Are oil products overpriced?

Director-General Ralph Recto last week triggered much speculation that there must be more than meets the eye behind his unexpected and sudden departure from the Arroyo Cabinet. While he publicly explains that he has decided to leave to explore his political options for next year, the natural object of people’s suspicion has been the recent public disagreement over oil prices between Recto and Energy Secretary Angelo Reyes.

Neda and Recto had asserted that gasoline pump prices in the country may be up to P8 a liter higher than they should be. If true, then the oil companies have been making undue profits at the expense of the Filipino consumers.

Downward stickiness

People may not have noticed nor cared as much as they should, because fuel prices have generally been much lower this year compared to last year, when the international crude oil price had climbed to a record of more than $147 a barrel in July 2008.

The price is now hovering around $70, or less than half of what it was last year—and yet the decline in pump prices of gasoline and diesel has not been as dramatic. Economists describe the situation as a “downward stickiness” in prices; that is, it is generally easier for prices to go up than to go down with corresponding movements in actual costs.

Where there is not enough competition in an industry, businesses can control prices enough to get away with such pricing behavior.

Have the oil companies been colluding with each other to prevent fuel prices from going down to their more proper levels given current world crude prices? Neda appears to believe so. And it explains why in its website, where one can readily open a PowerPoint file detailing its calculations that led to its findings of seemingly excessive prices.

The argument is simple: The pump prices of gasoline and diesel now should approximate their observed prices in recent past instances when the prevailing crude oil price in peso terms was at the same level as they are now. However, Neda finds that prevailing current prices are much higher than they were when crude oil cost about the same.

Pencil-pushing

The following summarizes the pencil-pushing that Neda did:

Last April 16, Dubai Crude Oil (DCO) cost $50 a barrel, which translated to P2,408 at the prevailing exchange rate of P48.16 a dollar. Gasoline sold then at around P40 a liter at the pump.

In February 2005, DCO price was $39.70 a barrel, which at the exchange rate then of P54.81 a dollar, amounted to P2,176.07. At that time, gasoline pump price was P27.37 a liter.

In March 2005, DCO sold for $45.84 a barrel, or P2,495.54 at the exchange rate then of P54.44 a dollar. Gasoline pump price was P29.22 a liter.

Since the April 16, 2009, DCO price of P2,408 lies between the February and March 2005 prices, pump price of gasoline would be expected to lie between the February 2005 price of P27.37 and the March 2005 price of P29.22. A straight-line interpolation would yield P28.71. Adding the 12-percent VAT which gasoline was still not subject to in 2005, the expected price comes up to P32.16. So why, then, was it selling for P40 last April?

Turf battle

Just to be sure, Neda tried other approaches to calculating the expected gasoline pump price that should have prevailed in mid-April 2009, including using the Mean of Platts Singapore (MOPS) gasoline price for comparison. With adequate competition, domestic gasoline prices must be tied to the price at which gasoline is internationally traded, indicated by the MOPS price, which was $60.46 a barrel.

At a dollar exchange rate of P48.19, and adding in all costs incurred leading to the pump price (including oil company margins, specific taxes, VAT and other costs), gasoline pump price should have been P32.21. Still two other estimation approaches Neda invoked led to gasoline pump prices of P30.57 to P33.69. Even at the most liberal estimate, the actual pump price observed last April was still more than P6 higher than it should have been.

This is the apparent fuel overpricing that Secretary Recto had called attention to, which led to his run-in with Secretary Reyes who apparently resented the Neda secretary’s perceived encroachment into his turf.

The introductory note on the Neda PowerPoint hints at the turf battle somewhat defensively: “As the primary economic and development planning agency of the country, Neda puts the welfare of the general public at the center of its work. We recognize that it is the Department of Energy (DOE) that is the main body which monitors oil price movements and oil companies’ behavior. Neda commented on oil pricing to underscore the effects of escalating oil prices on the general economy.”

It is indeed incumbent upon Neda to raise such questions, especially when lack of competition and lack of transparency on the part of the oil industry may be compromising the public interest. –Cielito Habito, Philippine Daily Inquirer

Comments welcome at chabito@ateneo.edu