Sky high oil prices and full-blown Iran war:

Is the Arroyo Regime Up to the Challenge?

A significant portion of RP's crude oil comes from Iran, thus a war in Iran becomes a very serious problem for the country. But the crucial question is whether the beleaguered Arroyo regime is capable of keeping pump prices at a manageable level in the face of an actual disruption in global crude oil supply.

BY ARNOLD PADILLA

IBON Features

Posted by Bulatlat

Consider these facts. The Philippines imports almost four out of every ten barrels of its crude oil requirements from Iran. When Iran last went to war during the 1978 to 1980 period (civil war and war against Iraq), the average gross supply shortfall reached 3.3 to 3.5 million barrels per day (MBD), the largest volume in the history of global oil supply disruption.

Meanwhile, the price of Dubai crude oil jumped by 174 percent within three years, and the local pump price of regular gasoline increased by 174 percent; premium gasoline, 160 percent; LPG, 113 percent and; diesel, 40 percent. And to think that there was a "semblance of regulation" during those years, unlike today when oil companies can automatically adjust pump prices.

Thus, one could not help to ask: Is the Philippines prepared in case the US-Iran standoff escalates into a full-blown war?

The biggest challenge obviously is how to keep pump prices at a manageable level in the face of an actual disruption in global crude oil supply. If a significant portion of the country's crude oil comes from Iran, then a war in Iran becomes a very serious problem for the Philippines which imports almost 100 percent of its petroleum needs.

To have an idea of how much an actual war in Iran and a real supply disruption would affect the country, just look at how global and local prices have been moving recently due to widespread speculation caused by uncertainties in the Middle East.

US President George Bush's threats alone of invading Iran have sent the spot price of Dubai crude oil streaking from $53.2 per barrel in December 2005 to $62.6 in April (3-18 average) 2006. In the last four months, the prevailing pump price of diesel has increased by P2.58 per liter and the various gasoline products by P1.63 to P1.77.

What more if Bush makes good of his threats? Is the embattled Arroyo regime up to the task?

Lacks urgency and boldness

If the response of the Arroyo government to the recent developments in the world oil market is any indication, then Filipinos indeed should brace for the worst. With its deregulation policy, government has left the people and the economy at the mercy of profit-hungry oil companies led by the Big Three and the so-called market forces. As Department of Energy (DOE) Secretary Raphael Lotilla said, let us all just hope that the high oil prices due to the brewing tension in Iran is a "temporary phenomenon." 

Malacañang has prepared a set of measures to mitigate the impact of high oil prices in case it persists in the coming months. But a closer look shows that this package of measures lacks the urgency and boldness needed to moderate the harsh effects on the national economy and the people of a drastic increase in oil prices.

Among the measures that government is looking at are the ethanol and coco-diesel program, expanding the number of gas stations that offer a P1 per liter discount on diesel, and promoting the use of liquefied petroleum gas (LPG) for taxis and compressed natural gas (CNG) for other transport vehicles. Unfortunately, these measures do not guarantee substantial protection from steep increases in oil prices.

First, the ethanol and coco-diesel program is still at the initial stages of implementation and could hardly be considered an alternative to existing oil products in terms of supply availability and price competitiveness. Even the full implementation of the coco-diesel program would displace 977,000 liters of diesel imports a year, which is only about 0.03 percent of the country's total diesel imports of 3.25 billion liters in 2004. Similarly, the full implementation of the ethanol program would displace 236 million liters of gasoline per year, which is only about 12 percent of the country's total gasoline imports of 1.89 billion liters.

Second, even if the DOE doubles the current number of gas stations offering the diesel discount, there would be only 732 gas stations offering such discount while more than 3,140 gas stations all over the country sell diesel at its regular (high) price. In addition, the P1 discount being given by selected gas stations no longer makes a dent on oil prices given the escalating prices since last year. Between January 2005 and April 2006, the prevailing pump price of diesel has already jumped by around P10.39 per liter.

