Oil prices

Some candidates are making an ill-advised call for the government to reacquire Petron, supposedly so retail prices can be controlled.

I have news for them. Petron does not own even one oil well. It buys its crude oil and petroleum products from the international market where prices are set by market forces. Unfortunately, those market forces include wars like the one going on in Ukraine.

We are almost totally dependent on imported oil for transportation. That’s our problem. Car owners, bus, and jeepney riders will be heavily affected by this rise in international oil prices to over $100 a barrel.

The good news is our energy dependence on imported oil has gone down considerably. Our major power plants that supply the main grids use mainly coal, domestic natural gas, geothermal, hydro and some solar.

The other good news is that thanks to Transportation Secretary Art Tugade, we will soon have a resurrected mass transit railway system that runs on electricity. We have the option to leave our cars at home and ride the MRTs instead.

If you want total independence from oil, you can always ride a bike. They are putting bike lanes all over now so it will be somewhat safer than before.

Buying back Petron is a stupid idea. First of all, we cannot expect our government to run it well. Just look at the crazy decisions our energy officials have been making lately.

We can be sure politics and kickbacks on supply and logistics will intrude. Better to leave San Miguel to run it as a business.

Running an oil company is complicated. It doesn’t make that much money on oil. There are other businesses that give more return on investment.

We used to joke that Petron is really a bank. Given the large volume of money it handles, it is all about the float. We pay cash when we load at the gas pump, oil companies get credit from suppliers.

Running an oil company is also not for the faint of heart. Just ask Ramon Ang how much Petron has lost over the last two years.

The pandemic depressed demand, causing a drastic drop in prices. Petron was caught with a lot of oil in their storage tanks that they bought when prices were higher. Inventory losses were significant.

Petron must keep at least a 30 day supply of crude in its storage tanks to keep its refinery running and avoid a shutdown. The gasoline importers only buy finished products they need for a week or two from the spot market.

The so-called independents are not as affected by inventory losses. But when oil prices surge like now, their cash flow requirements demand they must immediately recover by increasing pump prices.  And if there is nothing to buy on spot, they go dry and so will we.

The other inane proposal is to scrap deregulation and start regulating retail oil prices. That will just dry up supply. Why would independents import to replenish stock only to potentially lose money? A business wants to recover cost, plus some profit or why bother?

With rising international prices and price control, Petron will just process what crude they have in storage. The refinery will shut down after their crude inventory is processed. Petron will avoid losses.

If the government owned Petron and sustains losses from continued refining, the taxpayers will cover the losses. No such thing as free lunch.

If we want better oil supply security, the government should set up a strategic reserve of crude oil. When prices are depressed in the world market, the strategic reserves buy crude not for processing, but for storage.

Of course there will be costs, and the costs can be significant and must be passed on to consumers. There is the cost of crude and the financial carrying cost to maintain the reserves.

There is a science in running an oil company and the manuals for operations are quite specific. Political interference only messes things up.

When Petron was owned by the government, politicians who wanted to interfere had to deal with then energy  minister Ronnie Velasco. Velasco trusted his executives enough to listen to them and follow their recommendations. After all, he had highly trained Filipino oil company executives he inherited from Exxon when the government bought Esso Philippines that became Petron.

Today, the energy officials have allowed politics and cronyism to interfere with their decisions. The Malampaya problem is a good example.

Velasco would have never allowed a decision to award a major gas field to an entity with no track record in managing a gas field. Being an engineer himself, Velasco knew the technical stuff matters.

The way it looks, we will lose the possibility of extending the life of the gas field. The bad decision to sell to a crony means there are no new investments to expand the field and its productive life, which should be happening right now.

That’s a pity because Malampaya supplies about 30 percent of the Luzon Grid requirements. Losing it means we lose that much independence from the vagaries of the international oil market.

There should be someone in government who is looking out for our long term requirements. But I doubt if we even have senior officials in the energy department who truly understand how the industry works.

So we are where we are. All that the government can do is to relax taxes on oil products. That’s the only number they control. But that’s giving up a significant portion of revenues our nearly overborrowed Treasury needs.

San Miguel said it is willing to sell Petron back to the government if that is what a new administration wishes.

Reacquiring Petron will be expensive. It has just invested over $3 billion for modernization. Unless the takeover price is reasonable and mutually agreeable, it will look like an unjust confiscation of private property. That will kill investment confidence in the country.

It is so easy to say: reacquire Petron. But the devil is in the details. Government officials will likely run Petron to the ground even as they fatten their wallets from commissions and other deals.

Boo Chanco’s email address is [email protected]. Follow him on Twitter @boochanco