Wednesday, January 09, 2008

Reducing oil tariff: just another misguided policy

The other day, the government announced that it has reduced tariffs for oil products by one percentage point supposedly to cushion the impact of rising crude prices. Sounds good except this policy might end up becoming a subsidy to oil companies without achieving the social objective of “cushioning” the rise of oil products like gasoline, diesel and LPG.

The fact is that the industry is deregulated and movement of prices is determined more by global trends and the nature of local competition than government actions. Lower tariff for oil products simply means that importers are going to enjoy lower import costs or charges. Whether or not they are going to pass the lower import costs to consumers in terms lower prices is another matter. They probably won’t as they always did in the past. Market competition should theoretically force oil companies to go easy on raising prices but that’s only possible in a competitive environment. Right now, the local market is still dominated by the big three (Shell, Caltex, and Petron) and it seems the newcomers, the so-called independent oil producers, are simply taking the cue from actions of the Big Three.

The new policy therefore is another populist measure that may end up achieving nothing. The best thing the government could have done therefore is to maintain the current tariff levels and continue collecting the money to improve government finances. If policy makers suspect that oil companies are colluding, they might as well look for effective ways at bringing greater competition in the oil and energy sector.

1 comment:

Anonymous said...

CARTEL - A cartel is a formal (explicit) agreement among firms. Cartels usually occur in an oligopolistic industry, where there are a small number of sellers and usually involve homogeneous products. Cartel members may agree on such matters as price fixing, total industry output, market shares, allocation of customers, allocation of territories, bid rigging, establishment of common sales agencies, and the division of profits or combination of these. The aim of such collusion is to increase individual member's profits by reducing competition. Competition laws forbid cartels. Identifying and breaking up cartels is an important part of the competition policy in most countries, although proving the existence of a cartel is rarely easy, as firms are usually not so careless as to put agreements to collude on paper (Wikipedia).

Oil companies fall into this category. This is widely accepted. One would safely conclude that other entities profiting from transactions made by oil companies are acomplices to the crime.

Following this logic, most governments on Earth are as guilty of inflicting consumer misery. The higher the price of gasoline, the bigger their take in taxes on oil products.

Until governments decide that it is more conscionable to extract revenues from oil on volume rather than selling price, they have no moral right to claim benevolence toward their constituents, nor can they claim righteousness at all, period!

No one country with another across a common border will be able to reduce tariffs on oil products effectively. Only powerful groups like G7, ASEAN or the UN can start any action of possible global impact or significance to reduce their complicity to increasing worlwide misery by reducing their take on oil product sales.

For now, citizens of the world are bearing this pressure. Ultimately, poorer human beings will be driven to actions of self preservation and this sentiment will eventually spread and will be shared by everyone. We can only imagine the chaos and anarchy that would result at that event.

Citizens of the world, UNITE!

This is my opinion.