Lessons from the oil deregulation law

It’s been 25 years since the Oil Deregulation Law was passed, and the landscape previously dominated by a loathed “Big Three,” referring to Shell, Petron, and Caltex (now Chevron), and their perceived “oil price fixing” evils has somewhat been submerged in a marsh of obscurity by the entry of more than a hundred new albeit small industry players.

From time to time, though, like when Russia invaded Ukraine last year, someone in Congress presses an alarm button calling for a review of the law, accusing not so much oil companies of colluding to rig prices, but of the government’s inability to stop retail prices of oil products from rising.

Happily, in this last instance, cooler heads prevailed with the economic team proposing an amplified and extended run of the pandemic relief intervention instruments under the Bayanihan to Heal as One Act. In effect, diesel prices for fisher folks, farmers, and public utility vehicles operators continued to be sold at lower prices to somehow mitigate the cost of fuel in their day-to-day operations.

The Downstream Oil Industry Deregulation Act, which was fully implemented in February of 1998, has accomplished much of what it was set to do, mainly to foster “a truly competitive market under a regime of fair prices.”

How this manifests is most visibly seen in the number of retailers that are fiercely competing for market share with the Big Three. Independent retail service outlets are also mushrooming almost overnight in high traffic areas, capitalizing on their lower operating cost advantage compared to the branded service stations.

If consumers were also more aware of movements in international crude and product prices, correlating these with local price movements give or take a few weeks, is an easy read. This happens because the Department of Energy has strict reporting requirements (with heavy penalties for non-compliance) on oil companies, thus making price monitoring a more exact science.

Not apparent changes

What is not very apparent to the public eye resulting from the deregulation law is the increase in importers and bulk distributors of oil products, many of which do not operate any retail service stations, and which instead go after industrial fuel users who do not have their own bulk storage facilities.

Many of the small bulk distributors are also importers that have eaten into the market previously held by the Big Three before deregulation set in. With noticeably more independent big terminal operators now in business, running a comparatively small bulk distribution facility can be profitable.

For some others, being a fuel bulk distributor can be ultra profitable if their owners or operators are bold enough to buy smuggled fuels and skip the reportorial requirements that the law stipulates. Herein reflects a weakness in the deregulation law, one that can be enforced only with effective enforcement.

When buyers who surreptitiously patronize smuggled fuels are able to skirt inspections, in effect selling or using fuels that are not taxed, quite hefty sums are involved.

Under the law, all accredited importers of fuel products have to use a special dye to signify compliance to tax adherence. Fuels that slip into the country without the dye mark only means that no import tax had been levied on them.

For an archipelago like the Philippines with a long shoreline, illicit entry of oil product shipments, usually in smaller volumes, is more difficult to monitor, especially when there are not enough enforcement personnel under the Bureau of Customs to cover all oil depots.

The downstream oil industry players always remind appropriate government agencies of lost revenues when enforcement weakens. Not only is the state coffers deprived of the lost duties and taxes, law-abiding importers suffer from lower sales revenues.

One refinery left

For keen industry observers, the absence of two members of the Big Three in oil refining should not have gone amiss. In 2003, Caltex wound down in oil refining activities in Batangas. And in 2020, Shell finally made the decision to close down its refinery, also located in Batangas. This left the country with just one refinery, that of Petron Corp. in Limay, Bataan owned by San Miguel Corp.

During the time when Shell, Caltex and Esso (which was bought by the government during the Martial Law years, and renamed Petron) were building their refineries some time in the mid 19th century, it made economic sense to import crude oil in big tankers to be processed locally into various fuel products.

But with the rise of Singapore as a crude oil refining center in Asia in subsequent decades, the difference in the cost of production of petroleum products with Philippine refiners grew wider. Ultimately, it was more economical to simply purchase finished products rather than run a refinery that was getting behind in terms of technology upgrades.

This, of course, does not mean that the Philippines has become less energy secure – because the country continues to be energy insecure, being dependent on the importation of many of its fuel energy needs, including coal, and more recently, natural gas.

Having one remaining refinery draws mixed feelings. One is pride that a Filipino-owned company has managed to compete well with imported fuel products without giving up on quality standards and its market share in the local market.

On the other hand, there’s a twinge of apprehension that Petron’s refinery, which is past its sixth decade of existence, is one that is aging, and thus falling behind in state-of-the-art upgrades. It’s time to assess just how valuable having a refinery is, and what government should do.

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