Third, it will take a couple of years to fully implement and feel the benefits of vehicles running on LPG or CNG instead of the traditional transport fuel. In fact, the public transport component of the Malampaya natural gas project is still at the feasibility stage which would last until 2010. And while 427 vehicles (108 in Metro Manila and 329 in Cebu City) are now using LPG as fuel, the uncontrolled increase in its retail prices puts in serious risk the viability of the program. In the last 16 months, prevailing pump price of LPG has already increased by P3.03 per liter.

These measures may bring limited benefits in the future but the most urgent problem today is that the price of oil may get too high and there are no mechanisms in place to control it. More urgent and bolder measures, like repealing the deregulation law, are clearly needed.

Foreign control

The absence of effective state control over the oil industry, even during the years before Republic Act (RA) 8479 or the Downstream Oil Deregulation Act of 1998 was passed but more so when it was implemented, explains why the Philippines is highly vulnerable to external oil price shocks.

The oil insecurity and exorbitant prices in the Philippines, which are heightened during global oil supply disruptions, stem from foreign monopoly control over the oil industry. The country has been unable to diversify its sources of oil and significantly reduce the cost of petroleum because transnational corporations (TNCs) like Shell, Caltex, Petron, and Total (that together control more than 90 percent of the local market) import oil from their own partners abroad.

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). 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.

Venezuela and Cuba have an arrangement where the former supplies the latter with 100,000 barrels a day of subsidized oil and in return, the former receives medical help from more than 17,000 Cuban doctors and dentists stationed in Venezuela. Without effective state control, the Philippines could not pursue similar government-to-government deals with Venezuela or other oil producing countries.

Drastic reforms

To correct this, IBON has been advocating for the repeal of RA 8479 to pave the way for measures like centralized procurement of imported oil (government is the sole importer of crude and refined oil), commodity swap (similar to Venezuela – Cuba oil deal), active state involvement in refining and retailing (reclaiming Petron), and price control (i.e., public consultation instead of automatic price adjustments; buffer fund to cushion sudden price surges).

Government should also exercise effective control over the exploration, development, and utilization of domestic petroleum resources like Malampaya. To effectively face a crisis like the impending Iran war, government could not afford to allow foreign companies to export our petroleum while we pay higher for imported oil like what Shell and Chevron Texaco (owner of Caltex) did in Malampaya.

Immediate measures

While the implementation of these reforms is ongoing, government must declare a suspension on further oil price hikes, order a rollback in prices, and reverse the regressive 12 percent value added tax (VAT) on oil products.

Suspension of oil price increases and a rollback are possible because monopoly control (and worsened by deregulation) has artificially bloated the price of oil. The pump price of diesel, for instance, has been overpriced by P4.99 per liter from 2000 to 2005. This estimate assumes that the world market reflects the true cost of oil, which is not possible because the global oil cartel dictates the price. Based on our estimated true cost of Dubai crude oil, for example, current diesel prices may have been overpriced by P16-17 per liter.

Without the VAT, the total increase in the pump price of diesel in the first four months of the year could drop by 78 centavos per liter; premium gasoline, 77 centavos; regular gasoline, 72 centavos; kerosene, 80 centavos; and liquefied petroleum gas (LPG), 16 centavos. Instead of the regressive VAT, IBON proposes an improved progressive system of specific tax wherein socially sensitive oil products diesel, LPG, and kerosene are exempted.

Crucial question

But the crucial question now is whether the regime of President Gloria Arroyo, which is facing a serious political crisis, is capable of implementing these immediate and medium-term measures.

The track record of Arroyo shows that the current government will not abandon its pro-market, pro-deregulation stance. In fact, the Malacañang-endorsed charter change wants 100 percent foreign control (as opposed to the current 40 percent) over Malampaya and other petroleum exploration, development, and utilization projects.

A mishandling of the Iran crisis and issue of oil prices would further fan social unrest and political instability. Coupled with unresolved questions on the legitimacy of Arroyo, the socioeconomic impact of more oil price hikes in the coming months on an economy already battered by high prices, joblessness, hunger and poverty would make more people realize the urgent need for a change in leadership. IBON Features / Posted by Bulatlat

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