Philippines decontrol woes

Patrick CrowWashington, D.C.
[email protected]

Last week, the Philippines Congress was struggling to pass a new oil industry decontrol law to replace the one the Supreme Court struck last year.

The court ruled Nov. 5 that the statute passed last February was unconstitutional because it favored the existing refiners-Petron Corp., Pilipinas Shell Petroleum Corp., and Caltex (Philippines) Inc. (OGJ, Nov. 17, 1997, p. 44).

In early December, the court rejected petitions to overturn the ruling. The justices said the law put at a disadvantage new refiners with a 4 percentage point tariff differential on imports of crude and refined products, a requirement for a 40-day inventory, and a provision that prevented them from selling at a loss to gain market share.

The court said, "A weak and developing country like the Philippines cannot risk a downstream oil industry controlled by a foreign oligopoly that can run riot."

Although opponents said the ruling would discourage oil market competition, the justices said it "precisely levels the playing field for foreign investors as against the three dominant oil oligopolists."

Legislation

After the court's final ruling, President Fidel Ramos called a special session of Congress to revise the oil decontrol bill.

Meanwhile, the government cut tariffs on oil products in order to ease the pressure on refiners and consumers until legislation could be passed.

The three refiners had complained they were losing millions of dollars daily because they were not allowed to raise prices to match crude prices.

Last week, the Philippines House of Representatives passed a bill to deregulate the oil industry after a 6-month transition period. The Senate was still working on its measure, which called for a 1-year transition.

The House legislation would allow President Ramos to speed or delay deregulation, if he determines it is in the public interest.

The House also allocated 5 billion pesos ($113.6 million) to subsidize the costs of liquefied petroleum gas and kerosine, both used extensively for cooking, and diesel fuel during the transition.

Ramifications

The oil decontrol crisis could not have come at a worse time.

Filipinos had begun complaining about product prices last summer, around the time the government abandoned its target exchange rate for the peso, and the falling peso made products more expensive.

Since then, the peso has dropped 42%, and commercial interest rates have doubled to 25%. The peso recently plunged to a record low of 45.2 to the dollar.

Earlier this month, the Philippine central bank had to ask the International Monetary Fund to delay a planned Jan. 16 meeting to discuss the nation's exit from 35 years of IMF supervision.

Oil market decontrol is a prerequisite for exiting the IMF program, and the government needed to give Congress time to act.

Even if Congress passes a decontrol bill, the oil price issue is unlikely to fade. Product prices always have been controversial in the Philippines, and opposition parties plan to make decontrol a major issue during the national election campaign in May.