SPONSORSHIP REMARKS OF HON. MARCIAL C. PUNZALAN, JR. (LAKAS, SECOND DISTRICT, QUEZON), VICE CHAIRMAN, HOUSE COMMITTEE ON ENERGY, ON HOUSE BILL NO. 5264, 13 DECEMBER 1995

 

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Mr. Speaker:

 

It is my distinct privilege to sponsor a very vital economic measure this afternoon that would help depoliticize pricing, allow consumers to immediately benefit form the increasing prices, and avoid the nightmare of experiencing substantial increases in oil prices, House Bill No. 5264, entitled: “An Act Deregulating the Downstream Oil Industry, and For Other Purposes.”

 

Mr. Speaker, one of the failures of our policy-making is the tendency to formulate temporary and piecemeal measures as problems arise.  It is about time that we prescribe comprehensive and enduring solutions to our economic problems.  And what better way to start than today with this bill.

 

One of the foremost thrusts of the government is the liberalization of the entire economy.  When we speak of liberalization, it means allowing free market forces to take their own course in the economy with the minimum control of the government to ensure the maximum benefit for our people.

 

The question now, Mr. Speaker, is why do we have to start deregulating the downstream oil industry now?  Mr. Speaker, Ladies and Gentlemen, the answer is that our economy is at present experiencing continued growth, stability of crude oil prices, as well as the foreign exchange rate.  It would not make sense to dilly dally in implementing the entire deregulation program considering the benefits that would be derived from such a shift.

 

Mr. Speaker, procrastination deprives us of opportunities. House Bill No. 5264, Mr. Speaker, is one of these opportunities.  It is the realization of extensive studies, consultations, and dialogues we had with the private sector and the various concerned agencies of government.  This is in accordance with the intention stipulated under Section 5 (e) of Republic Act No. 7638, otherwise known as the Law Creating the Department of Energy, which states the need to deregulate appropriate energy projects and activities of the energy industry.

 

Mr. Speaker, a cursory review of events of yesteryears would give us a better understanding of the whys and wherefores of our position.

 

More than twenty four years ago, regulation was effectively introduced to the Philippine oil industry.  It was triggered by the invasion of Egypt by Israel in June of 1967.  This is the famous Arab-Israeli Six-Day War, an event that traces its origin to the time of Abraham, the enmity between his two sons Ismael, his child by Cirrus, Egyptian maid Agar and Isaac, his child with his wife Sarah.

 

To support Egypt, Saudi Arabia cut down substantially its oil production and denied supply to those who were supporting Israel’s occupation of the West Bank or of the holy city of Jerusalem.

 

The Arab-Israeli Six-Day War brought about profound changes in the petroleum market.  The effect of this war reverberated around the world and the Philippines was not spared.

 

Congress then, Mr. Speaker, realized that we were at the mercy of the oil-producing countries.  Thinking that regulation would ensure the security of oil supply for the country, it passed Republic Act No. 6173 in 1971 to regulate the oil industry and effectively acceded to the requirements and dictates of the big players to attain its objectives of ensuring continuous supply of oil for the country and to hopefully maintain stable oil prices.

 

But the worst is yet to come.  The continuing crisis in the Middle East dampened the continuing production of oil wells while demand to act inventory in case of emergency, among others, for crude oil heightened.   Spot prices gyrated and continuing fear of energy crises permeated in the international oil-consuming community.

 

        Meanwhile, negotiations between Israel, Egypt, and Syria continued in an effort to resolve the territorial claims dispute which has resulted from the Six-Day War in 1967.  Unable to settle their differences at the negotiating table.  Egypt and Syria invaded Israel on October 6, 1973, setting off the Yom-Kippur War.

 

The world experienced the first economic disruptions resulting from price increases levied by the Organization of Petroleum Exporting Countries (OPEC) and the embargo and production cuts initiated in October of that year by the Organization of Arab Exporting Countries (OAPEC).  In the United States as well as in our country serious consideration was given to fuel rationing and layoffs were introduced in some industries.  More serious hardships arouse in other consuming nations, though the embargo ended in March 1974 and the production cutbacks were eased.  It was clear that the OPEC and the OAPEC actions marked the emergence of a new era in the world energy situation.

 

The power of the OPEC and the OAPEC created a direct impact on the levels of prosperity and phase of economy or of economic growth in the industrialized countries.  It was also a cause for great concern among the non-oil producing nations of the developing world.

 

Since then, Mr. Speaker, substantial changes however have happened in the past two decades.  Alternative sources of energy have been explored and developed.  Dependency on oil has gone down.  Relative peace in the Middle East exists.  Since then up to now, however, for about a quarter of a century our oil industry was placed in a vacuum unmindful of the changes around the world. Although the Filipino consumers were protected to a certain extent from international adverse conditions, our economy was impervious to international positive changes affecting the industry.  Practically all countries which imposed regulation have since then deregulated.  We are but one of the few, if any, who have remained fully regulated.

 

Through Republic Act No. 6173 and other issuances augmenting and amending the law to ensure security of supply and maintain stable prices, the government tried to cushion the economy, the consumer and the public in general from the effects of very drastic changes in the international crude oil market.   However, Mr. Speaker, the synchronized movement of prices between our country and the rest of the world while prices of crude were going down in the world market, oil companies in our country were petitioning for rate increases.  The demonstrations, the jeepneys and transportation strikes and the anarchy in the streets every time there is a price increase, lost opportunities to lure local and foreign investors from investing in a heavily regulated industry which were substantially in favor of existing players.

