Knee jerk ideas

Because our government has never been good at thinking long term and planning for contingencies, every crisis brings about a flowering of populist knee jerk ideas that will make things worse.

Our current oil crisis is no exception. Members of Congress out for good optics or sound bites suggest things like re-nationalizing Petron. Yet, we all know how inept our government is in managing anything these days.

We should thank our lucky stars Petron is now in private hands. Not only did San Miguel keep the refinery when scrapping it made more business sense; San Miguel invested $2 billion to upgrade it so that it can now produce more diesel and gasoline per barrel of crude oil.

It was a very different time when the government bought Esso which became Petron. It inherited a very well-trained staff of oil industry professionals with a work ethic and a system of operations that worked well in Esso’s worldwide operations.

Petron also didn’t lose its private sector identity. Its employees were members of SSS, not GSIS. It operated without most of the constraints of government corporations so it can compete with Shell and Caltex.

If the government buys back Petron now, it will be run by incompetent political supporters of whoever is in the Palace. That’s what happened to PNOC. The top positions in PNOC became sinecures for loyal political supporters.

If the government has money to buy back Petron, which is doubtful, it is better used to build crude and product storage tanks in Bataan and product tanks in key regional centers so that we will have a national strategic oil storage capability.

Government ownership of Petron will not guarantee stability of pump prices nor assure stability of supply because those are driven by the international market. Government ownership guarantees interference and favors to feed the greed of politicians.

Incidentally, Petron also lost P11 billion during the pandemic due to a combination of unprecedented drop in demand and a sharp drop in international oil prices. Petron had more expensive crude stock in normal storage resulting in inventory losses.

Ayuda is another knee jerk response popular with the public and our politicians. There is no denying our masa needs help at times like this but we must start to build the institutional processes that will make implementation of ayuda smooth, fair and free of corruption.

DSWD, with the help of LTFRB, must maintain a list of drivers who are qualified to receive aid when fuel prices rise significantly. Such a list can be done. We did it for the Pantawid Pamilya program. Government agencies must not be conjuring such a list only when it is needed.

Until that’s done, the only help that could be managed well is reducing or eliminating taxes. We will not dispute the contention of economists that this is a less desirable means of helping in a crisis but it is the quickest and least susceptible to corruption leaks.

Because the targeted assistance or ayuda now being given to drivers is so small, do not expect them to drive their routes without a fare increase given the significant rise in diesel prices. This ayuda is merely designed to show BBM is doing something.

Price control is another stupid idea. That will just make oil products disappear from the market. We have no control over oil prices. That’s controlled by the international market that is subject to geopolitical events like wars.

Some people are probably thinking that the government must cap domestic oil prices. Not only is it unfair to require the oil companies paying higher international prices to lose money, price control also doesn’t work.

As The Economist explains, “such interventions will do more harm than good. High prices and fat profits tell consumers to economize on energy while encouraging producers to find and sell more…

“It is arithmetically impossible for every government to shield its consumers from the energy shortage. So long as the Strait of Hormuz remains closed, the world has lost 15 percent of its oil supply; add in damage to Qatar’s facilities, and the global supply of LNG is down by about a fifth. No amount of subsidy can bring this back. Global energy consumption must fall.

“Regulatory interventions do not cost money, but are just as likely to backfire…”

The only thing the government can control is the tax component of gasoline and diesel pump prices.

The problem with government technocrats at the finance department is a single-minded focus on collecting with ease even in the face of a national emergency like what we have today.

Former congressman Joey Salceda recalled how the DOF opposed a CREATE provision that changed the prevailing system requiring Petron to pay taxes and duties on crude oil immediately upon arrival. CREATE made the taxes and duties payable when the processed petroleum products leave the refinery.

Salceda recalls how he fought for that CREATE provision.

“What it does is stop the government from using the refinery’s working capital as a float. Without it, Petron finances VAT and customs duties on every crude shipment before producing a single liter of gasoline. It will be difficult for any refinery to survive that cash flow structure…

“Five years later, the provision is earning its keep…”

Cong Joey estimates that based on our national consumption of roughly 20 billion liters per year, Petron is saving us P30 billion to P40 billion annually in additional consumer spending, which would have otherwise flowed out of the country to Singapore refiners and international traders.

Assuring the nation there is a sufficient supply of oil products is wrong when we know our inventory level is precarious. Such assurance will bite back BBM and DOE if our supply dries up as the war extends.

It is better to prepare for the worst-case scenario. If it doesn’t come, we can celebrate. We should not be caught by surprise.

Boo Chanco’s email address is [email protected]om. Follow him on X @boochanco