Oil Deregulation Law

Fifteen years have passed since the enactment of Republic Act 8479, otherwise known as “Downstream Oil Industry Deregulation Act of 1998”, but down to this day, Oil Deregulation Law remains to be a subject of disputes. The heightening tension is not only based on whether or not we should regulate or deregulate oil industry but is also founded on an important economic question: Should the government intervene in setting oil prices or should they leave the market outcome to market players – producers and consumers? Before deciding on which side of the ring we will support, it is necessary to consider the following questions: What does it mean to regulate and deregulate oil industry? Who benefits or who suffers under a regulated and deregulated environment? Will regulation or deregulation be a blessing or a curse? Pondering over the answers to these questions will aid us in choosing whether we are for or against Oil Deregulation Law.

According to Bernales(2010), “deregulation is the lifting of certain government controls (such as price control) on several aspects of a specific industry, specifically the oil industry”. Oil deregulation, therefore, means that there is nothing that the government can do to interfere with pricing and operation of oil companies except policy making. On the other hand, under a regulated environment, government establishes Oil Price Stabilization Fund(OPSF) which pays for the difference in price set by government and price of oil in the global market.

Those who oppose R.A. 8479 claim that deregulation will result to abuses from oil companies whilst advocates of Oil Deregulation Law argue that it must be retained primarily because it encourages competition and protects government from vulnerability of price changes. The data gathered by Ibon Foundation, an independent think-tank, shows that pioneering oil companies, Shell, Caltex, and Petron has earned enormous profits in 2007 alone amounting to Php4.12 billion, Php 2.75 billion, and Php 5.95 billion and since 2000, oil prices are overpriced by as much as Php 4.55 per liter because prices are left unregulated. Oil Deregulation Law hence gives oil companies chance to manipulate or even abuse pump prices prejudicing consumers.

On the other hand, supporters of R.A. 8479 is against the repeal of the said law because they have witnessed the benefits brought forth by putting Oil Deregulation Law in place. “From three players – Caltex, Shell, and Petron, there are currently more than 80 new players. These new players, according to Department of Energy, have invested more than Php 28.35 billion as of 2005”, Bernales said. Deregulating oil prices,therefore, breeds competition. Another blessing experienced under a deregulated environment is protection from unusual fluctuations. If regulation of oil price is allowed, the government will have to bear discrepancy if the price set in the global oil market is higher than the price fixed by the government. If oil regulation is still in practice, OPSF would have to fund at least Php 8.3 billion in 1998.

With all the pieces of information gathered, it is imperative to use cost-benefit analysis as a tool to understand whether Oil Deregulation Law is favorable or unfavorable. Many believe that oil companies took advantage of the policy, hiking oil prices, but even in a regulated environment, oil prices will continue to rise. Let’s say, oil companies are given a degree of space to manipulate oil prices but that is JUST ONE out of several reasons that can be attributed for increase in the price of oil. Will not oil prices increase if oil-producing countries refuse to produce more supply of oil? Will not oil increase due to weather, peso-dollar exchange rate, global financial condition, and any other factors? Logically, oil companies can’t maneuver oil prices just to serve their interests. Why? Because the competition is in full swing. If they will abuse and set prices to gain unfair advantage, they will hurt no one except themselves because consumers will certainly look for other alternatives.

What about the benefits realized during the implementation of the policy? A number of players have willingly invested their money. Taxes, of course, would be collected from these players by the government and these collected taxes will be used to fund meaningful projects – building schools, roads, establishing national defense, etc. Oil deregulation, indeed, promotes national development In line with that, the data collected by Ibon estimates that OPSF would have to shell out Php 8.3 billion in 1998 to pay for fluctuation in oil prices had we pursued a regulated environment. What can we do with that huge amount? Perhaps, under a regulated environment, people tend to feel secure because government allots resources to subsidize prices. Yet, the effect is only artificial. Why? Although the pressure is not felt by the population, government’s limited resources are spent not where it is needed but to pay for the difference between the artificial price set in the national setting and the correct price in the global market. Weigh the cost and benefit and select for yourself. Will you side with regulation of oil prices or will you be for deregulation of oil prices?