Oil Price

July 31, 2008

Prices & Profits
By Marlon Tan
28 July 2008 - 10:04

 

 

The upward movements in local prices of petroleum products have again brought the spotlight on the alleged “excessive” profits of the major oil companies operating in the country.

 

Suddenly, everyone and his brother have began vilifying the major oil companies (in particular, Petron and Shell) for their excessive profits.

 

These accusations have ranged from Congressman Teddy Casiño’s (quoting Ibon Foundation’s “study”) allegations that the oil companies have “overpriced” their products by PHP 12 per liter; to Congressman Eduardo Gullas’ accusation that Petron and Shell have cumulatively earned Php66.87 billion in the 10 years under a deregulated environment, broken down into Php33.59 billion for Petron and Php35.18 billion for Shell; to Congressman Roilo Golez’s demand that the oil companies’ books be audited by the Commission on Audit.

 

Curiously, a careful look at Ibon’s web site does not show the overpricing report, much less the methodology by which it arrived at its allegation that petroleum products are indeed overpriced.

 

Congressman Gullas—one of the few “thinking” members of the House—on the other hand merely did a straight line calculation of the oil refiners’ net income after tax beginning 1998—the deregulation of the downstream oil industry.

 

To the ordinary Filipinos, particularly those who make less than the mandated daily minimum wage, the word “billion” is plainly unimaginable. It likewise seems unimaginable for a company to make billions of pesos in net profits, let alone lose billions of pesos due to market conditions. The fallacious conclusion, therefore, is that the oil companies must be colluding!

 

To illustrate, during one of the stockholder’s meetings of Petron Corporation, one stockholder demanded (arrogantly at that!) why the company booked approximately Php300 million in interest expenses. This stockholder stopped short of accusing Petron’s management of mismanagement.

 

However, oil companies borrow money to purchase their crude importations. With crude oil running then running about US$35 per barrel, it was indeed unthinkable to this fellow why the company had expended Php300 million for interest payments alone!

 

But let’s look at the math:

$ 35/barrel (2004 average, Dubai Crude)

x 30,000 barrels for 1 shipment

——————

$ 990,050,000

x 56 pesos (2004 price) per US$1

——————

55.44 billion pesos, and that’s for just 1 shipment!

 

No wonder Petron had to borrow money and expend about Php300 million for interest! Of course, the stockholder had no choice but to shut up!

 

Going back to the alleged Php12 per liter overprice according to Ibon—show the math!

 

Seemingly overlooked by both the media and policymakers is the recent study commissioned by the Department of Energy (DOE) and undertaken by economics professor Peter Lee U of the University of Asia and the Pacific (UA&P) and the accounting/auditing firm Sycip, Gorres & Velayo (SGV).

 

Posted in the DOE web site, the UA&P-SGV study found that contrary to the claims of overpricing, the oil companies have performed miserably in a deregulated environment, vis-à-vis a regulated environment:

PRICE BUILDUP – UNLEADED GASOLINE

PRICE BUILDUP – DIESEL

PRICE BUILDUP – LIQUEFIED PETROLEUM GAS (11 KG CYLINDER)

But should net income after tax be the correct benchmark for a firm’s profitability, as Gullas would want us to believe?

 

The respective results of the UA&P-SGV study, and the study conducted by the Independent Review Committee (IRC) on the Oil Deregulation Law formed by the DOE, say otherwise.

 

The IRC, chaired by former ERC Commissioner Carlos Alindada found in its report that Petron’s and Shell’s average return on equity (ROE) from 1998 to 2004 can be summarized as:

Petron – 3.69%

Shell – 3%

 

On the other hand, the UA&P-SGV study found that over a five-year period (2002-2007), Petron and Shell’s respective returns on equity were:

Petron – 4.81%

Shell – 7.43%

 

These numbers validate the perception that Saudi Aramco sold its 40% in Petron to the Ashmore group because the Aramco investment did not generate the returns that they had initially counted on. (Please see our column, “Pulling Out of Petron”)

 

In an attempt not to be outdone by his colleagues, Congressman Roilo Golez stated that the oil companies, by moving in unison, are cartelized, particularly since their price movements are the same, and despite their different costs, their prices are similar.

 

Uniform pricing = a cartel?

 

Hmm….maybe the good members of Congress should step out of the confines of their newly-renovated offices and visit the sari-sari stores, where they will find that prices of products in these stores, whether they are soft drinks, cigarettes, or the prepaid call cards, are the same.

 

Following Golez’s logic, these sari-sari stores are also members of a cartel.

Or perhaps the good congressman should endeavor to check prices of cell phones (such as the E90 Nokia Communicator) by strolling down the mall and comparing the price of that specific phone among the different stores in the mall. He will find that the price among the stores for that particular phone won’t vary significantly and are practically the same.

 

Thereafter, he should charge these sari-sari and cell phone stores with combinations in restraint of trade under Article 186 of the Revised Penal Code.

 

The Alindada panel had this to say about the issue of “Why do oil companies seem to raise prices at the same time?” :

 

“When products are interchangeable, when market share is the ‘name of the game,’ and competition is in full swing, we should not be surprised, but rather expect, that oil companies’ prices will seem to rise and fall at the same time.”

 

Better yet, perhaps the good congressmen (Messrs. Casiño, Gullas and Golez) or for that matter, all senators and congressmen should first read the UA&P-SGV study, as well Peter Lee U’s paper, “Competition Policy for the Philippine Downstream Oil Industry”, so they could be educated in the subject before they begin opening their mouths and pandering to the emotions of an already confused public.

 

On Golez’s proposal that the oil firms’ books be audited by the Commission on Audit, is there a legal basis for this move? Isn’t the UA&P-SGV study commissioned by the DOE not good enough for the congressman?

 

Or if these good congressmen are quite serious about what they have been proselytizing lately, they shouldn’t hide behind their being legislators and file the appropriate case before the DOE-DOJ Task Force instead of filing resolutions in aid of investigation or trying to generate publicity for themselves.

 

Let us not wait for another investor to pull out of the downstream oil industry, as what the Saudis already did.

 

As Americans bluntly put it, “Loose lips sink ships”!

 

 

*Source: http://www.thelobbyist.biz