Government sanctioned exploitation: Illegality of the automatic oil pricing mechanism in the downstream oil industry deregulation act of 1998

• Main Authors: Banguis, Francisco C., Jr., Simagala, Krisha Mariel B., Soledad, Alexandra G.
• Format: text
• Language: English
• Published: Animo Repository 2019
• Subjects: Petroleum products—Prices—Law and legislation; Law
• Online Access: https://animorepository.dlsu.edu.ph/etdm_law/20
• Institution: De La Salle University

The power crisis experienced by the Philippines in the early 1970’s decelerated the progress of national economy prompting the government to plan reforms and rehabilitation programs to resolve it. Former President Fidel V, Ramos revived the plans to liberalize the oil industry. In response, the Philippine Congress attempted to deregulate the downstream oil industry in 1996 through the passage of Republic Act. No. 8180, but the same was declared unconstitutional by the Supreme Court on 5 November 1997 on the rationale that it encourages an anti-competitive behavior among stakeholders in the oil industry, specifically oil companies engaged in the downstream oil industry, violative of Section 19, Article XII of the 1987 Constitution on which prohibits monopolies and combinations of trade or unfair competition. Congress again pursued the deregulation of the downstream oil industry by enacting Republic Act No. 8479 or known as the Deregulation of the Downstream Oil Industry Act of 1998 on 10 February 1998. It became effective on 14 March 1998. Finally, the downstream oil industry was fully-deregulated when Executive Order No. 471 was then enacted by former President Fidel V. Ramos. It was enacted to propel competition among oil companies in the local market which is dominated by the Big Three Companies such as Petron, Shell and Caltex (Big 3 Companies); and to remove from the government the burden of maintaining price subsidy due to the deficit of the Oil Price Stabilization Fund (OPSF). The deregulation law allowed the oil companies to set oil prices which was previously fixed by the abolished Energy Regulatory Board (ERB). In an attempt to question the validity of R.A. 8479 as a policy, the Supreme Court upheld its constitutionality and avoided trespassing on the powers of Congress and its wisdom on its enactment. However, it did not prevent the end-users or consumers and other militant groups to inquire on the law’s constitutionality and allege that the effects of the same runs counter from its purpose. Oil companies are accused of price fixing, through cartelization among Big 3 Companies, and the existence of asymmetry in oil prices. Apparently, the automatic oil pricing mechanism that is previously the function of the ERB is a major why the prices of oil since 1998 consistently increased, and it has been subject to abuse by the oil cartel to the detriment of the general public. Chapter 2 of this study will show the transition of the downstream oil industry from a regulated phase to a deregulated phase and how it affects the increase of oil prices. Further, it will show how the law promoted an anti-competitive behavior due to the unfair trade practices and monopoly of foreign-owned oil companies thereby causing asymmetry in oil prices negatively affecting the poor Filipinos, and other end-use or consumers. It also reviews the proposed national oil exchange, and the stand of opposition groups vying to declare R.A.8479 as unconstitutional. Moreover, it will show the relationship between oil prices and alternative and/or renewable source of energy, as well as other oil and petroleum products. Chapter 3 uses consultative interviews, case law analysis, and documentation analysis to come up with the information provided in the preceding chapter, as well as interview key informants to validate the same. Chapter 4 examines the effects of the deregulation law, and the proposed oil exchange. Moreover, a welfare analysis is utilized to show that asymmetry in oil prices is caused by cartelization by the Big Three Companies (Caltex, Shell and Petron) which defeats the purpose of the law’s enactment. It will expose how automatic oil pricing mechanism in the downstream oil industry has been exploited by oil companies, which is why the Department of Energy intervene in the industry more than merely assessing and monitoring oil prices. The rising standard of living of Filipinos will also be discussed and how their quality of life mandated by the 1987 Constitution is prejudiced by the deregulation of the downstream oil industry. An analysis of how the lowering of oil prices could increase the consumption of petroleum products which eventually is not good for the environment is also provided. However, suggestions on the use of alternative and other renewable energy sources is not the only solution to solve the problem because the same is also limited, and replenishable. The effects of the effectivity of the TRAIN law also shows that the burden of the taxpayers will increase. Finally, Chapter 5 concludes that although new players entered the country’s downstream oil industry and participated in the retail gasoline market, the public experienced the negative effects of its deregulation due to the monopoly engineered by the Organization of Petroleum Exporting Countries, and the domestic cartelization of the Big 3 Companies. As crude oil import costs increased, so did the retail of petroleum products prices continued to move in the same trend. The study recommends that oil exchange should be nationalized though buy-back of Petron by the government, and a review committee be established to prevent unfair practices and oil cartelization. In addition, the generation of more renewable energy resources is also recommended.