These are the exchanges in pilipinasforum@yahoogroups more than 15 years ago and the official position paper that we issued on the proposed National Oil Exchange Commission, a government monopoly corporation on oil trading. Get your favorite snacks and drinks, this is 31 pages long. Enjoy.
Pilipinas Forum, On Oilex and Government Monopoly of Oil Trading
Initially, Cong. Garcia said the OilEx was patterned after the California eletric system, only latter did he start saying that it was patterned after the PEPEX…
and you see noy, it’s more than just the bureaucratic inefficiency it will breed, it’s also about the INAPPLICABILITY of the proposal…
1. The oil industry does not operate on a GRID system
Independent suppliers of electricity in the State of California or any of its contiguous states could supply electricity anytime and in various quantities (as long as their capacity permits) as transmission of their product throughout the state by the press of a button, such that bidding may take place on a hourly basis and that delivery of the product after bids is ensured.
Unlike an electric grid system, however, where electricity may easily be transmitted instantaneously anywhere within the grid, oil comes from different sources around the world and would take months and before it reaches our shores. The bigger oil tankers have a maximum rated speed of 16 to 18 knots, such that a tanker leaving Venezuela could take three months to reach our shores. Also, it should be noted that California buys its electricity not only from the lowest bidder, but buys only a majority of its supply for a given time from the lowest bidder. It is interesting to note that California still buys from the other bidders on a pro-rated basis, depending upon their proximity to the lowest bid. This is one reason why California was able to stabilize and even bring down the prices of electricity in their area because price competition between the participating bidders were intensified thereby resulting to lower prices.
In the case of the NOEC, it bids out its oil requirements monthly, and this is a totally different, if not, a precarious situation because what will the NOEC exactly do? Anticipate demand monthly? There is no clear mechanism how the NOEC or the DOE will do this and the prospect of fuel shortages occurring isn’t too remote.
The idea that the price of our supply may go to the lowest bidder will not be guaranteed because the NOEC will only have a day to approve the bids. What would happen if a day after bidding the prices of world crude oil immediately goes down? Prices in the world market change daily, even hourly, and fluctuates widely (ANNEX 1b). Still, the best price stabilizer is the presence of competition which has continually checked domestic oil prices despite increasing crude and product prices in the international market.
Also, the measure’s plan to tap the spot market (this is where the government will ideally get the cheapest price) also poses a number of problems, specifically on the cost and time of delivery and the quality of the commodity ordered. For all we know, we might end up spending more processing poor quality Chinese crude! Take into consideration that soon enough power generation plants will be requiring “sweet crude,” or the best quality crude, to conform to air emission standards under the Clean Air Act.
2. Suppliers of crude oil are located in different areas of the world
The Philippines comprises less than ½-percent of the world’s crude oil consumption and it is difficult to presume that we precede others in the sellers’ order of preference. We should always remember that we’re at the bottom of the hierarchy of importance as far as the distribution of crude oil supplies is concerned. The demand for crude oil is highly volatile, though cyclical, such that during the month of October, Europe tries to buy all the oil it can get its hands on, and that US demands for the product traditionally rises in the months of March and April. So how sure are we that we can get a steady supply from the world during these months. It is said that during the Gulf War, the Big 3 have to literally beg to crude oil suppliers the world over to supply them with the commodity. Should the Philippines bid out its crude oil requirements to the world on a monthly basis, wouldn’t it be hard to guarantee that supplies would reach the country on time save when Singapore, who is the closest exporter of crude oil to the Philippines, win out the bid every time.
3. The supply of world oil, as the bill admits, is cartelized.
One irony in the proposed measure is that while it recognizes that a monopoly/ oligopoly/ cartel in world oil supply exists, it fails to subscribe to the fact that the problem of rising oil prices in the country is not a domestic issue, but an international one. If Rep. Garcia vehemently protests against the cartelization of the world supply of crude oil then establishing a NOEC is NOT THE SOLUTION because prices in a cartelized environment will always remain the same. If Rep. Garcia is dead serious about government intervention to augment the problem then maybe it would just be more practical, and less expensive, if government would just implement another subsidy program to deter any oil price hike. But is this not going a step back back?
