Oil price controls

Business World
Introspective

The administration recently issued the controversial and poorly studied Executive Order 839 imposing price controls on oil. Economists and industry analysts have observed that, hand in hand with rampant oil smuggling, which an IMF paper euphemistically referred to as underdeclaration of imports due to election-related lenience in 2007, this will encourage full bloom of black-marketing and corruption with the coming 2010 vote.

To provide general background on the issue, the author thought it useful to share the section on Oil Deregulation of a study on the Political Economy of Reform During the Ramos Administration done by Christine Tang and him for the World Bank Growth Commission in 2008. The full report which also covers Water Privatization and Telecom De-Monopolization can be accessed via the following link http://www.growthcommission.org/storage/cgdev/documents/gcwp039web.pdf.

If there is proof of political will on the part of the Ramos presidency or of any other Philippine presidency, let this new oil deregulation law be the proof of that.... - Statement of Fidel V. Ramos. Enactment into law of R.A. 8479, Feb.10, 1998.

The deregulation of the downstream oil industry involved the highly politicized issue of liberalizing oil pricing. Three important considerations were (i) a long history, dating back to the 1970s, of civil disturbance related to oil price adjustments; (ii) the cost was going to be spread out across a wider segment of the population, including well organized, low-income groups such as transport groups that in the past partly paralyzed Metro Manila through transport strikes; and (iii) legislation was required to enact liberalization. Thus, from the start, the Ramos government focused on managing potentially broad opposition to the reform.

Efforts to deregulate the industry started as early as 1993. The Ramos administration launched a nationwide public information campaign to educate people about the workings of the oil market and allay fears of spiraling prices after deregulation. Public acceptance of (or at least reduced resistance to) the proposal was deemed important to get the congressional nod for proposed legislation to deregulate the industry. The Ramos government also committed the reform measure under the country's program with the IMF to help set a timeframe for passing legislation.

Although government officials related that they encountered very little resistance during the nationwide roadshow, what is interesting about this reform experience were the actions of the veto players - the legislature and the judiciary.

As the initial spadework on the proposed bill led up to the May 1995 congressional and local elections, work had to be put on hold as the likelihood of getting congressional approval became slim. While certain nationalist members of the legislature continued to strongly oppose the proposal when Congress resumed in July 1995, the LEDAC mechanism proved invaluable in speeding up congressional approval of the bill. An oil deregulation law was enacted and was in force for roughly 18 months starting in April 1996. During that period, a fully deregulated regime, with the oil companies free to adjust oil prices, had been gradually phased in. In November 1997, in response to a petition by a group of congressmen who had voted against the bill, the Supreme Court declared the law unconstitutional.

At the time, the Philippines was already four months into the Asian crisis. With the peso having lost a quarter of its value, which pushed up domestic oil prices, the Ramos administration was under renewed pressure to reregulate the industry. Nevertheless, the president persisted in pursuing the reform both by trying to get the Supreme Court to reverse its ruling and by asking Congress to pass a new law without the constitutional infirmity cited by the court. President Ramos succeeded in the latter, signing into law the Downstream Oil Industry Deregulation Law in February 1998.

The benefits of oil deregulation became evident during the most recent run-up in world oil prices. The full pass-through of world oil price increases to domestic oil prices helped to shield the fiscal sector from the burden of providing oil subsidies at a time when government finances were most fragile. Other benefits have included (i) increased competition in the industry with the entry of new players; (ii) less politicization of oil pricing; (iii) proper market response to high oil prices, including conservation and the search for substitutes like biofuels; and (iv) clean and good restrooms at service stations all over the country as a by-product of introducing competition in the industry, helping support tourism.

Mr. Romeo Bernardo is Global Source Philippine advisor and board member of The Institute for Development and Econometric Analysis, Inc. He was formerly undersecretary of finance during the Aquino and Ramos administrations.