Deregulated

Published by rudy Date posted on April 28, 2009

There are two commodities that politicians, anxious to improve their popularity ratings, constantly rant about when prices seem to be on the upturn: rice and oil.

No set of two commodities could be so different from each other in terms of economic and pricing dynamics.

The price of rice is determined by a public monopoly: the National Food Authority (NFA). Under the law, only the NFA is allowed to import rice. It used to be that the business model of the NFA revolved around importing cheap foreign rice and using profits from its trading monopoly to subsidize the milling, storage and transport of domestically produced rice. In that setup, the NFA is supposed to guarantee stable domestic pricing for a staple commodity.

That is a business model that works only when foreign rice prices are substantially lower than the domestic cost of producing the commodity. When global rice prices spiked last year and matched domestic prices, the business model unraveled. The NFA is now the biggest loser among all public enterprises, requiring billions in outright subsidies and state-guaranteed financing to continue on.

It was the NFA, in fact, that caused the global spike in rice prices last year. Because it has monopoly over rice importation, it necessarily orders rice in large bulk. When global buffer stocks thinned last year, the NFA’s placement of a large order for rice sparked speculation in rice prices, with traders from China, Thailand and India withholding stocks from their own markets in anticipation of fat profits from selling to the NFA.

Oil pricing is a different thing altogether.

To begin with, the global price for crude oil is constantly fluctuating. The price level is determined by a large number of factors: the decisions on production levels arrived at by the OPEC cartel; the excess or deficit in the US strategic oil reserve stock which could signal short-term demand levels; the exchange rate of the US dollar; the effects on consumption pattern of recessionary cycles; and, of course, speculation in the global commodities futures markets.

Contrary to what some politicians might want to make it appear, there is no simple formula for calculating the correspondence between global crude prices and local pump prices. Pump prices are calculated according to a host of variables, including price at the time of purchase, refining and transport costs, differential overheads among the competing oil firms and anticipated price movements.

 The last item in that list is usually almost imponderable. A cut in policy rates by the European Central Bank, for instance, could result in a surge in the exchange rate of the US dollar. That will likely push crude prices down even as there is no change in production levels and consumer demand.

Contrary to what the mentally-challenged leftist protest groups argue, the oil companies actually prefer that the industry remain regulated. Under the regime of regulation that pertained before, the oil players were guaranteed a fixed return on their investment. All the risks were assumed by government and, by extension, the taxpayers. Government dictated pump prices and paid out subsidies to the oil players when the real price equation results in operational losses. The oil companies ran their business without risks.

Under the present regime of deregulation, the oil companies assume all the risks. They have to make all the complex calculations and daily decide on competitive pricing. If they lose money, the taxpayer is not harmed.

Finding the right price is no longer a fiscal or a political issue. It is entirely a private sector concern. If companies price the product too high, they lose market share to smaller but more nimble players. If they price too low, because of wrong market assumptions, they pay the price in the form of operational losses. Petron, for instance, lost a huge sum of money last year because it was left with large inventories of expensive oil after crude prices dropped dramatically.

I do not understand why Sen. Francis Escudero is grandstanding at the expense of the Department of Energy, demanding that Sec. Angelo Reyes stop oil prices from rising. The senator must have forgotten that the oil industry has been deregulated. Prices are not politically determined anymore, although clamoring for lower prices might still be a profitable activity for politicians eyeing greater glory in May 2010.

If Escudero wants to return us all to the status quo ante, where oil pricing is highly politicized and always at the expense of the taxpayers, he should instead join the leftist groups in demanding that the oil deregulation law be scrapped (and our newfound fiscal stability imperiled). Otherwise, he must recognize that the DOE is limited to policing the oil industry to prevent predatory or cartelized pricing practices.

Surprisingly, NEDA Secretary Ralph Recto has come out with a headline-grabbing pronouncement that local oil products are overpriced by P8 per liter. That is an outrageously agitating thing to say and Sec. Angelo Reyes has challenged his Cabinet colleague to present his calculations before industry experts. Recto has yet to agree to that.

Sharply contrasting with Recto’s rather surprising claims is a sober, careful study of oil pricing recently undertaken jointly by economists from the University of Asia and the Pacific and auditors of the respected SGV firm. The study clearly demonstrates that local pump prices have not increased more than they have abroad in the rollercoaster ride of crude prices. That jives with other studies demonstrating that pump prices in the Philippines are among the lowest in the world, outside the subsidized prices of oil producing countries.

I campaigned for the oil deregulation law. It leaves oil pricing to the market and depoliticizes the product. It makes fiscal management more feasible.

Our politicians must realize that mixing oil and politicking could produce a dangerous compound. I understand that populist grandstanding is good for gathering votes. But it is bad for raising public economic literacy. –Alex Magno, Philippine Star

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