So what lowest bidder are we then talking about? We should remember that it’s a seller’s market out there, and that OPEC and non-OPEC countries shall and will always sell its product to those who can pay more, like Japan, the US, and the EU. And if we think that the prices of crude oil from non-OPEC countries is cheaper then we should think again. Their prices have historically been the same! What oil producing economy in its right mind would sell its crude oil at a price lower than the OPEC’s when the demand for the product have always been continually high (remember that oil is price inelastic, in the long term, at least)?
To say that what worked with power industry in California will work for the oil industry in the Philippines is downright oversimplification of the problem and of the solution. We cannot get away that easily. Electricity, given that there is a critical amount of power suppliers could be available anytime, anywhere. But, oil, sad to say, could only be available from a limited few (about 40 suppliers the world over) and that the delivery of the said commodity is subject to so many variables (i.e. weather disturbances, political instability, or any other acts of God).
hope this adds to the discussion…
– Poch Bermudez
This is interesting. Actually I’m not so familiar about the nitty-gritty of the debate about this oil exchange of Cong. Tet Garcia. My disagreement with the proposal is basically on its economic theory and principle: it’s again back to regulation. Government regulation accdg. to theory and experience, will always result to inefficiency (& corruption) if the subject of regulation is not a “public good”, if there is no “market failure”, and no “externalities” involved. Thus, if these things are not present, government should NEVER come in to intervene or regulate.
Thus, unlike the provision of national defense or traffic lights, where no private businesses will dare produce and expect to make profit, oil retailing is a purely private good where private businesses – in competition with one another – will provide and make profit in the process.
– Nonoy Oplas
Conflicts arising from fiercely parochial causes (e.g. nationalist/ethnic movements, sector strikes, etc.) have probably resulted to more deaths, economic losses and deprivation than any other events in recent history. My views on the recent transport strike and the OilEx issue:
First, deregulation, not transport strikes, would be a more effective and more lasting oil price-reduction measure. If you want to bust the Big 3 market dominance, you have to facilitate the entry of more players to the industry. The fact that the oil industry in our country performs importation, refining, storage and distribution operations, without the huge costs of extraction (and exploration, for some), makes it a fairly ‘contestable industry’. And this is already evidenced by the presence of other oil companies in the market. The more players, the more profits are suppressed, as companies try to undercut each other’s prices to increase their market shares (in a perfectly competitive industry, which exists only in textbooks, profits are zero in the long run). In countries with highly competitive energy industries, a liter of petrol can
sometimes be cheaper than a liter of bottled water. Petrol prices rise and fall in a day or two following changes in global prices. OPEC is still powerful but it no longer wields the same power it used to. Other countries have explored their own energy sources, have learned to develop more energy-efficient technology, and have become more efficient users themselves following the two global oil crises.
Second, government should shy away from regulating both the supply and price of oil as well as fare rates. If transport organizations and unions are free to set their fare rates, strikes would be minimized and commuters would have a range of choices. As commuters flock to jeepneys and buses that charge lower fares, others operators would have to cut their fares to gain commuters back. Price-cutting would settle to a fairly lower level of fares. Regulatory power over supply and prices should be limited to emergency circumstances like war and extreme shortages in supply. The Government already spent billions just to stabilize oil prices during the OPSF regime. Which could have been used for more basic social services. And you thought you did not pay for that as a taxpayer. In the actions of the different parties to this conflict, various interests were considered but the consumer’s. At si Mang Driver ay si Mang Consumer din. I don’t want government to be dictating my political choices (martial law, national ID, etc.), so why should I want it to dictate my economic decisions, as well? This is not the way towards a ‘civil society’.
Third, creating another government regulatory agency or for government to again own an oil company is not the answer. The controversy involving former Petron employees getting priority over the purchase of shares when the company was privatized showed how government power over business entities can be abused. If you set up any government company, inefficiency is more likely than not to creep in. How can you get the best managers when they can earn more in the private sector? And once created, you know how politicians just find it difficult to abolish agencies/corporations.
Just look at why the Soviet economy collapsed and why the Chinese economy continues to prosper. Because as one economist puts it, “the Soviets followed the ‘Harvard Model’ while the Chinese adopted the ‘Chicago Model’.
Which “has made all the difference”.