Oil prices reasonable, review committee says

Is oil in the Philippines truly overpriced?

Not so, says the Independent Oil Price Review Committee, as it said Wednesday that it found no evidence that oil firms have been making excess profits.

In a press briefing, committee chairman Benjamin Diokno said the committee's study on oil prices found that local pump prices are more responsive to changes in global oil prices than before oil deregulation.

The committee found, however, that oil companies "changed prices by slightly less during episodes of world price decreases between July 2010 and June 2012." It said the Department of Energy should look into that but that it found no evidence of overpricing.

The IOPRC also found that oil firms are earning less than before deregulation. The average profit margin is around 5.4 percent, Diokno said.

The return on equity (ROE)--or how much profit a company makes from money invested by shareholders--for oil is around 13 percent against 23 percent before deregulation. This is lower than the ROE for the telecommunications, power, gaming, and mining industries, Diokno said. The ROE for oil is only higher than in real estate.

"The oil company gross margin for gasoline during the regulated periods were much larger than that during the deregulated period," Diokno added. The IOPRC attributed this to the level of competition brought about by oil deregulation.

Engineer Marcial Ocampo, a member of the committee, said that based on historical data and considering the insurance, freight costs, customs, and taxes that companies pay for oil, the gross margin, which covers internal costs and includes profit, for oil firms was not excessive. "Hindi siya malaki," he said.

The committee also said deregulation has been working, citing a bigger market share by independent oil firms. Independent oil companies had a market share of 25.7 percent in 2011 against none at all in 1998.

The number of retail stations has also grown to 4,500 by 2011 against 3,500 in 2000. Around 800 of those stations are operated by independent oil companies against just 270 in 2000.

"Competition results in lower oil product prices. Pump prices are lower where there are more retail stations," IOPRC said.

Three approaches

The committee used three approaches to check for over-pricing. It used regression analysis to check how well local pump prices tracked world oil prices. That was then compared to the movement of local pump prices in Thailand because, Diokno explained, it is in a similar situation with the Philippines.

Pump prices would have been unreasonable if they did not match the movement of world oil prices and if "the movement of local prices are extraordinary compared to a closely-situated country."

It also checked the financial information of oil companies and used project financial modeling to determine rates of return, IOPRC said. These were then compared to the rates of return in other industries and of government bonds.

Had the rates of return been much higher for the oil industry than in other industries, this would have indicated unreasonable profit, the committee said.

The study also made a predictive model of unleaded and diesel pricing that factored in Mean of Platts Singapore pricing and the fees and taxes paid on oil products. "Unreasonable prices here will be manifested in much higher actual prices than those predicted by the model," the committee said.

"We used different approaches. Lahat magkaiba at nakita namin isa lang ang naging recommendation and findings namin," Dexter Ortega, an accountant and a member of the committee, said.

Asked why oil firms seem to raise and lower prices at the same time and by the same amount, University of Asia and the Pacific economist Victor Abola said this is a function of competition.

"Pag-nagbaba ang isa, sasabayan talaga nila," he said, adding that does not mean automatically mean oil firms are colluding on prices.

"Kung lahat nagtaas ng piso, tapos ikaw nagtaas ng P1.10, mawawalan ka ng business. Di ka naman puwede magbaba ng sobra kasi malulugi ka," Diokno, an economist and former Budget secretary explained.