Wednesday, September 07, 2005

Calls for protection

It's not only JG Summit which is asking for tariff protection - to the detriment of manufactureres downstream, who use plastics, say for packaging.

The oil price hikes are provoking calls for domestic refining capacity. So the Energy Department is mulling a tariff differential (between imported crude for further refining, and imports of refined products). This is going to hit the new players, who do not have their own refining plants. And it will confer advantages on the Big Three, who are in the best position to invest in refineries. (Two maintain refineries; Caltex shut down its San Pascual refinery in 2003.) This is the kind of policy that promotes market power - not deregulation!

The rationale for the tariff differential has been expressed by Boo Chanco:

As we are now seeing, in times of crisis, the refiners have a better handle on managing the price surges than the product importers. The importers must reflect every convulsion in the spot market immediately. The refiners have a little more lead time. The refiners who buy crude usually on long-term contracts, also get better prices. It is also clear that having refineries here give us a level of security in supply, specially in these troubled times. It is also a source of export earnings and provide high technology careers for Filipino engineers.

But if these benefits are really there, justifying refinery investments now, why isn't the simple market-based ROR calculation sufficient?

And if market-based ROR turns out not to justify refinery investment, then why impose a tariff differential to justify it? The above-quoted argument hinges on the volatility of international fuel prices, for finished products versus crude oil. Is it true that, for prices of refined products, domestic volatility is really lower than international volatility? Note that the domestic refineries are also exporting, so that the vagaries of international markets also gets communicated to domestic prices. And even if domestic volatility is lower than international volatility, would this benefit really be worth the cost - that of relatively more expensive refined products from abroad?

Just asking.


f said...

okay so first they deregulated the industry and got rid of the tariff differential to give incentives to players to enter the downstream part of the industry, now they're thinking of reversing it to kill the small players that's keeping the pressure on the big players to price competitively? brilliant.

right on the point on the ror. if this refining capacity investment was a good idea in the first place, the firms would have done it without the government handing them gifts. what is the evidence that these "subsidized" refiners would not follow world markets anyway?

Econblogger said...

So I guess your answers to my questions are: no justification; domestic volatility is not lower; the benefit is not worth the cost.

As the questions were rhetorical, I cannot but agree.