Wednesday, August 31, 2005

Business bashing is sexy

It seems the oil "crisis" is a great time to debunk bad economics. I can hardly keep up! Here's another grandstanding politician talking about oil company profits: Two of the country’s oil refiners — Pilipinas Shell Petroleum Corp. and Petron Corp. — raked in P11.6 billion in after-tax profits in the last 18 months, as they enjoyed what a lawmaker described yesterday as "massive pricing power" due to soaring world crude prices.

Citing financial statements filed by the two oil firms with the Securities and Exchange Commission (SEC), lone Catanduanes Rep. Joseph Santiago said Shell and Petron posted P2.87 billion and P2.31 billion in net profits, respectively, from January to June this year alone, or a combined P5.18 billion.

In the 12 months of 2004, he said Shell and Petron posted P2.98 billion and P3.43 billion in net profits, respectively, or an aggregate profit of P6.41 billion.

Let's see - how does higher cost of foreign oil translate to massive pricing power? If there is monopoly power, wasn't it there before the oil price increases? What makes them able to better exploit it now than before? It simply does not compute.

Santiago notes his comment could raise anti-business sentiment, so he adds: We are not out to judge the two oil firms. It is not a crime to make a profit in this country," Santiago said. "We are simply disclosing these figures in the interest of public scrutiny and transparency. We are leaving it to the people — to consumers — to judge for themselves." Yes, his motivation in making this press release is oh so transparent.

It turns out that the explanation is more pedestrian: Petron is making more profit because of its export earnings; Shell is making more profit because of export earnings and sales from related business, such as gas station concession fees and retail goods. (From today's issue of the Philippine Daily Inquirer, "Oil firms earn billions of pesos amid crisis", unfortunately unavailable online.) Gee, I learned something at least - now I know the top oil players are exporters too.

Is there anything substantive about the pricing power accussation foisted against the oil industry? What are the facts? Read the independent review of the Oil Industry Deregulation Act, available here. Why was this report not played up in media? Simple - stating the plain facts about free markets is not sexy. Business bashing is.


Amadeo said...

Also because being "anti-business", especially against the free enterprise type, is "cool". It is always cool to blame business, especially big business, for the extensive world-wide condition called poverty. And for most if not all the economic hardships besetting this world.

And this sentiment is quite true even here in the the US, considered arguably as the most affluent country in the world.

Of course, we know that the truth normally lies somewhere in between.

Econblogger said...

I think the "zero-sum" thinking is also to blame. The idea is that if somebody is benefiting (business), then somebody else is losing (ordinary folk, consumers, workers.) It is not clear to most people that the marketplace is "positive sum", in which businesses can profit only if they benefit workers (by paying wages) and consumers (by supplying goods and services). If they did they would notice that business is not to blame for poverty. In fact the solution to poverty is for the poor to start climbing the ladder of market participation (by acquiring saleable skills and business capital.)