Does oil deregulation really work?

If the Electric Power Industry Reform Act (EPIRA) or RA 9136 of 2001 had found it difficult to straighten out the power industry’s complex problems to help the Filipino consumer through lower prices and stable electricity supply, the Downstream Oil Industry Deregulation Act of 1998 seems to be getting somewhere.

One might argue that the latter has a less complex structure, and perhaps that is all too true. In an early assessment of the oil industry’s performance during its first few years, the oil majors were already finding their market shares eroded by the new industry entrants, even if only by a small fraction.

Thus, it comes as a big surprise to know that the combined market share of all “independent” oil companies as opposed to the Big Three of Shell, Chevron and Petron now stands at 32 percent. Yup, that’s how much the industry’s “monopoly” of nearly a century had shrunk in just 15 years.

Clearly, this shows that the law had successfully provided for a framework that leveled the market’s playing field to encourage more competition in an industry that had long been vilified as greedy for profits whenever it needed to raise prices of oil products.

Transparency

Of course, people will always quibble that prices have not necessarily gone down. In fact, they will add, prices have gone sky-high. But this discontent is in reality more belly-aching about having to shell out more pesos to fill up a gas tank or buy an LPG tank.

Business ( Article MRec ), pagematch: 1, sectionmatch: 1 Deep down, people understand and believe that high prices are more a function of more expensive crude oil that all countries in the world – rich, poor, small, big, with oil, without oil – fraternally suffer.

Well, there might be the occasional complaint that the pump price increase is five or 10 centavos higher (or lower) than what it really should be. And this could be better managed if our regulatory agencies are more diligent in communicating the reasons for any price movement.

The oil deregulation law has very detailed procedures about maintaining price transparency, and the Department of Energy is likewise in a strong position to monitor, assess and comment on the industry’s upwards or downwards price decisions.

Price differences

Occasionally also, there would be comments about the new players, especially those that have grown in size and market share, about having the same prices now for their petroleum products. And this could well be true.

During the early years of deregulation, small independent oil companies were aggressively pricing their gasoline and diesel fuels by as much as 50 centavos lower compared to the Big Three. This could be seen as introductory pricing strategy employed as a marketing tool, but it worked.

If these same companies abandon pricing as a tool, then perhaps they have earned loyal patrons who are happy with their service or product portfolios. Notably, a number of independent oil companies have product offerings that have become acceptable for being environmentally friendly.

New entrants

For example, Flying V of Ramon Villavicencio’s TWA, Inc. is extremely proud of its research and development efforts in diesel. It has persisted in selling an eco-friendly diesel fuel branded as Environtech that claims to be efficient, clean, and natural as against fossil-based diesel.

Being the first Filipino oil company to challenge the Big Three, Flying V has also made a name for itself during the last 15 years for reliable products that are safe for motor vehicles, efficient, and competitively priced compared to the majors.

Flying V can claim to have the biggest network of service stations in the country, counting to more than 400 to date. It has set to grow its retail market network to 700 service stations by 2015.

Another new entrant is Phoenix Petroleum Philippines, Inc., which traces its roots to Mindanao. Similarly as aggressive in its expansion, Phoenix recently celebrated the opening of its 300th service station in Lanang, Davao City.

While Flying V and Phoenix account for over 90 percent of the 800 retail service stations that do not belong to either Chevron, Petron or Shell, the bustle in the market is equally as lively in the bulk sales segment for gasoline, i.e., for commercial and industrial customers.

There are other new markets where the majors are losing share: auto LPG, lubricants, and fuel oil. In fact, LPG as a motor vehicle fuel is eating up on gasoline sales primarily for taxicabs that are looking for a more efficient and lower priced fuel to run their engines.

Tipping point

The benefit of the oil industry’s deregulation is inarguably for the greater public – not only in terms of lower prices, but also in widening the kinds of fuels that are available.

With the avowed plans of new players to go for bigger market shares, I should be warned if I were one of the majors. With so much bigger networks, the independents are now a serious force to reckon with.

This year, and the following years ahead, expect fierce competition as the Big Three tries to fight back to hold on to their diminishing market hold. We could be seeing the comeback of those years in the early 50s to the late 60s when the customer was truly king. –Rey Gamboa (The Philippine Star)