This story
was taken from Bulatlat, the Philippines's alternative weekly
newsmagazine (www.bulatlat.com, www.bulatlat.net, www.bulatlat.org).
Vol. V, No. 38, October 30-November 5,, 2005
Centralized
Procurement of Imported Oil: A Doable Alternative to Reduce Prices
One of Ibon’s proposals is a
system of centralized procurement of imported crude oil and refined oil
products, a necessary step to ensure the steady supply of reasonably priced
petroleum in the country.
By Arnold Padilla It has now become obvious
that the Arroyo administration does not have a credible program to lessen the
impact of high oil prices on the domestic economy and the people's livelihood.
Pump prices continue to soar in spite of the downward trend in the price of
Dubai crude and improvement in the foreign exchange in August to October. Worse,
the government will impose the value added tax (VAT) on petroleum products
starting November that will further push up the pump prices. The much-publicized
energy conservation program of the Department of Energy (DOE) has failed to
bring immediate relief for the public since the most urgent problem is not the
over-consumption of oil but the exorbitant price. Independent think-tank Ibon
Foundation has been staunchly advocating for the repeal of Republic Act (RA)
8479 or the Downstream Oil Industry Deregulation Act of 1998 to allow the
government to control and regulate the activities of the oil companies operating
in the Philippines. One of our proposals is the implementation of a system of
centralized procurement of imported crude oil and petroleum products to minimize
the effects of the cartel operation of big foreign oil companies on prices.
Counter-cartel Almost 9 out of every 10
liters of oil sold in the Philippine market come from the Big Three, a group of
companies that have their own oil fields abroad as well as their own global
network of pipelines, tankers, depots, refineries and retail stations. Such
commanding position has allowed Shell, Caltex and Petron to impose exorbitant
prices on the domestic oil market. Deregulation, or the lack of substantial
government intervention in the oil industry, has given these companies more room
to manipulate the price of petroleum at the expense of the consumers and the
economy. A system of centralized procurement of imported crude oil and refined
oil products is therefore necessary to ensure the steady supply of reasonably
priced petroleum in the country. Under centralized
procurement, the Philippine National Oil Company (PNOC) becomes the sole
importer of crude oil and refined petroleum products, which refiners and
retailers operating in the country will have to purchase from. Consequently,
PNOC must have substantial control over the country's oil storage facilities.
There are around 119 oil depots nationwide, and PNOC can at first control the
most strategic among these storage facilities such as the Subic Bay terminal
(the largest in the country with a storage capacity of 3 million barrels), which
at present is being operated by a joint venture of US-based Coastal Corporation
and the Petroleum Authority of Thailand. At the same time, PNOC can also utilize
Petron's storage facilities and lease privately-owned depots to meet its storage
requirements. Gradual
centralization For example, under a
five-year program, PNOC would import on the first year a volume that is
equivalent to 20 percent of the country's total import volume in the previous
year. By the second year of its program, PNOC would import 40 percent of the
import volume in the preceding year and so forth until it reaches the 100
percent level by the fifth year. By the time PNOC is already procuring 100
percent of the previous year's volume, its imports may be higher or lower than
the actual need of the country. Under this situation, the surplus imports will
be stored as a buffer supply of PNOC in case of any shortage or extremely high
global prices, while it will have to withdraw from the said buffer and/or
increase its imports to bridge the gap between its imports and actual domestic
need. Based on the annual growth
average in volume (-2%) and value (18%) of oil imports from 1998 to 2004, Ibon
estimated that by 2006, under a gradual centralized procurement program spread
over a five-year period, the government would have to import 24.7 million
barrels of oil worth $1.2 billion. By 2010, the volume would reach 113.9 million
barrels (or 100 percent of the 2009's estimated total imports) worth around
$11.2 billion. The cost is expected to be lower as government negotiates for
special terms and arrangements with potential suppliers. The government can use its
earnings from Petron and the specific taxes imposed on petroleum products to
partly finance PNOC's centralized procurement activity. From 1998 to 2003,
collection from specific oil taxes averaged P24.9 billion while government's
earnings from its 40 percent-equity in Petron averaged P820 million during the
same period. Additional funds may also be sourced from royalties and taxes that
the government earns from petroleum exploration and production, and government
revenues from the corporate income tax being collected from the oil companies.
In Malampaya alone, for instance, the government is expected to earn $400-500
million a year in royalties. 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 © 2005 Bulatlat
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Ibon Features
Posted by Bulatlat