We may yet be lining up at gas
pumps which are drying up for lack ofreplacement stocks.
Militant groups are calling for the
scrapping of the oil deregulation law. They want to treat oil like any other
commodity. No more government say on how the oil business should be run,
subject, of course, to safety and product quality standards. No more threatened
audit of the books of oil companies, save for the purpose of ensuring the oil
companies do not cheat on their taxes.
Surely thats not what the militants mean by scrapping oil
deregulation. The way we understand it, their call is for a return to oil
regulation, which at bottom means fixing the prices of gasoline and other
products.
So what could and probably will happen?
To begin with, how do we peg the prices of oil products? One
way of doing this is to set a fixed rate of profit, say 12 percent. That 12
percent figure has an element of symmetry to recommend it. The government skims
off the top 12 percent of final sales in the form of value added tax. The oil
companies, who advance the capital and take the risk, surely deserve the same
return on sales.
The fly in the ointment is that if we adopt the 12 percent
rule, the officials of oil companies would be jumping for joy like chimpanzees.
Petron, the biggest oil company with a 39 percent share of the market netted a
profit of P6.39 billion from sales of P210 billion, for a profit rate of 3
percent. At an allowable return of 12 percent, it would have netted P25 billion
last year.
Or we could peg the cap on the return on base assets (or its
newest incarnation, the weighted cost of average capital). Power utilities, for
example, are allowed a 14 percent return on assets. The ratio of Petron for 2007
is 6.12 percent (P6.39 billion income on assets of P210 billion).
From the above, it can be seen the alleged "super-profits" of
the oil companies are non-existent. That knocks off the basic assumption that
underpins the call for price-fixing.
Another argument for price-fixing is that the "the oil
companies-can-afford-to-absorb-higher prices-of-crude oil," a claim that was
lent credibility by Gloria Arroyo when she jawboned the oil companies into
rolling back prices by P1.50 a liter last weekend.
The trouble with this argument is that while the oil
companies can indeed allow profits to stay flat or even suffer a cut, they
cannot continue selling their products at a loss, which would be the case if
their cost it not reflected in their selling prices. Thats a recipe for going
out of business.
Even as we are debating (fruitlessly, we believe) whether the
oil companies can forego price increases, we should be addressing a far more
dangerous threat. Adequate oil supply must be assured. The same level of
revenues, however, buys a lesser volume of higher priced crude.
We may yet be lining up at gas pumps which are drying up for lack of
replacement stocks.
