Why is fuel more expensive in the Philippines?

As fuel prices kept climbing due to the conflict in the Middle East, President Ferdinand Marcos Jr. declared a national energy emergency on March 24.

According to the Department of Energy (DOE), pump prices in the Philippines have reached historic highs, in turn triggering electricity rate hikes, faster inflation, and lesser spending power for ordinary Filipinos.

Behind the detrimental effects of the surge in oil prices lies a deregulated oil industry that gives the government little wiggle room for intervention.

Replacement cost

Unlike its Southeast Asian peers, the Philippines has a fully deregulated oil industry that is governed by the Downstream Oil Industry Deregulation Act of 1998, which shifts the burden of supply and pricing to the private sector.

In a Senate hearing on March 24, Energy Secretary Sharon Garin told the Senate PROTECT (Proactive Response and Oversight for Timely and Effective Crisis Strategy) committee that the government does not have the mandate to dictate prices or interfere in the private sector’s operations.

“I think it works…in good times though. In bad times, the government does not have any regulatory [function] or any powers over the private entities,” she said.

“Kaya hindi mo sila madidiktahan kung kailangan, kung kailan na talaga kailangan pumasok ng gobyerno (That’s why you can’t tell them what to do if necessary or when the government really needs to intervene) because the only thing that the government can do is supervise, monitor.”

One of the most significant factors driving fuel price hikes is replacement cost accounting, which allows oil firms to adjust pump prices based on the current world market rate even if their inventory was purchased weeks prior at a lower price. Replacement cost refers to the amount of money a business must pay in order to replenish its supply at current market prices.

Despite the practice and the deregulation of the industry, Garin told senators that the DOE monitors prices set by oil companies.

“Our monitoring follows, we have benchmarks in place. We don’t just leave them to their own devices because we have irregularities reported. But the administrative or the criminal or civil part, we have no powers there. But we can monitor and talk to them, and they correct it if there’s something wrong or we accept it if they can justify,” Garin said in a mix of English and Filipino.

Senator Rodante Marcoleta questioned the oil firms’ use of replacement cost during a Senate PROTECT panel hearing on March 26, saying that the practice has caused unjustified fuel price hikes despite sufficient buffer stocks.

Supply and demand also play a role in why certain petroleum products are more expensive than others. In a press conference on Monday, March 30, Garin explained that diesel prices are higher because there is higher local demand for it compared to gasoline.

“Diesel is the most used. The demand for diesel is always higher. But also, the international market has changed in terms of diesel. Diesel is the most volatile now,” Garin said.

Lack of government intervention

Compared to its regional neighbors, the Philippines has one of the highest pump prices in Southeast Asia amid the lack of government intervention.

In Thailand — another net importer of oil in the region — the government utilizes an Oil Fuel Fund to subsidize domestic prices. According to the Thai government, it has been spending around 2.5 million baht (around P4.6 million) per day to shoulder subsidies.

However, it has since reduced subsidies for gasoline and diesel to preserve the fund’s liquidity, resulting in a 6-baht increase in Thai pump rates.

Philippine Energy Undersecretary Alessandro Sales also told senators that Thailand’s earnings from its upstream petrol production are funneled to the subsidies that maintain pump prices at a certain level.

Sales noted that the Philippine government has instead opted to provide “direct assistance” such as cash transfers to vulnerable sectors instead of broad price stabilization funds.

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– Rappler.com