BIZ COLUMN: LPG PRICE CONTROL WILL ASSURE SHORTAGE
MANILA, FEBRUARY 16, 2009 (STAR) DEMAND AND SUPPLY By Boo Chanco - I can’t believe Ronnie Concepcion recommended listing LPG as a basic commodity with the effect of putting it under price control. Ronnie must be nursing some secret ambitions for 2010. Assuming government is able to do as Ronnie recommended, by amending at least two laws, the price of LPG can no longer go up by more than 10 percent in a 30-day period, a prohibition that covers prime commodities under the Price Act.
I am sure Ronnie knows better that such a move rather than helping harassed housewives and now, taxi drivers too, it will most likely just assure a prolonged shortage of LPG in the market in an era of rising world oil prices. The local refineries cannot produce all of our LPG needs. We import a significant part of our requirements as butane and propane which are “bottled” locally as LPG.
What happens if in a one month period the price of LPG goes higher than the 10 percent limit imposed on products under DTI price watch for prime commodities? Government may force LPG marketers to sell existing stock at a loss to comply with the law. But knowing this possibility, LPG marketers will keep inventories low, even if this means risking more frequent run outs. And who is the idiot who will import LPG at a price beyond the price control limit and lose money? Not even Ronnie Concepcion.
How will the country get its supply then? We won’t. The only way traders will continue to import is for government to guarantee the price difference… in other words, provide a subsidy. But does government have the money to do this? Besides, if government gets into the business of subsidizing LPG, there will be clamor to also do the same thing for diesel and other petroleum products. Even the oil producing countries in Asean are moving out of this subsidy business.
The last few weeks of panic and shortage of LPG supplies are horrible and as far as I can determine, a combination of factors contributed to the problem other than the breakdown in the local distribution system. Hoarders merely took advantage of an already prevailing bad situation.
First of all, demand for LPG increased by 30 percent of the average for the first 10 months last year. Secondly, we are getting a significant portion of our supply, about 35 percent, from Liquigaz, a wholly-owned subsidiary of SHV Gas of the Netherlands. Such a big dependence on a single supplier, one that primarily sources supply from the spot market, is unhealthy. Apart from supplying industrial or commercial accounts, Liquigaz supplies retailers, especially the independent refillers or those who sell under brands other than those of the majors.
The reliance of Liquigaz on the spot market works in normal times when there is plenty of LPG in the market. Unfortunately a crisis can cause supply problems. This time, the crisis took the form of the Russian dispute with Ukraine that resulted in the stoppage of the supply of Russian natural gas to Europe through the Ukraine pipeline. Europe was facing a cold winter so that available LPG was diverted to Europe for use as heating fuel in place of the Russian natural gas. This caused tightness in supply that caught Liquigaz by surprise.
A delay in the arrival of a Liquigaz import shipment in December created a backlog in serving the orders of the independent refillers. This resulted in a surge in LPG demand from the other players especially given the fact that cooking gas is usually in high demand during the holiday season. Petron’s LPG sales in December went up to 36,000 MT compared to an average monthly demand of less than 32,000 MT in the first 11 months of the year.
Bad weather also resulted in a delay in arrival of imports made by Petron. It didn’t help that refineries in Europe and China reduced their runs due to poor refining margins. Saudi Aramco – a key supplier of propane and butane – reduced supplies to term buyers by 20 percent to 35 percent. All these were happening against a backdrop of colder-than-usual weather everywhere. Liquigaz’s mother company SHV has reportedly been scrambling to cover requirements for February and March as their volume allocation was slashed by almost 20 percent starting January.
The way I see it, the problem is pretty much a failure of government to take control. I don’t get the feeling that the bureaucrats at the Department of Energy, including its agency head, really know enough about the business and its logistics to effectively take control. Or if they do, they certainly kept their capability a state secret.
It should be easy enough to know at any given time how much LPG is in the country. LPG imports pass through Customs where proper documents are presumably filed. The productions of the local refineries are also easily determined. They should also have historical data on local demand. I suppose LPG marketers are required to submit data on current demand. And I hope DOE officials are closely monitoring the world market for signs of potential supply disruptions due to weather or the politics of oil supply like what happened in Ukraine in so far as all these factors impact on us.
I assume DOE also knows where we import LPG from and how much are due to arrive in country at any particular time. Government regulators should be as savvy as the private sector traders. DOE should know when to have increased stock to meet seasonal spikes in demand. And I have to assume they factored the fact that the Petron refinery would be shut down for maintenance for a number of months. From all that, they should be able to determine market demand and on that basis, plan accordingly.
What really damaged the credibility of Energy Secretary Reyes is his seeming inability to grasp what’s going on in the ground. He looked ridiculous declaring there is no shortage (galit pa when he says that) when every housewife knows supply is hard to come by. Even Ate Glue lost her patience with the Secretary after she verified his report of adequate supply to be inaccurate. Secretary Reyes ended up looking like an arm chair general who has never seen action in the battlefield and whose idea of work is shuffling papers in his air conditioned office. And when he did visit bulk terminals, he apparently didn’t know what questions to ask and what to look out for.
Price control is rather extreme. Far from being a solution to the problem, it is guaranteed to make matters worse. As far as I can see, all we need are more capable bureaucrats who know what they are doing. I don’t know how they do things these days but in our time at Energy, we made sure planning and execution are at their best. Proof is that even when we faced some of the worse international supply disruptions in the 70s and 80s, we managed to deliver and when asked to explain, we gave an honest response and didn’t seem like the fools we see on television these days.
And yes, selling Petron 100 percent to the private sector was a mistake. A government-owned Petron could have been very useful in times of emergencies like the one we just experienced. At the very least, government would have the most accurate information on the state of the market in terms of supply and demand. We used Petron to make sure there is enough supply at all times. Actually, heads would have rolled in Petron if something like that supply disruption of these past few weeks happened during our watch.
Secretary Reyes should be embarrassed that there is a public clamor for DTI to take over the function of monitoring LPG from DOE. No less than the President was supposed to have expressed her disgust of DOE’s failure. If this happened in Japan, the Secretary would have known the honorable thing to do. But hey… this is the Philippines and in Ate Glue’s cabinet, mediocrity is excusable… indeed, par for the course. Secretary Reyes is safe.
Ice Cream flavors
Ben & Jerry created “Yes Pecan!” ice cream flavor for President Obama. They however, are trying to dispose of the bumper stock of flavors they created for George W. Here are some of those.
Grape Depression. Housing Crunch. Abu Grape. Cluster Fudge. Nut’n Accomplished. Iraqi Road. Chock ‘n Awe. WireTapioca. Impeach Cobbler. Guantanmallow. imPeachment. Heck of a Job, Brownie! Neocon Politan. Nougalar Proliferation. Credit Crunch. Mission Pecanplished. Caramel Preemptive Stripe.
Chief News Editor: Sol Jose Vanzi
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