Gil S. Beltran

Undersecretary

Department of Finance, Philippines

WHY OPSF?

OPSF created in 1984

Objective

Minimize excessive fluctuations in domestic

petroleum prices

• OPSF administered by DOE but pricing

decisions are made by Energy Regulatory Board

(ERB)

• ERB is a quasi-judicial body manned by

“independent” professionals

HOW DOES OPSF OPERATE?

• Producers drew from the OPSF when landed

costs are high & contributed to it when landed

costs are low

• Ideal: Drawdowns = Contributions

• Bi-monthly setting of petroleum product prices

by Energy Regulatory Board (ERB )

• Prices should be based on landed cost

(petroleum import price and exchange rate

movements)

• Conduct of public hearings before price

adjustments by the ERB

POLITICAL PRICING

UNFORTUNATELY, petroleum is a POLITICAL

COMMODITY

Pricing was very political

- Price adjustments informally approved by the

President

Public hearings were confrontational

- Producers vs. Consumers

- Govt vs. Producers & Consumers

RESULTS OF POLITICAL PRICING

Adjustments too late and too small

OPSF depleted during periods of high oil prices

OPSF deficit bloated the public sector deficit

and public debt

Govt provided P17.6B in subsidies to OPSF from

1990 to 1997

- Equivalent to 0.2% of GDP or 0.8% of central

government expenditures

POLITICAL PRICING Oil subsidy displaced more important govt expenditures.

* Equivalent to:

- Free rice for 17.6 months to the poorest 30% of the population below poverty line

- 62,241 schoolhouses

- 5,280 kms of rural roads

- 146,080 deep wells for drinking water or

- 2 light rail transit lines

POLITICAL PRICING

Shifted petroleum price increases from direct

heavy consumers to ordinary taxpayers

Provided more subsidy to the highest income

groups and middle class with cars and air

conditioning (92.8%) compared with lowest

quintile (7.2%)

Poorest of the poor who walked to work got

none

POLITICAL PRICING

From 1991 to 1995, contributed to:

26% of the 60% rise in traffic volume

33 M li increase in gasoline consumption

annually

Additional 78,000 tons of carbon dioxide

emissions annually

Additional 1,100 tons of nitrogen oxide

emissions annually

Congestion and slow traffic in Manila streets

POLITICAL PRICING

In 1995,

Pushed up imports of crude oil by 15%

equivalent to an estimated 7M barrels

amounting to US$100M

Amount should have been used to purchase

capital goods for new factories that would have

generated 34,650 new jobs

DOWNSTREAM PETROLEUM

INDUSTRY DEREGULATION -

1998

Abolition of petroleum product subsidies

Market-oriented pricing

Liberalized imports

Liberalized entry of refiners & importers

Restructuring of petroleum taxes to tax less

products consumed by the low-income groups

Abolition of OPSF after payment of all claims

IMPACT OF DEREGULATION

More competitive pricing (selling margins

dropped)

More players (from 3 to 16)

Politically noisy groups continued with their

rallies every time petroleum prices were raised

but their ranks slowly thinned out

Petroleum consumption growth (3.1%) dropped

below real GDP growth (3.3%) from 1997-2012

(vs 7.9% & 3.4%, respectively, from 1984 to

1997)

RECENT REFORMS (2010 onwards)

Whenever there are steep increases in

petroleum prices (50% or so), we adopt:

Targeted, temporary subsidies for public utilities

& lifeline users of electricity

Subsidies funded by “excess” revenue collection

Subsidies much less than in the past (<P0.5B

per year in 2010 and 2011) – 0.01% of GDP and

0.03% of central government expenditures)

Led to increased acceptability of deregulation

CONCLUSIONS

FIRST BEST SOLUTION: DEREGULATION

Accepted as the most appropriate policy along with OPSF abolition

Had favorable impact on conservation, development of alternative fuels, and environmental protection

SECOND BEST SOLUTION: OPSF MECHANISM

Designed for countries with wide exchange rate fluctuations

For OPSF to function well,

- Politics should be rooted out from pricing

- Regulators should be professional & independent

Thank You