The Voice of Overseas Filipinos
RAlLPH RECTO's FAULTY ANALYSIS ON OIL PRICE
STRATEGIC PERSPECTIVE
René B. Azurin
Incompetent or devious?
After making the public wait for over two weeks, economic planning agency head Ralph Recto finally released a statement that “explained” how he calculated that gasoline prices were overpriced last month by about P8 per liter. On reading the explanation, an oil industry veteran made the marvelously descriptive comment, “It’s a Mickey Mouse computation!” I would have agreed, except that I thought it insulting to Mickey Mouse.
One way of interpreting Mr. Recto’s two-weeks-in- the-making explanation is that the country’s chief economic planner is incompetent and simply does not have the analytical skills for the technical position he now occupies. Another interpretation is that he is deliberately and maliciously disseminating false economic information to the public in order to promote some secret private agenda.
What the National Economic and Development Authority head did – reportedly, none of NEDA’s knowledgeable technical staff were in on it – was to relate the prices of Dubai crude in February 2005 (his figure was P2,176 per barrel at the exchange rate then of P54.81 to $1) and March 2005 (P2,495 per barrel at P54.44 to $1) to the local pump prices of gasoline in those two months (his figures were P27.37 and P 29.22 per liter, respectively) . This led Mr. Recto to calculate – he says by “interpolating” – that more than 4 years later in April 2009 when Dubai crude was P2,408 per barrel (at the exchange rate now of P48.16 to $1), the local pump price for gasoline should be P32.16 per liter. That exact figure of P32.16 actually cannot be derived from the NEDA chief’s logic so he must have made an error in his calculations or he made an adjustment to his figures that he did not make us aware of.
It should be noted that Mr. Recto selected the price of Dubai crude for the months of February 2005 and March 2005 to use as basis for his calculations. Choosing any other months in any other year would have produced a different price estimate. The question must therefore arise: why did Mr. Recto arbitrarily choose those particular months in that particular year? Was it so that he could arrive at a particular desired result?
There is, moreover, something distinctly disingenuous about Mr. Recto’s claim that gasoline – he did not specify which kind of gasoline – was overpriced by P8 per liter. In the week that Mr. Recto made this claim, the price monitor posted on the Department of Energy website showed that Premium Plus Unleaded gasoline was priced between P37.32 and P40.85 per liter, Premium Unleaded gasoline was priced between P34.70 and P39.71 per liter, and Unleaded gasoline was priced between P32.25 and P39.07 per liter. It is obvious that Mr. Recto picked the highest prices in each price range to make his “overpriced by P8 per liter” claim. In fact, most prices in Metro Manila during that week were in the vicinity of P36 per liter – not that far from the P32.16 per liter figure estimated by the NEDA chief – and the lowest posted gasoline price of P32.25 per liter was virtually the same as his estimate.
Mr. Recto used the word “interpolating” to describe his calculations. In mathematics, “interpolating” means deriving or inserting an intermediate value between two adjacent values. In ordinary usage however, “interpolate” (according to Webster’s) means “to insert new or spurious matter, deceptively or without authorization”. Aha. Maybe the whole claim of overpriced gasoline prices is “spurious” and maybe it is being “deceptively” inserted into the public’s consciousness.
Actually, what the NEDA chief described was – mathematically speaking – a simple ratio-and-proportio n calculation. Ratio-and-proportio n calculations assume that the relationship between variables that happen to be under scrutiny is constant or consistent. That implies that the conditions affecting the subject variables also remain constant and consistent. Mr. Recto’s calculations assume – crucially – that the ratio between the Dubai crude price and the Manila gasoline price is constant and that it remains unchanged even after the passage of over four years. Effectively, what Mr. Recto is saying is that absolutely none of the conditions that could possibly affect these two variables have altered this ratio in the last four years
In reaction statements that I thought tried to be kind, both Pilipinas Shell and Petron pointed out that the imposition of a 12% value-added tax on oil products already constituted a major change in conditions since February and March 2005. In Mr. Recto’s P32.16 per liter estimate, this additional tax alone would add P3.86 to the per-liter price of gasoline at the pump and raise his estimate to around P36 per liter.
As the oil companies also correctly point out, other changes – modifications in product mix with the introduction of bio-fuels, the use of double-hulled vessels, new standards for retail outlets, changes in dealer margins, etc. – have already altered their cost structures since February and March 2005. If there are such changes in the way cost is built up for gasoline (or any other oil product), then the ratio between Dubai crude and Manila gasoline cannot be expected to remain constant as Mr. Recto likes to assume.
More fundamentally, the country’s supposed chief economist shows no apparent recognition of the ramifications of a deregulated industry environment. Nor does he exhibit any awareness of how the local oil products market is structured and how competitors compete. In fact, competition is evident from the variations in gasoline or diesel prices around Metro Manila: certain gas stations are known to motorists for pricing their products some P2 per liter lower than generally prevailing price levels.
Local sellers of oil products consist of both refiners (Shell and Petron) and importers (all the others). Because importers buy finished products from refineries that are typically larger in scale and thus more efficient than local refineries, the costs of imported finished products are often lower than locally refined products. Accordingly, even refiners import finished products and it is the importers’ cost structure that essentially determines local prices. This is why the basis for local pump prices is not Dubai crude as Mr. Recto had assumed, but the average prices of finished products transacted on the Singapore exchange (this average is referred to as MOPS, or Mean of Platts Singapore).
In any case, it should be disturbing to every concerned citizen that the former senator who now heads the agency that sets economic policy in this country is either intellectually ill-equipped or deviously ill-intentioned. Either Mr. Recto has no clue as to how product prices are set and how markets work or he is maliciously dispensing economic propaganda to further some unholy purpose. In either case, he has no business posturing as the country’s chief economic architect even while he waits to run again in a few months for the Senate seat he lost in 2007.
