Reversing Oil Deregulation: Nationalization as an Urgent Necessity

Published on June 26, 2004

In the age of globalization, nationalization is seen as anathema to “development.” However, the current spate of oil price hikes warrants a re-examination of the concept of nationalization of the downstream oil industry to ensure affordability and accessibility of a very important product.

By DANILO ARAÑA ARAO
Bulatlat.com

The spate of oil price hikes can still be reversed, if only the administration will heed the call to enact policies that will ensure the affordability and accessibility of petroleum products.

According to the Department of Energy (DoE), the government is “steadfast in its position of…giving deregulation a chance, thereby letting market forces determine the fate of the (downstream oil) industry. Indeed, prices are higher than it was prior to deregulation, but considering present conditions it is fair and actually lower than is expected under a regulated environment.”

This implies that government is expected not to do anything to control prices of petroleum products, in the hope that a rollback will happen once international crude prices go down.

Presidential Spokesperson Ignacio Bunye stressed that right now, “dialogue, discipline, solidarity and sacrifice are needed so that common solutions can be found involving the broadest range of affected sectors.”

As it is, government officials even stress that the public should be thankful that oil industry is now deregulated, since the consumers have more choices as to where to buy their petroleum products.

Such arguments have been going on since 1996, and it is necessary at this point to review the events related to the deregulation of the downstream oil industry.

Reviewing deregulation

The deregulation of the downstream oil industry started in April 1996 through Republic Act (RA) No. 8180. However, the Supreme Court (SC) declared this law unconstitutional in November 1997. According to the SC justices, there were provisions that failed to promote free competition, such as the minimum inventory requirement for oil companies and the higher tariff on imported refined petroleum products (7 percent ad valorem tax) compared to imported crude oil (4 percent).

The high court likewise denounced the existence of a foreign oligopoly despite the entry of new industry players that belonged only to the “Lilliputian” league.

In February 1998, the Ramos administration approved RA 8479, the second law on downstream oil deregulation. An attempt was made to ask the SC again to nullify the law on the ground that there was only five-month transition period to full deregulation. This time, however, the SC dismissed the petition in December 1999, saying that the issue of oil deregulation is beyond its jurisdiction, among others.

According to the government, deregulation is necessary to depoliticize the pricing of petroleum products. Officials argue that the public must be acclimatized to frequent oil price changes based on the foreign exchange rate and world crude prices.

For them, competition among the oil companies will result in lower prices and better services. In the final analysis, the consumer will reportedly benefit due to increased choices.

Repudiating deregulation

The arguments for nationalization must be considered at this point when prices of petroleum products continue to increase, and as government officials claim that they cannot do anything to control the prices.

Unlike in a deregulated atmosphere, a nationalized regime undertakes price control which can minimize the impact of sudden price increases brought about by the peso devaluation and fluctuations in the prices of imported crude oil.

In the process, the domino effect of sudden price increases would be prevented. According to the government, results of its study show that the five heavily-affected sectors are products of petroleum and coal, food manufactures, land transport, trade, and electricity and water.

Market forces should not be the only determinants of pump prices, for the need to make prices as affordable as possible to consumers is more important. Socially-sensitive products like diesel, LPG and kerosene should be given more priority and thus subsidized to ensure lower prices.

In a deregulated atmosphere, the pump prices are “depoliticized,” which means that the prices of socially sensitive products like LPG, diesel and kerosene are now left in the hands of transnational corporations.

Nationalization is said to correct this set-up by reversing the “depoliticized” price setting and having instead a regulated pricing mechanism. The latter takes cognizance of the need to make petroleum products affordable.

It becomes feasible therefore to institute cross-subsidies, such that the pump prices of socially-sensitive products like diesel, kerosene and LPG are subsidized. On the other hand, those which are mainly consumed by the rich like premium gasoline are pegged at prices which would have a higher mark-up.

As regards ensuring the oil supply particularly in remote areas, the experience with oil deregulation shows that the entry of new industry players does not automatically assure accessibility of petroleum products particularly in rural areas. Indeed, the increase in number of industry players did not result in gasoline retail outlets being distributed nationwide.

This does not come as a surprise, since according to an IBON study in 1997 “profit orientation dictates that they invest in areas with higher returns on investment. For the new industry players, a developed area would mean bigger profit margins due to high demand for petroleum products. It also means less operating costs as they avail of better infrastructure.”

The control of Petron, Shell and Caltex on the downstream oil industry persists because deregulation has only given them greater magnitude in engaging in unscrupulous practices like price fixing. They are wont to do this since the downstream oil industry has a captive audience given the constant demand for oil in the absence of viable alternative sources of energy. It has been argued that the downstream oil industry provides opportunities for more and more profits as the population increases and industrial expansion happens.

Invoking nationalization

Through nationalization, strict government regulation changes the profit-oriented character of the industry into one that is essentially service-oriented. Unscrupulous practices are checked since the “free-for-all” characteristic of a deregulated regime is eradicated.

Aside from that, the downstream oil industry gets integrated to the thrust toward economic development. State control would enable the industry to respond to the power and energy demand of the economy and the people.

Nationalization, indeed, is not just a temporary fix to the problem of oil price hikes, but an urgent, absolute necessity to rectify the mistake of deregulating the downstream oil industry.