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Put fuel money where the mouth is

Department of Energy records show that the country’s end-users and consumers burn an average 62 million liters (equivalent to 388,000 barrels of raw crude) of various fuel products in a day. Diesel, traditionally tabbed as “fuel for the masses” accounts for the second biggest share at more than 31 percent – about 18.6 million liters daily -- of the fuels used up. Bunker fuel which costs two or three cents more than crude oil takes 36 percent of the nation’s daily fuel consumption with power plants using up as much as 30 percent to generate electricity.

Since the fuel of the masses runs jeepneys, buses, marginal fishermen’s boats, Benzes, Pajeros and the more recent makes of fuel-efficient cars, lawmakers whose hearts bleed for Filipino fuel users may opt to hack out a niche market in the fuel retail business and give Petron, Shell, Caltex, and 40 other new entrants in the oil industry a run for their money.

Now, such a huge number of competing firms also means a huge number of skilled people in their employ. The more participants there are in the downstream oil industry translates to more people employed; the more, the merrier.

Nothing prevents lawmakers, transport cooperatives or any group from setting up a giant trading entity to procure petroleum products from global sources. Likewise, nothing stands in the way of overseas fuel traders and refineries to sell their goods to local procurers. Fact is, the prevailing oil industry deregulation law (Republic Act 8479) allows any person or entity to buy crude oil or fuel products from any source, here or abroad. R.A. 8479’s Section 5 even provides that the buyer can sell the procured fuel products or use ‘em fuels for his own requirement. Lawmakers, in any case, can raise ample funds with which to buy fuel products for reselling at whatever they deem as consumer-friendly prices.

We may note that the Filipino taxpayer coughs up around P12 million to P15 million yearly to a lawmaker and his staff in salaries, perks and pork barrel allocations.

Now, take 100 lawmakers. Let ‘em earmark several millions each off their pork allocations and pool the monies together to buy the cheapest diesel anywhere in the world and put taxpayers’ money where the mouth is. They’ll have to put up a non-stock, non-profit foundation for this purpose. “Non-profit” is the operative word and here’s why.

For argument’s sake, let’s suspend the reality of added costs. Assume that our solons have procured finished diesel at a price equal to, say, the December 1999-January 2000 crude price of $24 per barrel. The three percent tariff would adjust the price to $24.72 a barrel. Based on the December foreign exchange level of P40.60 to the dollar, that’s about $0.16 or P6.50/liter. Again, assume this figure as landed cost which accounts for 2/3 of domestic pump price. Our solons may opt to tack the remaining 1/3 that represents other incurred costs (say, specific tax which makes up for 20 percent of diesel’s pump price) and tab a consumer-friendly retail price of P9.75 a liter.

If our lawmakers can -- under such aforementioned crude price, forex and tax conditions -- sell diesel at P9.75 a liter, they’ll corner the entire diesel segment of the fuels market in no time. Their operations will also go irreparably bankrupt.

In the last three months of 1999, Petron, Shell, Caltex and other industry players have been buying crude at $24 a barrel under a similar foreign exchange rate. With diesel pump price frozen since December at around P9.90 a liter, domestic oil firms are complaining that they have been losing between P0.93 to P1.40 for every liter. Unlike lawmakers, oil firms have to contend with the reality of costs incurred in churning out and selling refined fuel products.

A lawmaker claims that Singapore refineries can supply the Philippines with fuel products that are $3 cheaper per barrel than what Petron, Pilipinas Shell or Petron can churn out. Economies of scale can account for efficiencies in cost. The combined output of local refiners is about 380,000 barrels per day – a virtual drop in the bucket to the 1.3 million barrels per day yielded by Singapore refineries.

The difference in output volumes also translate to difference in costs incurred to produce a mix of fuel products. Horse sense and appreciation of volume discounts would likely view the cost differences (between Philippines and Singapore refiners) this way: buying my favorite smokes (Philip Morris) by the ream allows me to pay for only P19 per pack while the neighborhood store charges me P30 per pack…

Singapore refiners’ product yields also point to greater volumes of crude intake. Meaning, crude oil shipments to Singapore come in ultra-large tankers that will naturally correspond to cheaper transport costs; this results in cheaper crude landed cost. On the other hand, Philippine-bound crude carriers are of smaller capacities that entail higher per barrel freight costs – this translates to higher crude landed cost compared to Singapore’s.

Besides, if tanker capacities and procured crude volumes bound for Singapore and the Philippines were made equal, Singapore’s relative proximity to the world’s chief sources of crude in the Middle East would also entail lower shipment and crude landed costs than Manila’s.

Critics and detractors of the local oil industry also miss out on the cost advantage enjoyed by Singapore refiners. Singapore refineries don’t pay realty taxes; they don’t pay taxes and duties on materials, supplies and equipment that local refiners ordinarily pay.

Too, Singapore-based refineries pay much lower taxes. Lower business costs consequently translate to optimal prices for Singapore-refined fuel products. In comparison, the greater burden of costs saddled upon domestic fuels result in stiffer prices for local end-users and consumers.

By the way, Singapore ex-refinery prices are based on actual export sales of refined fuel products in the global market: Singapore refiners’ output are intended for the global market and are thus priced by export market forces. Singapore can peg relatively globally competitive price for its for-export fuels but its local consumers have to contend with domestic cost components like taxes, duties and marketing costs that add to the product’s retail price.

While the impending fuel price hikes will cause consumers to gnash their teeth and rail anew at local oil firms, a recent DoE study should provide a crude awakening. The DoE comparative study presented the cumulative price changes of fuel products in different Asia-Pacific countries from March to November 1999. Price figures were expressed in terms of pesos per liter and surprisingly showed that fuel prices in the Philippines are relatively the lowest in the Asia-Pacific region.

While the Philippines’ pump price for diesel is P9.55, the same fuel product fetches P31.44 in Hongkong, P12.04 in New Zealand, P12.71 in Singapore and P10.40 in Bangkok. Manila’s pump price of gasoline is P13.50 compared to P14.32 in Bangkok, P29.72 in Singapore, P21.29 in New Zealand, and P54.28 in Hongkong.

Malaysian pump price for gas is at an equivalent P11.61/liter with diesel at P6.87/liter. Diesel fetched P3.69/liter while gas was P6.60/liter in Indonesia. Both nations churn crude oil right in their backyards that allow lesser costs in producing refined fuels.

The increase in global crude costs will merely push these same figures by a few pesos and centavos more. Even so, our lawmakers will probably won’t appreciate the fact that Philippine pump prices will remain comparatively the cheapest throughout the region.


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