Is there an oil cartel in the Philippines?

Did you notice the so-called clamor to revisit the Oil Deregulation Law follows a cyclical pattern. It gets very loud at a time of rising international oil prices, and dies down when these prices decrease. So let us try to put to rest once and for all the issues that have to do with oil prices, such as: is there a cartel in the Philippine oil industry? Are the prices charged by these companies higher than what they should be charging, or higher than the prices that would have been charged under a regulated regime? Are the oil companies making excess or monopoly profits?

Actually, these questions were addressed as early as 2005 (when oil prices were rising, and the clamor was loud) by an Independent Review Commission formed by the Department of Energy and headed by former SGV head Carlos Alindada, with members from the labor sector, transport sector, private sector, academic sector, and the petroleum dealers association. Their study was updated in 2008, with the commission being headed by Peter Lee of the University of Asia and the Pacific. Let's look at these issues one by one. First, about cartels. A cartel is a combination of firms or nations designed to limit competition or fix prices. There is a cartel in the oil industry, the cartel known as the Organization of Petroleum Exporting Countries or OPEC, who try to influence prices by setting production quotas, thus influencing the supply side of the international oil market but a cartel in the Philippines is another matter altogether. The Alindada commission found no evidence of a price cartel. Then why are the prices of the three oil companies very close, if not identical, to each other, one may ask. The answer is quite simple: in the same way that the prices of firms operating under conditions of pure competition are the same, the oil companies cannot afford to have prices very different from each other. If one firm's prices are higher than the others, it starts to lose market share, and therefore has to move its prices back down in order to survive. But the point is thanks to oil deregulation law even if the Big 3 oil companies in the Philippines wanted to conspire to set prices, they will not succeed – because the moment their prices are out of line with international oil prices plus transport cost to bring to the Philippines, the smaller firms (there are now about 80 of them in the industry) will jump at the opportunity to import the petroleum products and undersell the Big 3. In other words, while the Big 3 oil companies account for about 90 percent of the Philippine market, that market is contestable – because the Oil Deregulation Law, which made the entry of the 80 firms possible in the first place, also allows the importation of petroleum products –ready to compete with the Big 3. Which brings us to the second question: Are the prices being charged by the Big 3 higher than they should be? The National Economic and Development Authority or NEDA presented a paper that asserted that based on historical data from February 2005, and interpolating it to the present, there may be a P6.00-P8.00 per liter overprice as of April 2009. But it turns out that its assumptions were too stringent – failing to take into account of other factors. Apparently the introduction of bio-fuels adds something like P1.00 per liter to the pump price of gasoline, and the use of double-hull ships adds another peso. Plus, pump prices used in the base year were reflecting the international crude oil prices of the previous month, rather than the current month. By the way, according to the DOE, Philippine pump prices are cheaper than most Asian countries who are also importing oil. Go figure. And again, the final test: if the big oil companies were overpricing, the smaller players would have had a field day bringing in imports, underselling the big players, and making huge profits. This did not happen. It is not deregulation that has caused the price increases, but the increases in the international crude oil prices, as well as currency depreciation. And finally, aren’t the large profits of the oil companies an indication that they are charging excessive prices? Well, “large” is a relative thing. Put it this way: If a company had profits of P500 million, that sounds like enormous profits. But if you factor in the information that the company's equity, or its “puhunan,” was P50 billion, that changes the picture entirely. Because now you find that the rate of return on equity is only 1 percent –which means that if the company had just put its money in the bank, it could have earned much more than that. It turns out that, and this according to the Independent Review Commissions, between 1998 and 2008, the oil companies made average returns 5 percent on equity. Bottom line: there is no basis for the suspicion of cartels, overpricing, and excess profits. If anything, deregulation and making the Philippine oil market contestable, seems to be working. The system isn't broken. It does not need to be fixed.