 

The threat of lack of supply and low inventory by the oil companies whenever petitions for price increases were not immediately granted. Accusations of collusion between the oil companies and the government whenever request for price increases were approved. All these were prompted this Representation, Mr. Speaker, to file the very first bill on oil deregulation as early as August of 1993 during the 9th Congress, as well as House Bill No. 210 and House Bill No. 72 in this 10th Congress.

 

Mr. Speaker, the deregulation of the downstream oil industry would foster a truly competitive market through liberalization of oil importation and the setting up of refineries and retailing activities.  Further, this would translate into fair price and margins and more choices, in terms of brands, rates of products and services, since the entry of new investors and players in the industry would create pressure on the oil companies and dealers to keep prices low in service levels size.

 

Aside from maximizing our geographical advantage as the best distribution point for the rest of Asia, deregulation would better enhance the climate for foreign investments.  With the proper business environment, this will send the right signals to foreign investors that the Philippines is a lucrative place to invest in.   And as a result of the impending deregulation of the oil industry, there are already more than a dozen independent oil companies applying to do business in the Philippines.

 

As a matter of fact, Mr. Speaker, the Department of Energy has recently approved the application of Asia Dragon Corporation, a joint venture between a reliable and known entity from Thailand, with respected Filipino capitalists to put up a 65,000 barrels per day refinery in Mindanao.  Our geographical advantage in the entry of more refineries will make us the best distribution point for Asia for refined products.  This would translate to an increase in investments and add to our dollar reserve.  Further, the expected entry of more oil companies would not only offer more employment but more importantly managerial skills and technology and more vigorous competition for the benefit of the consumers.

 

It is important to note, however, that the bill provides for a transition period in which necessary adjustments are to be made to assure success to deregulation.  This transition stage is very essential in the establishment of vital infrastructures such as the start of construction and completion of refineries, setting up of refineries, installation of depots and gas stations and distribution networks by the new players and investors as well as individual importers of refined products who will either retail them or use them for their own requirements in order that they could fairly and evenly compete with existing oil companies in the country.

 

At the same time, the new players’ existence would ensure adequate and continuous supply of environmentally clean and high quality fuel products while establishing an efficient level of industry competition, thus avoiding insufficient and undue concentration of resources.

 

So now, Mr. Speaker, how do we achieve such goals?

 

At the outset, our oil industry just like a newborn babe, this deregulation must be fed first with milk instead of meat since it may result in indigestion and like any ordinary child, his development comes in stages that could not be hastened over a limited period of time.

 

Therefore, Mr. Speaker, deregulation is planned to have several steps to its full realization.  First, deregulation is divided in two phases—the transition phase and the full deregulated phase.  This transition phase will allow for the new entrants to start putting up infrastructure and build their market, and as marketing companies build up their fleet of lorries and barges to meet demand as and when they are needed.  Likewise, OPSF is frozen effectively and abolished.

 

In the transition phase, Mr. Speaker, importation of crude and refined products as well as marketing, retailing, distribution and other downstream activities will be liberalized.

 

With the passage of this bill into law, immediately importation, refining, marketing, trading and retailing will be open to all commerce with a of minimum intervention from government except for some clearances to assure safety, quality of products, health, and environmental safeguards.  Also, an automatic price mechanism is introduced in this bill.  After having established the parity between the local prices and the world market, this scheme should also allow for frequent and small, upward or downward changes as opposed to infrequent and large changes we see today.

 

In simple terms, Mr. Speaker, this would also help approximate and promptly reflect the changes in prices of oil in the international market.  This would also help the consumers to be oriented or be acclimatized to the reality of price changes whether downward or upward in the world marketplace.  This is also designed to free oil prices from the politicized process which threatens to polarize the country every time a new price adjustment becomes inevitable, and likewise extricate the public sector from the destabilizing changes and fiscal impact of failure to adjust prices to reflect landed cost of oil.

 

Mr. Speaker, with only three current players in the oil industry, there are concerns that under the regime of price decontrol these players might behave like a cartel and take advantage of their preeminence to extract unmitigated profits.  Although highly improbable as crude and oil prices and costs involved in refining and distribution are public knowledge and may be known even by the hour or every minute.  Even in the transition phase, Mr. Speaker, the bill provides a full liberalization of the retailing, importing, exporting, construction and installation of service stations and storage facilities in order to entice new players to enter the market. Having done this, there would be an entry of new players, more gas station locations, direct importations of product by large users and traders and open competition for gas station services to motorists.

 

In the full deregulation phase, the OPSF is abolished and full market forces will determine the price of petroleum products. Nonetheless, adequate penal provision will be promulgated to assure compliance of the law to deter participants and cartels in collusion to put one over the public.

 

The bill has passed, Mr. Speaker, various government agencies to undertake monitoring activities by the Department of Energy to ensure product quality, the Department of Trade and Industry to ensure fair competition, the Department of Environment and Natural Resources to assure health and environmental standards, and the Department of Labor and Employment to ensure that the health and welfare of workers in the industry are safeguarded.

 

Mr. Speaker, my distinguished colleagues, it is time we unshackle our economy from the stranglehold of regulation.  Let us give the major oil companies and the independent oil companies, refiners, traders, importers, and retailers a chance to be competitive for the benefit of the consuming public.  Let us open our country to the global changes that will temper our economy to world class standard. Deregulation, therefore, is a key towards that direction.  In this endeavor, my esteemed colleagues, the legislative plans of government are a catalyst of this change.  Let us take part in shaping the destiny of this country.

 

Thank you, Mr. Speaker, and good day to all.

 

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