Centralized Procurement of Imported Oil: A Doable Alternative to Reduce Prices

Supply contracts

As an importer, the government does not have to impose a tariff or duty on its own oil imports even as it continues to charge such tax on private importers (i.e. prior to full centralized procurement). With the government as a major (and eventually exclusive) importer of oil and a leading refiner and distributor (through a 100 percent state-owned Petron) at the same time, ordinary consumers as well as industrial users of petroleum will be assured of a more reasonable price of oil. This will also give the minor Filipino oil firms the leverage they need to be able to effectively vie for the local market against the transnational corporations (TNCs). Meanwhile, the country will be able to diversify its import sources considering that at present, two countries– Saudi Arabia and Iran– already account for more than 85 percent of total crude oil imports that endangers our oil supply security.

In addition, the government can utilize various means of procuring imported petroleum unlike the current system wherein the local units of TNCs are being supplied by their own mother units therefore making oil artificially expensive through transfer pricing (i.e. the practice of bloating the price of a product as it is being transferred from one unit to another unit of the same TNC until it reaches the end-consumer). PNOC, for instance, can bid out supply contracts to prospective exporters of crude oil and refined petroleum products, particularly to state-owned oil companies from oil-producing countries, to be able to purchase the cheapest petroleum.

However, when looking for potential suppliers, the Philippine government must be cautious in dealing with these state-owned companies since some of them have strategic linkages with the oil TNCs and therefore collaborate with them. Saudi Aramco, which controls 40 percent of Petron, for instance, has refining and distribution arrangements with oil giants Royal Dutch Shell and Exxon Mobil. Priority must be given to state-owned companies that oil TNCs have relatively less influence such as the PDVSA of Venezuela.

Non-traditional trade

Another option is for the Philippine government to pursue a bilateral agreement with the national government of oil-producing countries. As an official pact between sovereign states, the Philippines can push for special terms in exchange for equally favorable concessions to the exporting country. One example that the national government must seriously study is the bilateral deal between Venezuela and Cuba where the former supplies the latter with 100,000 barrels a day of subsidized oil. In return, Venezuela receives medical help from more than 17,000 Cuban doctors and dentists stationed in Venezuela.

Further, PNOC can also consider a system of commodity swap, which is a trade practice where parties involve swap products instead of buying each other’s exports with foreign exchange. The Philippines can consider this scheme in order to minimize the impact of the fluctuations in the US dollar and peso exchange rate on the price of oil and to reduce the pressure of high global oil prices on the country’s dollar reserves.

At present, of the 16 biggest crude oil exporters in the world, the Philippines sources its crude oil imports from seven countries but five of them only account for 14 percent while the rest come from Saudi Arabia (51 percent) and Iran (35 percent). On the other hand, the country exported a total value of $3.1 billion to 11 of these countries, but with Malaysia alone covering more than 80 percent of the amount. The country has no trade relations (for petroleum or other commodities) with major crude oil exporting countries Algeria, Iraq, Libya, and Kazakhstan which have a combined export capacity of 5.6 million barrels per day.

The main imports of these countries include agriculture, food and consumer goods, which the Philippine government has already been promoting for exports. All this shows that the country has a lot of trade opportunities to explore if it would look for possible commodity swap partners. Aside from commodity swap, the government can also negotiate for a bilateral agreement wherein the country would purchase petroleum imports using the Philippine peso, which the oil exporting country can use in the future to pay for their imports from the Philippines. The Department of Trade and Industry (DTI) may be tasked to conduct studies on which petroleum exporting countries would such arrangements be most feasible.

Other reform measures

Centralized procurement of imported oil should be complemented by other important reform measures that will give the government more authority to intervene in the oil industry so as to make certain that the people have a secure supply of reasonably priced petroleum. De-privatizing Petron, improving the local refining capacity, establishing a buffer fund, and strictly regulating pump price adjustments are some of the urgent reforms that the industry needs today to cushion the impact of frequent and drastic oil price hikes on the economy and the people. Parallel to the efforts to regulate the downstream oil industry should be efforts to institute important policy changes in the upstream level of the industry. The Service Contract system, like the Malampaya project, should be abolished and replaced with a system that will uphold the constitutional guarantee of full State control and supervision of the country’s petroleum resources for the sake of national interest.

But these reforms should not substitute for the strategic objective to nationalize the entire oil industry. Oil is too important a commodity that any government seriously pushing for industrialization cannot risk to completely put in the hands of foreign corporations whose preoccupation is to profit without regard to the overall economic development of the country. To achieve this, a major overhaul of the national economic framework that is too dependent on foreign technology and capital, must first be initiated. In the meantime, the executive and legislative branches of the government have the doable option to regulate the various aspects of the industry, through centralized procurement and other reforms, even as it allows the participation of foreign corporations. Ibon Features/Posted by Bulatlat

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