Unlearning the past

Once upon a time, the oil industry was regulated by the government. The Energy Regulatory Board set the prices of oil products after conducting public hearings. Normally, representatives of drivers’ associations and operators of public buses opposed price hikes while oil companies defended increases in oil prices. Devaluation or a fall in the value of the peso relative to the dollar, increasing demand for fuel, and turmoil in oil-producing countries such as Iraq, Iran, and Venezuela were some of the major factors that pushed oil prices up. As expected, it took a long time for government to make its decisions. Decisions were often skewed and influenced by political interests. In the eyes of politicians, votes were much too precious to lose, and it was better to err on what was popular with the public.

And so it happened that pump prices were often set below world prices. An Oil Price Stabilization Fund (OPSF) was set up to serve as a buffer against spikes in oil prices. The government dipped from the OPSF to pay the difference between market and pump prices. For example, if the market price per liter of unleaded gas was P45.00, the government set a lower price of P40.00 and reimbursed oil companies for the P5.00 difference. The public was happy, the oil companies were happy too, and the politicians were happy as well. To them, it was a win-win situation.

But, the happiness did not last for long. The OPSF ate a lot of the budget. The resources that could have been used to provide adequate and better social services like education, medicine, housing, and water were used to maintain low oil prices. And since the resources of government are not infinite, OPSF subsidies were financed through borrowings. According to Usec Gil Beltran of DOF, the budgetary deficit increased by P17.6 billion from 1990 to 1997, or 0.2% of GDP. But the story did not end there. There are ripple effects when government borrows. Government tries to attract lenders by offering higher interest rates. Private lenders matched what the government offered and increased the interest rates on their products, such as bonds. An increase in the cost of money results to higher production costs. Ultimately, everybody suffers because of inflation or a general increase in prices.

There are other distortions when government plays the role of a small god. Oil prices are differentiated according to the judgment of public officials which is at times flawed. Diesel fuel oil was priced at a lower level because it was touted as the fuel of the poor. The result, everybody purported to be poor took advantage of lower diesel prices. Engines of pricey motor vehicles were converted to become diesel-fed. In the end, the government ended up subsidizing the wealthy.

And so came President FVR, whose agenda was to introduce stability in the economy. Government controls on the oil industry were lifted and the OPSF was abolished. Prices were to follow the market, and more players were allowed to challenge the pricing of the “Big Three” oil companies. The deficit was tamed, interest rates were lowered and so was inflation. Gone was the regime of 2-digit interest and inflation rates.

And now comes the clamor to reclaim the “inglorious past” of government regulatory controls. Isn’t it tragic, if not sad, that we never learn from experience?

The oil market is not totally free. There are government agencies such as the Department of Energy, which are tasked to see to it that abuses, cartels, and barriers to entry are prevented. The DOE can require oil companies and dealers to provide information to enable the government to discover unfair and predatory pricing practices. In addition, the government organized independent reviews to put oil companies to task. But these independent studies had consistent findings: increases in oil prices followed world prices, and collusion among oil companies and dealers was not found.

We expect more shocks in oil prices in the coming days due to the war in Ukraine. Russia is a big exporter of oil. With worldwide sanctions on Russia, a shortage in oil supply will trigger a continuous increase in prices.

It could be that the call for regulation is a product of an unresponsive government. Government has always poised the threat of huge revenue losses as an answer to the public’s clamor to temporarily suspend the excise tax and VAT on oil products. Add to this the lackluster performance of government in the administration of gas vouchers.

Bringing back the regulation of oil prices can be the right answer to the wrong problem.

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