Passing the buck

I had a different topic planned but I’m going to have to talk about oil again despite the fact that I’ve done so several times before (columns of May 15, July 24 and Aug. 21 are a few). The government’s dangerous decision to take a populist approach and discard sound economics leaves me no option.

The harm that Executive Order 839 (that caps oil prices) will cause if it is not immediately rescinded cannot be underestimated. Already it’s probably done some irreversible damage to future investment into the Philippines. Potential jobs, potential growth Filipinos need have been lost.

No one disputes that a state of calamity should be imposed, but only on areas affected, not in all of Luzon. And not to everyone anyway as I’ll explain later. No one disputes that some tough measures are needed to alleviate the plight of the hundreds of thousands who’ve been affected. But you don’t single out one industry to subsidize a society. Subsidy is the role of government, not the private sector.

President Arroyo said (according to the newspapers) that government had to “respond to the clamor of Filipino people to prevent an unreasonable increase in the prices of petroleum products…” But the price increases are NOT unreasonable. They are perfectly reasonable. The prices the oil companies buy at has risen from US$70 per barrel to US$82 in just the past month; they have no choice, if they are to stay in business, but to raise their prices accordingly. That is perfectly reasonable. So government’s reason, to be quite blunt about it, is wrong. And it can be proved wrong with some simple, basic facts. Let me give just one, the one that really tells it all, the cost of fuel elsewhere.

Gas and Diesel Prices as of Oct 21

Country (Gas,Diesel in pesos): Hong Kong (69.09,55.06); Singapore (61.52, 42.95); Cambodia (45.82, 37.87); Laos (42.94, 36.85); Thailand (41.64, 37.79); Vietnam (39.82, 33.53); Philippines (39.34, 29.64); Indonesia (33.12, 28.98); Malaysia (25.20, 23.80)

Indonesia and Malaysia produce oil so the cost of fuel is, in effect, subsidized, so the Philippines’ is the cheapest.

Additionally, the President said: “The government must exercise the powers conferred upon it within the limits set by the laws to prevent predatory pricing, unreasonable pricing, cartelization, among others, which the oil industry players may resort to”. I hope she was misquoted as that is a totally irresponsible, even libelous statement.

The oil companies, at least the major players (I don’t know the minors so I can’t comment on them; the Big 3 I know well) do not practice predatory or unreasonable pricing, and do not act as a cartel. They are very careful to avoid anything like that because they know the repercussions if they do. More importantly they maintain worldwide corporate codes of ethics that prevent them from doing any of these activities. Prices are much the same because oil is a commodity, there’s no “brand” difference. If they don’t match their competition’s prices they lose business. The ones who will benefit most are the smugglers because they have lower costs and evade much of the tax due. Is that who government wants to help?

As I’ve said, why is one sector singled-out to subsidize? What about mineral water, that’s far, far more important for these poor people. You can die without water, you just have to walk without gas. All the bottled water companies should also be controlled, right? It makes a lot more humanitarian sense, doesn’t it?

No one disputes that the hundreds of thousands of Filipinos dislocated and discombobulated by these storms deserve all the support and breaks they can get. But that is the role of government—to protect and look after its people. Yet here is a government, not just this one, that has willfully ignored sound building practices, sensible city planning, controlled waste management etc, etc. Added to that, it failed dismally to respond adequately to a disaster partially of its own making. As a result, many people who should not have died did so. But now it has the hide to put the onus on the private sector to do what it should be doing.

If government really believes that reducing the cost of oil products will help those dislocated by the storm then it has a very simple decision it can make that won’t decimate business and the investment climate. Just suspend the taxes during the calamity period. They account for about 38 percent (gas) and 18 percent (diesel) of the cost. So that would be a huge alleviation.

It should be done by giving discount certificates (from DSWD so it is properly controlled) a limited amount per person, to those demonstrably in need of help. It would buy those discount cards from the oil companies, i.e., pay the oil companies the difference. Or part of the P12 billion that has already been allotted to emergency relief could be used to subsidize the price of gas and diesel if government truly believes those who were affected by the storms will be alleviated in some way by being able to buy cheaper gas and diesel. The rest of us should pay the normal rate. If they retain EO839 as it now is I know it will help me because I drive in from Alabang to Makati every day and into the countryside every weekend. I use lots of gas. But I don’t need help, I’m prepared to pay a fair cost for the gas for my car so why am I included?

But, I must ask, will controlling fuel prices help alleviate the plight of the dislocated poor? They’re not driving cars and bus and jeepney fares have not yet gone up. Power prices haven’t been affected, so where’s the benefit? I’d like government to tell us, and tell us how it was justifiable to make such a decision given the serious impact it will have on getting anyone to invest here.

All of us (at least those honest ones among us) should shoulder the burden (through our taxes) not just one, singled-out sector of society.

For those that will now bash the oil companies for warning of shortages, saying they might be using this as a threat, they’re not. They are just pointing out a commercial reality – you can’t sell products at a loss and survive in business. Already I’m told some of the smaller players have canceled shipments because they’re not wealthy enough to take the losses government is forcing on them. The competition government wanted is disappearing. As to the Big 3 they are losing over P4 per liter on every liter sold. They can’t do that for very long.

Those that want to go back to regulation the oil companies will love it. When oil was regulated the oil companies were guaranteed a fixed rate of return of 12 percent. Now they’re deregulated they’re only earning 3 percent, way below what other industries generate. When oil was regulated the Oil Price Stabilization Fund racked up a debt of P15 billion, money the government could have spent on cleaning up the Pasig and building a spillway so this catastrophe didn’t occur.

Coupled with the forced reduction of drug prices the Philippines is now a country where the risk to invest is too great. The low levels of investment it now gets will become even less. –Peter Wallace, Manila Standard Today