POSTSCRIPT / June 11, 2000 / Sunday

By FEDERICO D. PASCUAL JR.

Philippine STAR Columnist

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Why OilEx hold on fuel market has to be total

THE problem of continually rising fuel prices cannot be solved by half measures or compromises. It can be solved only by a direct and decisive attack on the root of the problem.

This was the assessment given us yesterday by Bataan Rep. Enrique T. Garcia as he pressed his all-or-nothing confrontation of the fuel price problem that he traced to the stranglehold by the Big 3 (Petron, Shell and Caltex) on the local oil industry.

Garcia said he could not go along with our compromise formula allowing the oil firms to retain their refineries and gas stations while inserting the market presence of the National Oil Exchange (OilEx) to import gasoline and other fuels when the Big 3 cannot offer lower prices.

The Bataan congressman is the principal sponsor of the bill creating the OilEx. The House committee has completed its public hearing and is preparing to report out the measure for floor deliberation. There is a Senate counterpart bill filed by Sen. Juan Ponce Enrile.

* * *

A FORMER oil executive before he entered politics, Garcia said the oil firms are fooling consumers and the government with claims of huge losses to justify price increases. On the contrary, he said, they and their foreign principals are raking in dirty millions.

He recalled that when crude cost $10 per barrel in March last year, the oil producers, particularly the Organization of Petroleum Exporting Countries (OPEC) under the influence of Saudi Arabia, were already making hefty profits.

Arbitrarily, the oil cartel kept raising its price until it now averages $25 per barrel — for no other reason than to squeeze more blood from its captive buyers. There was no significant rise in production cost to justify the $15 increase.

* * *

UNLIKE agricultural crops and manufactured goods, oil is not fashioned, fabricated or farmed. Like water and air, it just happened to be there in big quantities. The lucky country in whose territory the oil is found did not invest a cent in producing it.

The only expenses incurred were in looking for the oil, pumping it out and delivering it to buyers. Once it is located and the infrastructure for extracting it is laid out, there is virtually no substantial additional cost for getting it ready for delivery.

The infrastructure and the administrative cost for extracting the oil when it was priced at $10 is practically the same as now when it is priced at $25 per barrel or higher. On the basis of virtually unchanging production cost, there is no reason to raise the price.

Granting there is a slight increase in cost of operations, it cannot be an indecent 150 percent – the different between $10 and $25 – in a year’s time.

Remember, at $10 per barrel, the oil sheiks were already drowning in megaprofits. The $15-per-barrel price increase is just additional unadulterated profit!

* * *

BUT those are the oil producers abroad, not the local oil companies, you might say.

Yes, but the locals are not independent operators. Shell is owned by Royal Dutch Shell and Caltex by Texaco Chevron, both principals being foreign oil firms.

Petron, which used to be a 100-percent Philippine corporation, is now 40 percent owned by Saudi Aramco. The Saudis supply 66 percent of Petron’s crude requirements under a suspicious contract that Petron is afraid to make public.

The $15 overprice of the crude refined by Petron, Shell and Caltex is enough pricing leeway for the Big 3 and their foreign principals to rout any competitor.

If the local oil companies were pressured enough to lower their prices — as what would happen if the OilEx controlled and bid out the entire national fuel requirement of 25 billion liters annually — their foreign principals would be forced to lower the price of the crude sent to their refineries here.

* * *

TO save their Philippine operations, Saudi Aramco, Royal Dutch Shell and Texaco Chevron can easily shave $3 off their per-barrel price and still make money (since they have a $15 band within which to play).

A mere $3 price reduction of their crude price translates to a P1 drop in the per-liter pump price of fuel being dispensed by the stations of the Big 3.

But this reduction is possible only if the local oil firms are threatened by serious competition. Such a test would materialize the moment the OilEx as proposed by Garcia would be allowed to bid out the entire national fuel requirement estimated at P240 billion a year.