René B. Azurin
Incompetent or devious?
After making the public wait for over two weeks, economic planning agency head Ralph Recto finally released a statement that “explained” how he calculated that gasoline prices were overpriced last month by about P8 per liter. On reading the explanation, an oil industry veteran made the marvelously descriptive comment, “It’s a Mickey Mouse computation!” I would have agreed, except that I thought it insulting to Mickey Mouse.
One way of interpreting Mr. Recto’s two-weeks-in- the-making explanation is that the country’s chief economic planner is incompetent and simply does not have the analytical skills for the technical position he now occupies. Another interpretation is that he is deliberately and maliciously disseminating false economic information to the public in order to promote some secret private agenda.
What the National Economic and Development Authority head did – reportedly, none of NEDA’s knowledgeable technical staff were in on it – was to relate the prices of Dubai crude in February 2005 (his figure was P2,176 per barrel at the exchange rate then of P54.81 to $1) and March 2005 (P2,495 per barrel at P54.44 to $1) to the local pump prices of gasoline in those two months (his figures were P27.37 and P 29.22 per liter, respectively) . This led Mr. Recto to calculate – he says by “interpolating” – that more than 4 years later in April 2009 when Dubai crude was P2,408 per barrel (at the exchange rate now of P48.16 to $1), the local pump price for gasoline should be P32.16 per liter. That exact figure of P32.16 actually cannot be derived from the NEDA chief’s logic so he must have made an error in his calculations or he made an adjustment to his figures that he did not make us aware of.
It should be noted that Mr. Recto selected the price of Dubai crude for the months of February 2005 and March 2005 to use as basis for his calculations. Choosing any other months in any other year would have produced a different price estimate. The question must therefore arise: why did Mr. Recto arbitrarily choose those particular months in that particular year? Was it so that he could arrive at a particular desired result?
There is, moreover, something distinctly disingenuous about Mr. Recto’s claim that gasoline – he did not specify which kind of gasoline – was overpriced by P8 per liter. In the week that Mr. Recto made this claim, the price monitor posted on the Department of Energy website showed that Premium Plus Unleaded gasoline was priced between P37.32 and P40.85 per liter, Premium Unleaded gasoline was priced between P34.70 and P39.71 per liter, and Unleaded gasoline was priced between P32.25 and P39.07 per liter. It is obvious that Mr. Recto picked the highest prices in each price range to make his “overpriced by P8 per liter” claim. In fact, most prices in Metro Manila during that week were in the vicinity of P36 per liter – not that far from the P32.16 per liter figure estimated by the NEDA chief – and the lowest posted gasoline price of P32.25 per liter was virtually the same as his estimate.
Mr. Recto used the word “interpolating” to describe his calculations. In mathematics, “interpolating” means deriving or inserting an intermediate value between two adjacent values. In ordinary usage however, “interpolate” (according to Webster’s) means “to insert new or spurious matter, deceptively or without authorization”. Aha. Maybe the whole claim of overpriced gasoline prices is “spurious” and maybe it is being “deceptively” inserted into the public’s consciousness.
Actually, what the NEDA chief described was – mathematically speaking – a simple ratio-and-proportio n calculation. Ratio-and-proportio n calculations assume that the relationship between variables that happen to be under scrutiny is constant or consistent. That implies that the conditions affecting the subject variables also remain constant and consistent. Mr. Recto’s calculations assume – crucially – that the ratio between the Dubai crude price and the Manila gasoline price is constant and that it remains unchanged even after the passage of over four years. Effectively, what Mr. Recto is saying is that absolutely none of the conditions that could possibly affect these two variables have altered this ratio in the last four years
In reaction statements that I thought tried to be kind, both Pilipinas Shell and Petron pointed out that the imposition of a 12% value-added tax on oil products already constituted a major change in conditions since February and March 2005. In Mr. Recto’s P32.16 per liter estimate, this additional tax alone would add P3.86 to the per-liter price of gasoline at the pump and raise his estimate to around P36 per liter.
As the oil companies also correctly point out, other changes – modifications in product mix with the introduction of bio-fuels, the use of double-hulled vessels, new standards for retail outlets, changes in dealer margins, etc. – have already altered their cost structures since February and March 2005. If there are such changes in the way cost is built up for gasoline (or any other oil product), then the ratio between Dubai crude and Manila gasoline cannot be expected to remain constant as Mr. Recto likes to assume.
More fundamentally, the country’s supposed chief economist shows no apparent recognition of the ramifications of a deregulated industry environment. Nor does he exhibit any awareness of how the local oil products market is structured and how competitors compete. In fact, competition is evident from the variations in gasoline or diesel prices around Metro Manila: certain gas stations are known to motorists for pricing their products some P2 per liter lower than generally prevailing price levels.
Local sellers of oil products consist of both refiners (Shell and Petron) and importers (all the others). Because importers buy finished products from refineries that are typically larger in scale and thus more efficient than local refineries, the costs of imported finished products are often lower than locally refined products. Accordingly, even refiners import finished products and it is the importers’ cost structure that essentially determines local prices. This is why the basis for local pump prices is not Dubai crude as Mr. Recto had assumed, but the average prices of finished products transacted on the Singapore exchange (this average is referred to as MOPS, or Mean of Platts Singapore).
In any case, it should be disturbing to every concerned citizen that the former senator who now heads the agency that sets economic policy in this country is either intellectually ill-equipped or deviously ill-intentioned. Either Mr. Recto has no clue as to how product prices are set and how markets work or he is maliciously dispensing economic propaganda to further some unholy purpose. In either case, he has no business posturing as the country’s chief economic architect even while he waits to run again in a few months for the Senate seat he lost in 2007.
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