Ladies and Gentlemen, good afternoon.

We are recommending the deregulation of the downstream oil industry as embodied in House Bill No. 5264.  This is consistent with the overall thrust of the government to liberalize the key sectors of the economy and make the private sector the main engine of growth.

Deregulation should not be equated to the absence of regulation.  Even if we deregulate, government can still exercise its police powers to ensure security of supply, fair and open competition, and that environment, health, and safety are maintained by the industry.

Deregulation should be viewed as an improvement over the present regulatory system because the current pricing mechanism is causing inefficiencies in the industry.  The problem with the present system is that it attempts to control domestic petroleum prices which are essentially dictated by uncontrollable external factors such as the international oil price and foreign exchange rates.  Adjusting domestic prices of oil products to seasonal fluctuations in international oil prices, foreign exchange rate and domestic supply and demand oil products has always been a political and social issue.  Deregulation will reduce costly government subsidies, encourage growth in local enterprises, improve the climate for foreign investments, and more importantly, remove the burden of political price setting.

For the consumer, deregulation is likely to result in the following benefits: reliable supply, good quality products, convenient locations, reasonable price levels and better choice of products and services.  Other countries like New Zealand, Thailand, South Korea, Japan, and Taiwan have already deregulated their oil industry.  Among these countries, Thailand’s deregulation was considered the most successful.  Prior to deregulation, it had five oil companies in the industry.  In a span of six years, this number increased to 24 players.   The shift to deregulation was in response to the shortcomings of price regulation.

Mr. Speaker, Thailand’s deregulation has been successful because the public and the industry players were able to adjust well to the policy shift.  The government prepared the oil firms by informing them well ahead of time of the government’s steps towards deregulation and its schedule of implementation.  Our government has also been consulting with various sectors including the present players in the industry.  The deregulation plan is conceptually complete although the main concerns are the timing of the deregulation and whether it will really attract new entrants to the industry.

Considering the experience of other countries, the timing of full deregulation in Thailand could serve as a model.  Thailand timed its implementation when the Gulf War crisis ended.  Immediately thereafter, the supply of crude flooded the market, exerting a downward pressure on crude prices.   This made their transition towards full deregulation relatively smooth, as stable prices were associated with deregulation.  Also with the control in the prices lifted, deregulation has enabled the oil companies to earn a reasonable margin.  This attracted more entrants to Thailand’s oil industry. Similar to Thailand, our deregulation plan will also involve a transition phase that will familiarize the public with frequent changes in petroleum product prices.

During the transition phase, Mr. Speaker, the automatic pricing mechanism will be adopted.  Under this scheme, pump prices will be adjusted every month based on the changed in the international oil prices as indicated by the Singapore Import Parity or SIP.  However, any increase in excess of P 0.50 will be absorbed by the Oil Price Stabilization Fund.

After a few months when the conditions are favorable, that is when the price of crude and foreign exchange rate are stable, full deregulation will be adopted.

Admittedly, there are consumers’ concerns.   These include the following:

First, deregulation could allow the three oil companies to form a cartel and take advantage of the public by overpricing their products.

If the essence of deregulation is to increase the level of competition, then it will have precisely the opposite effect.   Competition among oil companies should intensify, lessening the likelihood of cartelized behavior. In the interim, the liberalization of imports should act as a control mechanism against cartelization, as imports will provide initial competitive pressure.

Another concern, Mr. Speaker.  Allowing price volatility for petroleum products will spark a chain reaction of price movements for basic goods and services.

However, price movements in either directions are needed in order to establish a realistic balance between what the market will bear and what the level of profitability is needed to enable investment that improves the industry’s competitiveness.

Under the transition phase, the shift from bi-monthly to monthly price movements will help control the build-up of inflationary expectations.  This will also help in controlling the possibility of hoarding.

At present, we are already adopting the first stage of deregulation wherein some non-pricing rules have already been relaxed with the implementation of Administrative Order No. 95-001 by the Department of Energy.  This will be followed by the implementation of the automatic pricing mechanism and eventually by full deregulation. The tentative date of the implementation of the transition phase, Mr. Speaker, will be sometime in March 1996.  Full deregulation will hopefully be implemented on or before the first quarter of 1997.

Mr. Speaker, massive investments are needed to meet the growing energy and oil demand of a resurging economy.  However, capital is difficult to attract within the current regulatory environment.  A more liberal investment is thus needed, to encourage the industry expansion to help sustain the country’s economic growth.

Deregulation must be a multi-sectoral process.   On the part of the government laws have to be amended such as the OPSF Law, the ERB Charter and so on.  Additionally, areas of continued regulatory presence have to be identified like health, safety, and environment and enforcement capacity in these areas have to be built up.

On the part of the private sector the challenge is to live with and be successful in a more competitive environment.  Is business ready to realistically evaluate the impact of oil movements on costs?  Is business ready to demand from the oil industry better products and service, at reasonable prices?

Ultimately, Mr. Speaker, the success or failure of deregulation depends on what all of us—government, the industry, and the private sector—make of it.  A consultative process that begins with clear objectives and is transparent in its mechanism—this is only the first series of steps.  The more critical series of steps center on our willingness to accept the challenges of a more dynamic, more efficient environment, not just in the downstream oil industry, but in the economy in general.

For the above reasons, Mr. Speaker, we are appealing to you and to our distinguished colleagues to support House Bill No. 5264 which would deregulate the downstream oil industry.

Thank you. 

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