* * *

WHILE the OilEx bill would allow the oil firms to continue operating their refineries, Garcia said they would not be allowed to sell directly to local bulk and retail buyers. They must sell their refined products through the OilEx by winning in the bidding.

Garcia said it is crucial that the OilEx law require the oil exchange to bid out the country’s total fuel requirement. This is the step-by-step logic behind this:

  1. To survive and keep their expensive refineries operating, the local oil firms will have to win the OilEx bidding against all comers.
  2. To win against other refineries and traders abroad, they will have to lower their prices.
  3. And for them to be able to lower their prices, their mother companies abroad will have to lower the price of their crude, which is the main component of the ex-refinery price.

With their $15-per-barrel profit buffer, the oil suppliers can do this if forced by competition.

* * *

HOUSE sources said the committee report would create the OilEx as a non-profit government corporation. The exchange would determine the total national fuel requirement and accept bids from everywhere, including the local oil companies.

The committee recommends that the oil companies be allowed to keep their refineries, their depots and gas stations. The OilEx would use the Subic and Clark storage facilities now used by Coastal. We proposed the same thing in our compromise formula.

But the refineries would not be allowed to sell their refined products directly to bulk buyers, dealers and gas stations, as we suggested in our formula. They would have to buy the refined products sourced by the OilEx, then pass them on to their buyers and outlets.

* * *

GARCIA explained that if the oil companies were allowed to operate as usual with the OilEx merely coming in as another big player, the objective of applying sufficient pressure to lower prices cannot be realized.

The oil giants have many built-in advantages that a fledgling government company saddled with startup constraints may find difficult to overcome, he said. The only option is for the OilEx to have full control of the marketing side, he said, with the oil firms simply bidding to supply its requirements

If the OilEx succeeds even on a limited scale, the idea could catch on and other big consumers and even national governments may replicate it. The concept is a threat to the thriving business of the oil multinationals, hence their resistance.

With the oil giants and some foreign governments expected to react, the pressure to abort the OilEx would ultimately zero in on President Estrada.

In the final analysis, whether the OilEx would be allowed to work depends on the President. The OilEx looms as another test of his mettle and his sincerity.

* * *

WHILE one school says that the oil refining business must be separated from the marketing of refined products in the same way that generating and distributing electricity must not be in the hands of one giant firm, a US-based global monopoly has just been ordered split.

Microsoft was declared Wednesday by US District Judge Thomas Penfield Jackson as in violation of anti-trust laws and given four months to divide itself into two companies – one for operating systems and another for software and Internet properties.

The full impact of the order has not been felt in the Philippines, but we expect it to affect the future configuration of computers, the design of components and their prices.

* * *

MICROSOFT of Bill Gates, the world’s richest man who is worshipped by his disciples and denounced as the anti-Christ by his detractors, has grown too big and too overreaching for comfort.

His Windows has become practically the world’s standard operating system of personal computers, improving on and supplanting the DOS (Disk Operating System) of older computers.

But Gates did not stop there. He packaged his popular Windows and Microsoft software and Internet facilities in such a way that Windows users often have no choice but to use only Microsoft products if they want their PCs to run efficiently. His new Office 2000 bundled a wide variety of software, thereby killing similar software selling under the brands of different manufacturers.

* * *

MICROSOFT’S Internet Explorer is being forced on users of Windows. If one wants to use another Internet browser and deletes Explorer, all sorts of errors crop up, rendering the computer inoperable.

In the same way that hardware manufacturers (such as IBM) were forbidden in the States from making software and software makers (such as Microsoft) barred from manufacturing hardware, it is right that Microsoft be made to stick to either operating systems or software.

Back here, there is no similar resolve to strike down monopolies. The pattern of one influential family or one presidential crony or one conglomerate controlling one strategic industry is evident, but nothing is being done to nip it in the bud.

* * *

(First published in the Philippine STAR of June 11, 2000)

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