Out of the media boxMaking Sense of Oil Price Hikes
by Sonny Africa
Published in the May-June 2011 issue of PJR Reports
OIL IS among the economy’s most important and widely-used commodities. Its price, which directly and indirectly affects so many people, is among the most politically sensitive issues in the Philippines. Media organizations have diligently reported the hikes in oil prices in 2008 and since the start of 2011. This has kept the oil issue current in the public mind and contributed to stimulating important debate and prompting further study of the industry.
However, the reality of volatile and rising oil prices is more complex than it seems at first glance. The issue has features not amenable to standard media reporting and the media bias for breaking stories, definite information, clearly identifiable protagonists and antagonists, and easily digestible narratives. This presents challenges for the media to report the whole story behind oil price hikes.
The largest part of media coverage of the oil issue is on reporting movements in oil prices, the reactions of transport groups (especially when these take the form of transport strikes) and other people’s organizations, the corresponding justifications of oil firms and the response of the Department of Energy (DOE). Also reported, although to a lesser degree, are proposals to deal with rising prices such as suspending the oil value added tax (VAT) and reversing oil industry deregulation. The impact on inflation, transport sector incomes, and supposed government mitigating measures such as the Aquino administration’s Pantawid Pasada are also covered.
To some degree these are fine, since some of the most distinctive features of the issue at least reach the public. However, there is a subtle but profound problem insofar as media coverage reinforces the official line that oil price increases are the result of inescapable “market forces”. This is a dangerous premise with far-reaching consequences; the public debate on the oil issue will be well-served if this notion is subjected to greater scrutiny. The media can play a vital role in this effort.
The big oil companies and the government routinely explain rising oil prices as the result of industry “market forces” akin to a force of nature that cannot but be accepted. They are, like the country’s poor consumers, also victims of these forces. This is certainly a convenient storyline—local oil firms can say that they are just following global prices while the government can say that it cannot do anything because the market is beyond its power to control. In short, the people will just have to accept rising prices and their consequences, since nothing can be done about it. Indeed, it is argued, state intervention risks incurring the wrath of the market and catastrophic supply shortages.
Public attention is then systematically diverted to short-term “solutions” like transport, farmer and fisherfolk subsidies, and removing the VAT on oil. Matters go even farther afield with quibbling over the desirable size of subsidies, how much of these might be lost to corruption, and with estimating just how many percentage points of VAT can be removed and when.
The oil firms meanwhile are left free to make their profits. Petron, Pilipinas Shell and Chevron, (the Big Three) for instance, have already booked at least P141.7 billion in profits in the last decade (more once gaps in annual data are filled in). Yet even this is already P114.3 billion more than the combined income in 2009 of the country’s poorest 2.36 million families , or some 11.8 million Filipinos. Global oil profits are even more massive. Royal Dutch Shell and Chevron booked US$317.3 billion in profits in the last decade, an amount equivalent to nearly twice the size of the Philippine economy.
The Philippine government, meanwhile, invokes the spectre of fiscal crisis. It then keeps collecting oil VAT revenues and avoids taxing those in the country with the real ability to pay such as high-income individuals and companies, including oil firms with record profits. In the last five years the government has collected P239.6 billion in oil VAT revenues, or an average of some P48 billion per year, thus firmly establishing its pecuniary self-interest in high oil prices.
Yet global oil prices are actually not set by impersonal market forces in a freely competitive environment. The two main factors underlying rising global oil prices have to be appreciated if appropriate solutions are going to be identified.
Firstly, the global and local oil industry is a monopoly—or, strictly speaking, an oligopoly—with only a few dominant players operating and not according to “free market” terms. The barriers to entry in the oil industry are considerable, with huge exploration, production, refining and even transport costs involved. Neither do the biggest oil industry players transact on a commercial arms-length basis. The governments and oil firms of the United States (US) and Saudi Arabia, for instance, collaborate closely and interact within a web of oil, military and geopolitical interests.
Profit-seeking firms expectedly use their position to influence oil prices so as to maximize profits. This is not to say that unexpected changes in oil supply or demand due to war, seasonal weather or disasters do not matter—only that, despite such events, their influence remains.
Secondly, the last decade has even seen oil companies benefiting from a new financial lever for driving up oil prices—massive speculative investment in oil commodity markets. In 2009 for instance, oil futures trading on the important New York Mercantile Exchange was already up to seven times the actual volume of world oil production. The speculators are banks and other financial institutions which are neither producers nor users of oil and which trade in the commodity purely for the profits to be made.
The global oil monopoly is fully reflected in the local oil industry, which is dominated by the Big Three who corner some 80 percent of the market, gasoline stations and storage capacity. Even the new players could be considered part of this monopoly to the extent that they do not price any differently from Petron, Shell, and Caltex. Oil industry privatization and deregulation in the 1990s did not result in greater competition, and, indeed, even completely undermined the capacity of the State to effectively regulate and intervene in the public interest.
This is where media coverage of the oil issue needs the most improvement: the vital and strategic oil industry cannot be treated as just another business, and needs to be considered for what it is: a public utility providing a necessity.
Ironically, it is the public’s sheer need for, and dependence on oil that makes the industry so readily subject to abuse by profit-seeking businesses. This abusive pricing manifests in three ways. First, the oil firms in the country are fully integrated into the global scheme of interlocking monopoly pricing. They benefit from high global oil prices and are far from passive victims. Second, the oil firms engage in brazen profiteering when they do not even adjust local pump prices commensurate to the changes in the price of global crude and foreign exchange movements. And, third, they charge the highest possible prices in the provinces and regions outside the main urban centers.
Addressing rising oil prices is most of all about confronting this monopoly control of the oil industry, starting with the Philippines. This can be done in phases with a long-term view to eventual nationalization. There has to be real regulation of the industry. This necessarily means full transparency, with the oil firms opening up their books, supply sources and contracts, payments abroad, stocks and inventories, operating expenses and profits. Barring this, investigative media may have to break the veil of secrecy that the oil firms and government have created.
Returning Petron to the hands of a socially responsible government is important to give it a firm anchor for intervening in the domestic market. Other possible interventions include centralized procurement, setting up some kind of fund for stabilizing prices, or the State’s exploring alternative trading arrangements. When the government has enough experience, capacity and technological capability, it can move towards more complete nationalization of the oil industry.
Among the most potent weapons of the oil firms and the government right now for protecting their profits and oil VAT revenues, respectively, is the notion that nothing can be done and that the people will just have to deal with inescapably high oil prices. The mass media can go very far in helping break this notion and building a public momentum towards a more rational oil industry that will be in the service of the Filipino people.
Sonny Africa is a graduate of the London School of Economics and is head of research at Ibon Databank