EO to spawn black market

MAP chief warns: Price control ‘very dangerous’

The president of the Management Association of the Philippines (MAP) said that the government order to freeze fuel prices may have a short-term benefit, but its consequence was “very dangerous” to the economy as it would create a black market. “Buyers will turn to informal sources and a black market emerges. When there is no supply but there is real demand, the supply will come in some form,” Joey Bermudez, association president and a veteran banker, said in a roundtable interview with The Manila Times on Thursday.

“If not in the formal market it comes in the gray market,” he added. “You are actually giving rise to that gray segment the moment you control the formal segment unreasonably.”

He told The Times that while the Executive Order was widely popular with a consuming public reeling from the effects of the global financial crisis and the recent calamities, the directive on price control was based on an oversimplified but misleading view of the problem.

“It holds out the promise of lower prices, but it does not properly inform the public of the dire consequences of arbitrary and sweeping price control,” Bermudez said.

According to him, experience has shown that price control distorts patterns.

“This order will not be an exception. The unavoidable response of a company that is forced to sell below cost is that it has to cut its business volume to minimize losses,” Bermudez said, adding that as the chain scaled down, supply gradually disappears.

Challenge to government

He told The Times that the government must “look at the entire gaps and the root cause of the problem” and not just resort to immediate solution.

“Maybe we are too in a hurry to make deregulation works. Oil is too valuable to be disappeared in the market,” Bermudez said.

He maintained that if the government catches profiteering, it could isolate and punish the wrongdoers while allowing law-abiding businesses to go about their work without being demonized.

He added that if government catches firms hoarding supplies, they too should be punished—stressing that price controls would be harmful.

Bermudez said that in countries where prices were kept artificially low, it was the government that subsidized the products.

“Private companies should not be made to subsidies their products. These are the same investors that government invited into the country with assurance of stability and protection under the law,” he added.

Bermudez also told The Times that in the end, the objective of keeping prices low was defeated and that restoring normalcy to the market was then “protracted and painful in process.”

Major oil companies earlier said that they would follow Executive Order 839 but warned of a possible supply shortage.

Palace unfazed

Press Secretary Cerge Remonde had said that the government was “not surprised” by the warning of an oil shortage made by the oil companies.

He stressed that the government was unfazed by the warning, and it would use every power vested by law even under the deregulation law to put everything in order.

It was not forgetting its commitment to ensure a deregulated environment for the oil sector under the law, he added.

As to how long the government would maintain the state of calamity, Remonde said that it would depend on studies and evaluations made by the National Disaster Coordinating Council (NDCC) and other agencies.

Harmful in the long run

But earlier, former Budget Secretary Benjamin Diokno said that Executive Order 839 could hurt the economy in the long run as it would send wrong signal to potential foreign investors. In the short run, according to him, an oil shortage in Luzon, including Metro Manila, was “likely.”

He added that the potential investors were going to be “discouraged to invest in the country, seeing how shabbily the government has treated those oil firms who were enticed to come in when the oil industry was deregulated.”

At The Times roundtable, Bermudez said, “For all we know baka wala naman umaabuso [maybe no one is really abusing the situation]. Baka [maybe] there are really fundamentals reason why prices are like that.”

Meanwhile, the National Economic and Development Authority (NEDA) had reported that oil prices were rising because of the weak dollar, higher demand attributed to the global recovery, the early arrival of cold weather in the US and “stunning records for cold” across the United States, and great demand for oil in China, the Middle East, India and South America.

Acting Socioeconomic Planning Secretary Augusto Santos had said that the 2010 oil outlook of the International Monetary Fund (IMF) was that “it will become more volatile and fuel prices are seen to rise.”

Santos added that Dubai oil prices, the benchmark used in the Philippines, were expected to hit $80 per barrel in early 2010.

President Gloria Arroyo earlier issued Executive Order 839 that required local oil companies to revert to their October 15 price levels.

Executive Order 839 invoked the Downstream Oil Industry Deregulation Act of 1998, which gives the Department of Energy the authority to take over or direct the operations of any person or entity in the industry in times of national emergency, when required by public interest and other reasonable terms and conditions. –Lailany P. Gomez, Reporter, Manila Times