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#SahodItaasPresyoIbaba Economics' Understanding of How Gasoline Prices Work

International State College of the Philippines


Today is Flor Contempacion Day, and rallies are expected. However, whether it's Flor's death anniversary or not, rallies are expected for the wrongest of reasons. I would like to address this photo from the International State College of the Philippines' Facebook page. The demands here are rather clunky and stupid. We have the following demands that would naturally clash with each other, such as:
  1. No to the oil deregulation law while demanding lower oil prices. This is simply ignoring the basic fundamentals of economics, namely the law of supply and demand.
  2. They say that oil companies are greedy for gain. These rallyists probably don't really understand the difference between revenues and profits.

Let's understand the Oil Deregulation Law 

The Oil Deregulation Law, or the Republic Act No. 8479, passed on February 10, 1998, under the late Fidel Valdez Ramos. Here's how the liberalization works:
CHAPTER II 
LIBERALIZATION OF THE DOWNSTREAM OIL INDUSTRY AND PROMOTION OF FREE COMPETITION

Section 5. Liberalization of the Industry. – Any law to the contrary notwithstanding, any person or entity may import or purchase any quantity of crude oil and petroleum products from a foreign or domestic source, lease or own and operate refineries and other downstream oil facilities and market such crude oil and petroleum products either in a generic name or his or its own trade name, or use the same for his or its own requirement: Provided, That any person who shall engage in any such activity shall give prior notice thereof to the DOE for monitoring purposes: Provided, further, That such notice shall exempt such person or entity from securing certificates of quality, health and safety and environmental clearance from the proper governmental agencies: Provided, furthermore, That such person or entity shall, for monitoring purposes, report to the DOE his or its every importation/exportation: Provided, finally, That all oil importations shall be in accordance with the Basel Convention.

Section 6. Tariff Treatment. – (a) Any law to the contrary notwithstanding and starting with the effectivity of this Act, a single and uniform tariff duty shall be imposed and collected both on imported crude oil and imported refined petroleum products at the rate of three percent (3%): Provided, however, That the President of the Philippines may, in the exercise of his powers, reduce such tariff rate when in his judgment such reduction is warranted, pursuant to Republic Act No. 1937, as amended, otherwise known as the Tariff and Customs Code: Provided, further, That beginning January 1, 2004 or upon implementation of the Uniform Tariff Program under the World Trade Organization and ASEAN Free Trade Area commitments, the tariff rate shall be automatically adjusted to the appropriate level notwithstanding the provisions under this Section.

(b) For as long as the National Power Corporation (NPC) enjoys exemptions from taxes and duties on petroleum products used for power generation, the exemption shall apply to purchases through the local refineries and to the importation of fuel oil and diesel.

Section 7. Promotion of Fair Trade Practices. – The Department of Trade and Industry (DTI) and DOE shall take all measures to promote fair trade and prevent cartelization, monopolies, combinations in restraint of trade, and any unfair competition in the Industry as defined in Article 186 of the Revised Penal Code, and Articles 168 and 169 of Republic Act No. 8293, otherwise known as the "Intellectual Property Law". The DOE shall continue to encourage certain practices in the industry which continue to encourage certain practices in the Industry which serve the public interest and are intended to achieve efficiency and cost reduction, ensure continuous supply of petroleum products, and enhance environmental protection. These practices may include borrow-and-loan agreements, rationalized depot and manufacturing operations, hospitality agreements, joint tanker and pipeline utilization, and joint actions on spill control and fire prevention.

The DOE shall monitor the relationship between the oil companies (refiners and importers) and their dealers, haulers and LPG distributors to help ensure the observance of fair and equitable practices and to ensure the enforcement of existing contracts: Provided, That the DOE shall conciliate and arbitrate any dispute that may arise with respect to the contractual relationship between the oil companies and the dealers, haulers and LPG distributors involving the dealers' mark-up, the freight rate in transporting petroleum products and the margins of LPG distributors for the protection of the public and to prevent ruinous competition: Provided, further, That the arbitration award of the DOE shall be subject to judicial review under existing law.

