Editorial: Oil firms’ pricing strategy

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Wednesday, April 27, 2011


THE more Department of Energy (DOE) officials come up with reasons why prices of petroleum products in Cebu are more expensive than in Metro Manila, the more they sound like parrots. Not only are they saying nothing new, they are also echoing the p.r. line of oil firms.

Consider this latest statement by DOE Undersecretary Zenaida Monsada: “I think the biggest factor behind the high retail cost in Cebu is the transportation of fuel from their (the oil firms’) depots. The lack of small, independent oil players in the area might also affect pricing. There is less competition.” Yeah right.

But looking closely, the first reason is questionable and the second belies motive.

“Shipping cost,” the term used earlier by Energy Secretary Jose Rene Almendras, includes a number of factors and variables. Thus, instead of accepting blindly the oil firms’ use of this argument, the better option is to subject this reasoning to a deeper scrutiny.

On this, one can consider the possibility of transfer pricing, or the act of inflating the cost at each stage of production. That includes “shipping cost.”

“Market forces,” the other term Almendras used for Monsada’s second explanation, should rather be considered a giveaway of the oil firms’ profit motivation. Why should giant oil firms like Petron, Shell and Chevron wait for small industry players to provide competition and force the lowering the prices of petroleum products in Cebu?

Doesn’t this argument prove that the giant oil fims are pegging prices of petroleum products here as a cartel, meaning they are not competing against each other? If competition depresses oil prices, then doesn’t it follow that the lack of it jacks the prices up?

The pricing strategy of companies varies although the basic rule is that the price of the products should more than cover the cost of obtaining these products plus the operation expenses. How a firm interprets the phrase “more than cover the cost” determines the intensity of its profit motivation.

The pricing strategy of giant oil firms has long been regarded with suspicion by certain sectors, more so by consumers in Cebu where oil prices are questionably higher. The parroting by officials of these firms’ arguments indicates, therefore, either corruptibility or naivete.

Published in the Sun.Star Cebu newspaper on April 28, 2011.

Opinion

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