‘Retail competition at the gas and diesel pumps’

The Oil Deregulation Law – or Republic Act 8180 – was signed on Feb. 10, 1998. This week then marks the 17th year of implementation of a law that takes away from the government the – direct fixing of fuel prices.

“Independent price fixing base without government control.”  By far, this law has been effective in making the “downstream” oil industry more competitive and assuring stable supply of fuel.

The deregulation took the form of adopting a formula for determination of the price of fuels by using a reference pricing system that was outside the government’s direct control. The law required that the price of domestic fuels be referenced to the posted prices of fuels by oil refineries in Singapore, as reported by independent international publications.

For practical purposes, this was the Platts oil prices published in Singapore. (Singapore refineries prices respond freely to changes in international petroleum prices, hence, the reference point is world market determined.)

“New regime of deregulated, or flexible, oil prices.” The new regime of oil pricing has enabled adjustment  more quickly to world prices. In addition, it has encouraged the entry and growth of independent companies that retail fuel.

Consumers have benefitted by being able to buy fuels when and where they want fuels. Artificial market scarcities for fuels have disappeared.

The prices of domestic fuels differ by regions and provinces. But they are not much far off from each other after taking into account transport costs from Manila. (Oil prices in Manila are cheapest since it is the basis point for the transportation domestic oil fuels.) 

During the highly regulated and price control days, artificial scarcities often occurred. They happened almost as often as the controlled price of gas began to get out of line with market realities and when the government was in the process of finding a new set of price guidelines.

“There are more gasoline dealers.” Today, there are more retailers of gasoline and diesel on the road. Not too long ago, there were only Petron, Shell, and Caltex. Today, there are more oil dealers that have networks of gasoline stations around the country, where before they were absent.

Smaller retail networks are owned by Total, Phoenix, SeaOil, Flying V. If one travelled to many outlying provinces, one finds many smaller, provincial networks of retailers. Some of them resemble stand-alone gas stations, owned by independents, with interesting names even.

“Some criticisms of existing law.” Despite past experience, there are still criticisms of the present deregulation ;aw, including the few now who want price controls restored. Some critics based in other regions complain about fuel prices in their localities being much higher than those in Manila.

Such critics should direct their attention more toward reasons other than the Oil Deregulation Law to blame. There are many policies that continue to hamper transport development, including restrictive laws and regulations on transport utilities and the need for better infrastructure investments.

A more sophisticated criticism is related to the issue of non-similarity of price adjustments when the world price of crude goes down and when it goes up. For instance, in the Philippines, IBON, an NGO critic, says: “The oil firms increase pump prices by more than is warranted by increases in the global price of crude oil and ... decrease pump prices by less than the decreases in the global price of crude.”

Any dissimilarity in the extent of adjustment is possible. One reason is that taxes could be adjusted by the government, especially when the price of crude falls. The government finds an opportunity not to be missed to raise taxes.

However, this criticism is something that could be empirically investigated. Is there price asymmetry in the adjustments to price? Or are the price adjustments by and large reasonably the same, or symmetric?

“Test of price asymmetry.”  A recent paper by UP colleagues at the School of Economics, Ma. Joy Abrenica, Rolando Danao and Ma. Nimfa Mendoza addresses the issue of whether prices of domestic fuels increase more than proportionately when world prices rise compared to the drop in prices when world crude prices fall.

The study tracks the time series of 233 weekly data (from 2009 through to seven months of 2013).  Movements of the domestic prices of gasoline and of diesel at the pump are individually investigated against the movements of the posted Singapore prices of the same fuels (the reference prices of the pricing formula for the determination of the deregulated prices for these fuels under the law), and also the corresponding movements of the peso exchange rates against the US dollar.  Various lags in data are tested against the behavior of domestic fuel prices.

The study employs state of the art econometric methodology. There is little space to discuss details and implications of the study.

The authors do not find any evidence of price asymmetry in the behaviour of the price movements of domestic fuels. The data period covered did not support the presence of a difference in price adjustments when world oil prices were rising compared to adjustments when world prices were falling.

In closing, it would be useful to speculate, whether the recent episode of drastic fall in world prices for petroleum is fully reflected at the pump. Indeed, we have felt the sudden easing of oil prices, but do they all go down at the same rate?

Some of the price benefits from lower crude prices have, in fact, been instantly felt by consumers, to the great relief of many. However, there are also factors why the benefits would not necessarily be directed toward consumers immediately.

There are pressing needs of development to which such gains from falling pump prices could be directed. Additional taxes could be an open avenue for enlarging the share of government. That might not be bad at all for it could help to enlarge the opportunities for spending more on transportation infrastructure facilities which are badly needed.

Reference: Ma. Joy Abrenica, Rolando Danao and Ma. Nimfa Mendoza, “Market competition in the downstream oil industry: Is there evidence of price asymmetry?” Philippine Review of Economics, December 2014, vol. 51, No. 2.

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