As we look into what these rallyists from Makabayan Bloc are protesting against, they want to get rid of the Oil Deregulation Law and demand lower prices. It's plain common sense that when a business has no profit, a business couldn't pay for its expenses. If it wasn't 

Understanding how profits work and why we need profits

Business & Plans

Above is an example of a cash flow statement. We look into the net income here, we look at how the net income is barely half of the sales. That's why it's erroneous to confuse revenues with profits. The profits don't belong to the workers because when we do a breakdown, the worker fees are in:
  1. Cost of handling the goods
  2. Selling, general, and administrative expenses
We realize that again, for the nth time, when any profits are expatriated, those are net profits after taxes. Businesses, whether local or foreign-owned, are subjected to the Bureau of Internal Revenue whenever they pay all their taxes, such as the monthly value-added tax (12%), the quarterly tax, withholding taxes, or the annual income taxes next month. However, the FDI must also keep some money in the Philippines as emergency cash-on-hand. That means the Philippine banks benefit from the deposits not just by Filipinos but also by foreigners. After all, the foreign currency is translated into the local currency to be usable. 

Even a non-profit business must earn profits. For starters, the Tech Target describes the non-profit organization as:
A nonprofit organization (NPO) is one that is not driven by profit but by dedication to a given cause that is the target of all income beyond what it takes to run the organization.

Because of this, NPOs receive tax-exempt status from the federal government, meaning they don't have to pay income tax.

Nonprofit organizations are often used for trusts, cooperatives, advocacy, charity, environmental and religious groups. Many, but not all, NPOs have paid staff in management positions; almost all use volunteers.

Unlike for-profit businesses, NPOs have no owners and any surplus profits after operating expenses are used to further its goals instead of being distributed between members or employees of the organization.

The non-profit organization uses the profits for goal furtherance. That means even when a gasoline station runs as an NPO, it would still need the profits to do stuff like purchase gasoline, pay it workers, and keep the store open for the customers. 

The reality of the world market, hello!

Whether we want to admit it or not, the world market is the ultimate problem. Both the late Benigno Simeon "Ninoy" C. Aquino III and Atty. Rodrigo R. Duterte have their strengths and weaknesses. However, we must realize that events like the War with Ukraine or the recent conflict with Iran are the bigger factors. If there's war, it's common sense that every mile involved gets longer because of the distance needed. Why would the transportation risk pass through the shorter distance where the war is happening vs. taking the longer but safer route? I would rather take the longer but safer route even if I have to increase prices, because it would give me a recovery time.

According to the Center for Strategic & International Studies, this is a reality that people who demand lower gasoline prices during the current war need to face as the root cause of the fight:

Q1: Why are oil prices suddenly surging, now more than $100 per barrel, compared to the more moderate market reaction last week?

A1: During the first week of the war on Iran, which ended on Friday, March 6, the oil market reacted with only modest price increases, with Brent, the international benchmark for crude oil, rising just $12.93 (18 percent) through Thursday. The “grace period” offered by the market came to a sudden end on Friday, when it became increasingly unlikely that the unprecedented halt to the region’s oil and gas exports would be ending soon. This was manifest in Friday’s further $7.28 price rise, leaving Brent up $20.21 (28 percent) from its prewar level.

The situation deteriorated further during the weekend, with the targeting of Saudi oil fields, fuel storage terminals in Tehran and Kuwait, and even water desalination plants in Iran and Bahrain. With President Trump calling for Iran’s “unconditional surrender” and Tehran appointing the son of assassinated Supreme Leader Ali Khamenei, Mojtaba Khamenei, to take his place, traders are now positioning for a longer and more severe supply disruption. 

Markets opened in Asia on Monday morning with Brent surging as high as $119 per barrel—before falling back toward $100.

There's nothing any Philippine president can do. If one must think about it, Noynoy and Duterte didn't wave magic wands that made the prices higher or lower. Neither did President Ferdinand R. Marcos Jr. nor will Atty. Maria Leonor "Leni" Gerona-Robredo, if ever she becomes president, or any president in the future. The world market will be the bigger problem of the increase in oil prices. The presidents can only be at the mercy of the world market, even if they can find other ways to "help out" like suspending excise taxes for the moment, or find other sources of gasoline.

Right now, this should make me ask, "Why hasn't the Philippines focused on tapping its natural oil reserves, if ever? Why are we still afraid of FDI which in reality, will actually help supply us with our needs than just go for the self-industrialization model?" 

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