because of their vast control of the different stages of oil production and distribution. In the Philippines , around 90% of oil in the market passes through the Big Three. They use lower reported domestic profits to disguise the massive global profits they are making and to deflate public anger against them.

Those mega-profits earned by exploiting unchecked monopoly control and covered up through unscrupulous practices, even as ordinary Filipinos reel from the harsh impact of escalating fuel prices, highlight the urgent need for government regulation and control over the local oil sector to help ensure transparency in pricing.

PRIVATIZATION OF POWER SECTOR THE ROOT OF HIGH POWER RATES

The impetus behind the current crisis is the restructuring of the sector through the Electric Power Industry Reform Act, or EPIRA, one of the first laws signed by President Gloria Arroyo in 2001.

IBON Features– Amid the flurry of accusations between private distributor Manila Electric Company (Meralco) and state-run National Power Corporation (Napocor) over unjust charges, one fact remains clear: privatization and deregulation of the power industry– distribution, transmission and generation– is at the heart of high electricity bills.

For example, consider the multitude of unjust ‘pass-on’ charges levied by Meralco on its customers. These include system losses, in which power lost through pilferage and technical problems are passed on to consumers and P500-million a year of Meralco’s own power consumption which is similarly reflected in electric bills. There is also a reported plan to pass bad debts incurred by the power distributor on to consumers.

These charges have been approved by the government Energy Regulatory Commission (ERC), which is tasked to regulate the rates of electricity distributors. Although blame has been placed on the ERC’s lax regulation for such excessive ‘pass-on’ rates, in truth the regulatory environment has become lenient because of deregulation of the power sector and while moving towards full privatization.

It should also be noted that although Meralco is a public utility with a congressional franchise, its essential nature is a private, profit-oriented corporation listed in the Philippine Stock Exchange. Thus, it should not be surprising that the company exploits legal loopholes to levy such unwarranted charges in order to fatten its bottom line and make its stockholders and owners happy.

The privatization of the power sector created profit opportunities for private-sector independent power producers (IPPs). In order to quickly attract investors to the sector, government had to ensure the power producers’ profitability. Thus, onerous provisions such as ‘take or pay’ (which required Napocor to buy 70% to 100% of power producers’ output) and ‘fuel cost guarantee’ (which obligated Napocor to source and pay for fuel used by IPPs) were tacked onto IPP contracts. These provisions bloated consumers’ power bills through charges such as the infamous Purchased Power Adjustment (PPA). They also contributed to Napocor’s skyrocketing debt burden.

It will be remembered that a government-mandated review of 35 IPP contracts during the Arroyo administration found that only six were “clean” or without financial or legal issues. Five were found to contain “onerous” terms that were “grossly disadvantageous to government”. However none of these contracts were cancelled, and were instead “renegotiated”.

High transmission charges have also been blamed as a factor in high power rates. But the National Transmission Corporation (Transco) is also set for privatization, and thus, needs to charge high rates in order to attract potential investors. It should also be noted that transmission charges are regulated by the ERC as well.

Open Access

The impetus behind the current crisis is the restructuring of the sector through the Electric Power Industry Reform Act, or EPIRA, which was one of the first laws signed by President Gloria Arroyo in 2001.

Before EPIRA the sector was composed of generation, transmission and distribution sectors. Napocor generated electricity on its own and bought electricity from IPPs, and transmitted this to distributors and large industrial customers through high-voltage wires. Distribution of electricity to end-consumers was done by privately-owned electric utilities, a few government-owned utilities and electric cooperatives.

Under EPIRA, the various components of the power sector are separated into generation, transmission, distribution and supply. Generation and transmission assets of Napocor would be privatized while distribution would continue to be handled by the private sector. The end goal of the sale of Napocor’s generation assets is “open access” which is government’s supposed answer to high electricity prices. “Open access” ostensibly aims to introduce competition into the industry by allowing consumers to select their supplier.

EPIRA advocates claim that competition would lower rates, particularly with a provision which states that no power generator should control more than 30% of supply in a given grid and ostensibly prevents monopolies. But the experience of the deregulation of the downstream oil industry demonstrates that such “competition” does not bring down prices. Deregulation has resulted in new players taking 12% of the market while the big three oil firms (Petron, Shell and Chevron) share the remaining 88% or an average of 29% per firm. This has not stemmed cartel-like behavior with oil industry players raising pump prices nearly simultaneously. It has also not resulted in lower prices, as pump prices of all petroleum products have raised an average of almost 580% since deregulation of the industry was implemented in 1996.

EPIRA also notably allows cross-ownership between distributors and generators. This has allowed the Lopez family to own a controlling share in Meralco while also owning IPPs. This situation has led to questions of conflicts of interest as Meralco would naturally be more inclined to buy power from its sister firms regardless of whether it is cheaper than electricity sourced from Napocor IPPs.

Reversing Privatization

In the light of high costs in power rates, the reversal of privatization of the entire power sector becomes an increasingly viable answer. This entails the repeal of EPIRA law, reversal of the privatization of Napocor’s generation assets, and government control over the entire power sector – distribution, generation, transmission and supply.

Of course many would question the return of state control over the industry, particularly in light of corruption allegations against Napocor such as its alleged overbilling of customers by some P10 billion and its purchase of overpriced coal for its power plants.

However there remains no substitute for responsible state control in an industry such as the power sector whose natural monopolies will inevitably be exploited by private interests for maximum profit even at the expense of the public. And as a state-run industry, the people must have the right to subject the power sector to scrutiny and demand transparency in its operations. Effective state control remains the best solution to address high power rates– even as it is acknowledged that leaving the power industry to an administration known for allegations of corruption, unaccountability, and subservience to elite interests compromises achieving a pro-people power sector.

RESTORE OIL INDUSTRY REGULATION TO ENSURE TRANSPARENT, REASONABLE PRICING

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.

AMID RECORD-HIGH OIL PRICES:THINK-TANK RENEWS CALL TO REPEAL OIL DEREGULATION LAW

Drastic measures are urgently needed to minimize the vulnerability of the Philippines to high global oil prices. Independent think-tank IBON Foundation says this includes the immediate suspension and eventual repeal of the Oil Deregulation Law and setting up a mechanism for government control of oil price hikes to ensure reasonable pump prices.

At present, the only measure that the Arroyo regime is implementing to cushion the impact of increasing global oil prices is the automatic tariff mechanism. But this measure only delays oil price hikes and does not ensure fair price adjustments.

As noted recently by the United Nations, the Philippines is among the countries that are most vulnerable to oil price shocks because it is heavily dependent on imported oil. Worse, more than 90% of the local oil industry remains in the monopoly control of giant transnational corporations (TNCs) through their local units Petron, Shell, Caltex, and Total.

The monopoly of these companies has been further strengthened by the Oil Deregulation Law where automatic oil price hikes are allowed. Consequently, oil companies took advantage of the policy, hiking pump prices of all petroleum products by around 535% since the Oil Deregulation Law was first implemented in April 1996.

The Oil Deregulation Law also provided the big oil companies more space to manipulate pump prices. IBON estimates show that since 2000, pump prices are overpriced by as much as P4.55 per liter as oil price hikes were left unregulated.

Unfortunately, the Department of Energy (DOE) could only talk about its “long-term plans” anchored on questionable programs such as biofuels, aside from its tariff adjustment mechanism, when drastic measures are needed by the people urgently.

IBON reiterates its call for Congress to suspend and repeal the Oil Deregulation Law. Only state regulation and control can assure the country’s energy security right now amidst a highly speculative and volatile global oil market.