Will oil companies really stop importing?

The key question of the moment is: Will the oil companies really stop importing? Some government officials think they, the big ones specially, are just bluffing. They are too invested in the country to risk everything by precipitating a major crisis which a fuel run-out certainly is.

On the other hand, even the big oil companies have time and again demonstrated that they are ready to leave at a moment’s notice. Esso did that during the 70s, surprising even their own senior Filipino executives who all felt abandoned. Esso reasoned that the Philippines is too small a market to justify the giant political headaches that comes with the territory.

Some 15 years later, Caltex made the decision to close down its refinery and just be a product importer like the small players. The refinery margins are not attractive enough to have the problems that running an oil refinery entails. Not having a refinery also makes it easier to pack up and go at short notice.

Shell junked its plans to upgrade their present refinery in spite of at least two premature Malacanang announcements that Shell will invest over a billion dollars to do that. I found out last Wednesday that Shell is not even fully utilizing their relatively modest refinery (compared to Petron).

“We are running the refinery at minimum throughput in view of the negative refining margins,” Ed Chua, Shell’s country CEO e-mailed me. “It is cheaper to import than to produce at this point in time,” he added. I was told 40 percent of what they sell here are product imports, also just like the independents… increasing our vulnerability to just about two weeks inventory.  

Will the need to defend market share make them take losses for an indefinite period on the price cap? Not at all, Shell’s Ed Chua wrote me.

“Our decision is to cap the volumes in the Retail segment equivalent to the average sales over the last three months and we will most likely supply till we have exhausted stocks that on a FIFO basis may be seen by government as still profitable. Note that our pricing and performance metrics are all based on Current Cost of Supplies, CCS, which is similar to LIFO. And on this basis, the rollback and freeze order results in negative margins for us right now.”

What about the small players? Will they stop importing? At least one small player has issued a press release that they have enough to supply the country’s needs and can bring in supplies within three days, assuming they can muster the financial resources for it. It added that there are enough supplies in the world market as an assurance against shortage.

That’s true but who will risk a large amount of money to import for the country? Please note that the world market price is rising and the local price is capped below that. If government gives up part of taxes and duties, maybe the difference can be bridged. Without taxes, all the oil companies will be on an equal playing field with the oil smugglers who don’t pay taxes and are allowed to get away with it by government.

All other small players who pay taxes and duties will find it difficult to import even if they want to with the price cap in force. These independents have very limited capital and effectively live from hand to mouth. They will definitely be unable to take the risk of certain losses for an indefinite period. Every centavo for them counts… every shipment matters.

Two companies, Total and Flying V have already announced they will no longer import for so long as the price cap is effective. Total is a large French oil company but I doubt it has the inclination to stay in this market if the conditions are as unfavorable as this. Flying V is a small operation that cannot afford the price subsidy government is asking the oil companies to make.

I think Chevron is the company most likely to do an Esso if push comes to shove. Shell is likely to think twice. Despite Ed Chua’s assertion that they are not obsessed about defending market share, the fact that it is the market leader will give Shell reason to more carefully evaluate its options. Besides a sister company is the operator of Malampaya and that’s a big reason why Shell cannot easily bid the country good bye.

Petron is the most interesting company to watch. It is totally Filipino owned but by private investors including San Miguel. And if rumors are true, the British investment group that bought into Petron represents some very influential local people who are not inclined to lose money indefinitely.

Petron says it expects to lose P1.5 billion for Q4 alone because of the price freeze. Unless the “influentials” in Petron are thinking of offsetting their losses in the oil company because of the EO from profits in oil smuggling, I don’t think this EO is going to last very long.

I am almost sure San Miguel is now having second thoughts about Petron. They must be thinking that having “influentials” as partners in Petron is no guarantee the business can be protected. Worse, those “influentials” could be out of power soon. Luckily for San Miguel, they have not fully paid for their Petron shares… just a down payment they can write off as tuition fee for a good lesson learned.

Then again, Petron could use this situation as a means of gaining market share by driving the independents out of business but this will kill competition in the industry. If there is any local oil company with a credible ability to supply the whole country by itself, it is Petron. It can run its refinery and it has the logistics capability and the international credit lines to import whatever the refinery cannot produce. But will Petron do these at a loss?

We still have to see who blinks in the next two weeks. All government has to do is give a definite time frame and a mode of recovery and the oil companies may take losses for the meantime. The reality is: high oil price is a problem but the more serious problem is supply availability. An oil price increase may bring the professional jeepney drivers association leaders out in the streets. But a supply shortage that leads to rationing or worse is more politically explosive.

I just hope the guys in government know what they are doing. For the rest of us, it would help to befriend a gasoline dealer to assure our supply… just in case.

Holiday economics

Here we are again on the verge of another long weekend. I am not an entrepreneur with a budget and production schedule to meet so I am not complaining. In fact, I love these long weekends…I get the time to catch up with my readings.

But an EPZA locator wrote me to complain about Ate Glue’s holiday economics. He thinks it is voodoo economics. Here’s his e-mail.

As you know Gloria declared Nov 27 & 28th as a LEGAL HOLIDAY. She did this proclamation way back in April and just now announced it. In the paper it said it was a non working holiday. I was just informed it is a LEGAL HOLIDAY thus requiring employees to be paid. Its bad enough she waited 6 months to spring this holiday on us. It’s hard to even schedule your production with surprise holidays not to mention the added costs.

The Economist recently had this short item on national wealth and holiday entitlement. The article asked: Are holidays good for the economy? This is how The Economist answered that question.

Striking the right balance between life and work can be tricky. Employees in European countries tend to have a better deal than most, enjoying more days off work than their counterparts in Asia or America. Workers in Finland, France and Brazil have the most generous statutory allowance, getting 30 days of holiday every year.

Americans work longer hours: theirs is the only rich country that does not give any statutory paid holiday. (In practice, most workers get around 15 days off.) This work ethic may in turn help to explain Americans’ material wealth. Even adjusting for purchasing-power parity, America generates more wealth per person than all but a handful of mainly oil-rich economies such as Norway.

I guess The Economist gave us a good idea of why we are what we are. Holiday economics is indeed Voodoo economics concocted by someone with a PhD in economics. 

Amen 

Robin Tong sent this one.

Q: Ano ang pagkakaiba ng simbahan sa husband?

A: Sa simbahan, maraming nag-aamen...

Sa husband, maraming di uma-amin...

Boo Chanco’s e-mail address is [email protected]. This and some past columns can also be viewed at www.boochanco.com