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Vol. IV,  No. 32                               September 12-18, 2004                      Quezon City, Philippines


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Nationalizing the Oil Industry is Tough, But…

Despite countless increases in oil prices, why does the Macapagal-Arroyo administration still insist that deregulation of the downstream oil industry is working for the people’s interest?


Government officials see nothing wrong with the deregulated regime. In the past, they argued that world crude prices are increasing and absolutely nothing can be done about it or stop oil price hikes. Energy Secretary Vince Perez even stressed that due to deregulation, “the government can only appeal to oil firms.”

Government executives even thanked selected oil firms for imposing increases in small increments so that the people will not immediately feel the full impact of oil price hikes. Media projected oil firms as benevolent when they delayed oil price increases particularly during the election campaign, thereby allegedly absorbing losses in the process.

Arguing that the deregulated regime is part of its sound macroeconomic fundamentals, the Macapagal-Arroyo administration has swept under the rug the demand for the repeal of Republic Act No. 8479 (Downstream Oil Deregulation Act of 1998) which will revert the downstream oil industry to a regulated regime.

At this point, it is important to review the circumstances behind the regulation of the downstream oil industry in the 1970s. By analyzing the past, one would know the reasons behind the regulation of the downstream oil industry and the basis for the present demand to nationalize the downstream oil industry.

Reviewing the 1970s downstream oil shocks

The international oil crisis in the early 1970s prompted the then Marcos administration to regulate the Philippine oil industry. Studies showed that world crude oil prices increased by as much as 1,700 percent at that time.

The Philippine National Oil Company (PNOC) was established in 1973 to ensure adequate and continuous supply of oil, as well as break the foreign companies’ control of the oil industry. The PNOC later established Petron Corporation as its marketing arm.

Another major policy measure adopted in the 1970s was the creation of the Oil Industry Commission (OIC) to oversee the industry and stabilize oil prices. (In 1987, the Energy Regulatory Board replaced the OIC.)

The Oil Price Stabilization Fund (OPSF) was created in October 1984 through Presidential Decree No. 1956. Its objective was to cushion the effects of frequent changes in the price of oil caused by exchange rate adjustments or increase in the world market prices of crude oil and imported petroleum products.

According to its operations manual, the OPSF “absorbs the roller coaster effects of the world crude and petroleum products prices and the Peso/US Dollar exchange rate into the domestic petroleum products prices. In this way, it effectively addresses one of its primary purposes of minimizing the frequent price changes in the local market resulting from volatile world market conditions and the fluctuations of peso/dollar parity. Likewise, when it has a very healthy balance, it also assumes drastic upward price adjustments without affecting the pump prices or the consumers.”

The period of regulation required the oil companies — which, by 1985, only numbered three (i.e., Petron, Shell and Caltex) —to petition the ERB in order to increase oil prices. The ERB was required to conduct public hearings to determine the validity of price adjustments.

Calls to deregulate

As early as the late 1980s, oil companies called on government to deregulate the oil industry. According to then Shell President Reiner Willems, “(Under deregulation) it will be easier to make business decisions, and there will be less politics.”

Prof. Benjamin Diokno of the UP School of Economics, however, stressed in a 1995 study that the plan to deregulate had to be aborted in 1990 due to the uncertainties brought about by Iraq’s invasion of Kuwait at that time, as well as the precarious dollar reserves level.

In 1992, Republic Act No. 7638 that created the Department of Energy (DoE) was signed into law. According to this law’s Sec. 5(b), the thrust was toward privatization of government agencies related to energy, deregulation of the power and energy industry and reduction of dependency on oil-fired plants.

In the process, Sec. 5(e) required the DoE to come up with a “timetable of deregulation of appropriate energy projects and activities of the energy industry.” According to the action plan of the DoE, the skills training of its staff in preparation for a deregulated oil industry started as early as 1993.

Consistent with RA No. 7638, Petron Corporation was privatized in 1993. The PNOC sold 40 percent of its equity in Petron to the Arabian American Oil Company (ARAMCO) on December 16 of that year. At the same time, 20 percent of Petron’s equity was sold to the public through an initial public offering (IPO).

The deregulation of the downstream oil industry happened during the Ramos administration after it was made a condition by the International Monetary Fund’s (IMF) structural adjustment program. Republic Act No. 8180 was took effect in April 1996 but was declared unconstitutional by the Supreme Court in November 1997. The second downstream oil deregulation law (RA No. 8479) was therefore passed in February 1998.

Nationalization qualitatively different from 1970s regulation

Eight years after the deregulation of the downstream oil industry, Willems’ wish apparently came true as prices of petroleum products became depoliticized. For instance, prices of socially sensitive products like diesel, kerosene and liquefied petroleum gas (LPG) were subjected to market forces.

In taking a stand for nationalization, various cause-oriented groups and individuals argue that this can reverse the depoliticized price setting of petroleum products by having instead a regulated pricing mechanism. In other words, price controls will be a major feature of the nationalized regime.

What makes the nationalized regime, however, qualitatively different from the past regulated regime is the institution of the following policies: (1) centralized procurement of all imported crude oil and refined petroleum products; (2) commodity swaps through bilateral agreements; (3) abolition of specific taxes on petroleum products; (4) imposition of higher tariffs on imported crude oil and refined petroleum products; and (5) aggressive development of alternative sources of energy.

As in the past, a buffer fund will still be established to stabilize prices of petroleum products. Its use, however, shall be solely for this purpose unlike in the case of the OPSF where the latter’s funds were spent for initiatives beyond oil price stabilization like disaster relief and rehabilitation and the bailout of a mismanaged government-owned and controlled corporation.

Through these policies under a nationalized regime, consumers would not feel the impact of sudden fluctuations in world crude prices. Measures like centralized procurement and commodity swaps would make the government a more active player in the downstream oil industry. The poor in particular may also find prices of socially sensitive products more affordable since these could be even sold at subsidized rates. More importantly, the downstream oil industry would get integrated to the thrust towards economic development.

Indeed, there is an urgent need to nationalize the downstream oil industry, as the failure of the deregulated regime becomes apparent due to runaway prices of petroleum products.

The question at this point is: Does the Macapagal-Arroyo administration have the political will to turn its back on globalization, which is what nationalization requires? Bulatlat

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