Senators Urge President to Take Over Oil Industry as Supply Crisis Looms in Philippines

Senators Add Fuel to Fire

Senators from the Philippines parliament have urged President Gloria Macapagal-Arroyo to take over the domestic oil industry to tackle a looming fuel shortage brought about by Executive Order 839 (EO), which froze fuel price levels at 15 October levels on the island of Luzon in response to damage wrought by two major typhoons. Senate President Juan Ponce Enrile, Senate Minority Leader Aquilino Pimental Jr., and Senator Miriam Defensor-Santiago said that a takeover of the industry is allowed under the Constitution and accused the country's three leading oil companies—Pilipinas Shell Petroleum Corp., Petron Corp., and Chevron Philippines Inc—of trying to pressure the government into rescinding the EO by warning of impending fuel shortages if prices were maintained at loss-making levels. Enrile and Pimental also said the government could import fuel under the general welfare clause of the Constitution, adding that the state could, if necessary, go so far as to seize retail outlets owned by private oil companies in the interests of the population. Gary Olivar, deputy presidential spokesperson said that the government would not be "blackmailed" by oil company statements claiming that the supply of petroleum products in the country would run dry in less than two weeks time while Jacinto Paras, company chairman of Philippines National Oil Company-Exploration Corp. (PNOC-EC) also declared that the company could supply fuel within 10 days upon the order from the presidential palace. In the event of this situation, the company would use private oil companies’ own depots to store fuel shipments and to supply retail outlets.

Fuel price rises have been a sensitive issue in Philippines since 1998 when the government passed the Oil Deregulation Law, which took away government control over fuel pricing, removed fuel subsidies, and opened the sector to foreign investment. Increases in fuel prices by oil companies are invariably unpopular with much of the population as seen last year when record crude oil prices led to protests among truck- and mini-bus drivers. The rise in prices up to mid-2008 has heightened popular sensitivity to further fuel price increases, which oil companies have been implementing in response to price gains on the international market. Moreover, because fuel price adjustments by the major players tend to occur at the same time, in response to shifting international oil product prices and the foreign exchange situation, there have been suspicions that the oil companies are colluding to fix prices (see Philippines: 19 August 2009: Pressure Grows to Suspend and Repeal Oil Deregulation Law in the Philippines). The government has been demanding an audit of oil companies’ accounting books given allegations by the president's economic planning secretary Ralph Recto that the companies had been overpricing fuel by up to 8 pesos (US$0.17) per litre. Tensions had been made worse by the oil companies’ claim that the government's auditors, namely the Commission on Audit, the Bureau of Internal Revenue (BIR), and the Bureau of Customs (BRC) did not have the authority to open their books, leading to more speculation that they have something to hide. The issuing of the EO was made in the context of these tensions, although the more immediate trigger was the decision by oil companies to implement one of the largest fuel price increases this year on 20 October, which in the context of typhoons in the country that killed over 1,000 people and led to widespread devastation was derided as greedy and insensitive by the population.

The issuing of EO served a number of purposes for the government. First, by freezing prices it undoubtedly lowered expenses for the population of Luzon, who suffered at the hands of the typhoons. Second, it appeared to show that the government had picked the side of the people of Luzon against the oil companies, which are unpopular and resented. The EO therefore boosted political support for the government. Third, the move was a way for the government to assert its authority over the oil companies given the recent growth in tensions over allegations of predatory price in the last few months. Indeed, it is extremely difficult for the government to prove that oil companies are engaged in predatory price given that the Philippines operates a liberalised pricing system under which oil companies can adjust and set fuel prices themselves. For most oil companies that import refined products, prices are adjusted in response to international refined product prices, although prices are set on a competitive basis and therefore it is largely up to the company what they charge. Whether fuel prices are "predatory" is therefore rather difficult to clarify, although perhaps allegations of collusion in price fixing could be better substantiated.

Outlook and Implications

To date, the impacts of the EO have been a short-term political boost for the government, a knock to foreign investor confidence in the Philippines, and losses for the oil companies that grudgingly acceded to the government's order and are currently selling fuel below market rates on Luzon. The episode has also created new tensions between oil companies and the government, with Pilipinas Shell asking the Makati Regional Trial Court to grant a temporary restraining order on the EO, which the company claims is unconstitutional. There was also a lack of clarity on the order after it was issued that complicated its implementation, causing more difficulties for Pilipinas Shell that demanded clarity with regards to what products are affected, the duration of the cut, and whether the cut applies to the suggested retail price (SRP) or actual retail price (ARP) (see Philippines: 28 October 2009: Oil Majors Ordered to Freeze Fuel Prices in Luzon, Philippines).

The EO is also starting to lead to oil product shortages in the domestic market as oil companies scale back imports of fuel that they can no longer sell at a profit. Current reports suggest that shortages have not yet reached crisis point, although fuel retail stations in a number of cities on the island have introduced shorter business hours and are capping fuel allocations per customer to regulate supply allocations. However, the situation is becoming worse, with fuel inventories recently reported to be down to between eight and 13 days in comparison to the normal level of 21 days for finished products. More worryingly, if the three big oil product suppliers stop importing, this could have wide-ranging implications as many smaller retailers are dependent upon them for supplies.

Having reaped the political benefits of EO 839 it is in the government's interest to revoke it in a face-saving manner as soon as possible. The government has already urged an emergency panel, the National Disaster Coordinating Council to review the situation in some areas of Luzon to see if their emergency status should be removed. If the all-clear is given this would pave the way for the rescinding of the EO. However, by helping to whip up popular fervour against the oil companies it becomes politically more difficult to back down and instead the government is now being pressed to take over the domestic oil industry, a move it would seek to avoid given the complications of running the distribution system, the impact on foreign investment in the country, and the detrimental effect on the state budget from the increased operational costs and from having to sell fuel at below market rates. A takeover means the government would also be blamed in future for further increases in fuel prices, which would be inevitable eventually to prevent haemorrhaging losses.