Reaction of Petron to Mr. Raul Concepcion's Statement on Oil Price Increases

September 17, 1999 PSE CIRCULAR FOR BROKERS NO. 2337-99 REACTION OF PETRON TO MR. RAUL CONCEPCION'S STATEMENT ON OIL PRICE INCREASES In connection with the news stories that came out in the media today, about Mr. Raul Concepcion's views on oil prices and the oil companies, we would like to offer the following comments. We have been doing our share of shielding the public from the full impact of oil price hikes, and we are in favor of seeking solutions to ease the burden of successive crude oil price increases. The oil companies, however, cannot bear all of the cost of stabilizing domestic fuel prices. Since crude prices started moving up in March, we have not been able to pass on the full increase in our crude costs. On a per liter basis, the peso landed cost of crude had gone up by P2.60 as of August, but our product prices only increased by P1.54. Today, the price of crude is more than $22.00 per barrel, or 120 per cent higher than its level of $10.00 in February. Our pump prices, on the other hand, are only 18 per cent higher. We agree with Mr. Concepcion on his observation that the landed cost of crude increased by about 58 centavos per liter in August over July (reflecting the expected price increase this September). This, however, does not consider previous underrecoveries, such as the one pertaining to the crude cost increase in July over June. It will be recalled that Mr. Concepcion announced on August 16 that the increase for the said period should be 63 centavos per liter, but we only increased our retail prices by an average of 35 centavos on August 23. cdlex Additionally, we are not making huge profits, contrary to the claim of Mr. Raul Concepcion. In fact, our profit record has not been good in the recent past. Before deregulation, when the Energy Regulatory Board was setting prices, our Return on Rate Base (RORB) averaged around six per cent. In 1997, the first year of deregulation, we experienced our first loss in over 20 years, and our RORB was negative nine per cent. We managed a positive but low RORB of three per cent in 1998, but this year we are likely to see an even lower return than that, given our underrecovery of crude costs. Our low profitability is borne out by data compiled by Business World on the 1997-1998 revenue and profit performance of companies in various industries. The numbers show that the oil companies stood out in 1997 as the only industry to show negative returns. In 1998, the income of oil companies recovered to a positive level, but they still had the lowest income (as per cent of revenue) compared to other industries that posted profits. We have been exercising restraint in our price adjustments, out of concern for the public and the economy. But we cannot continue to sacrifice margins without seeing a deterioration in our own finances, similar to what happened in 1997 when the Supreme Court restrained us from increasing prices in the face of a rapidly devaluing peso. We borrow funds to finance our working capital and investment requirements. A continuing drain on our resources will eventually cripple our ability to service our debts and keep up our operations. We are deeply aware of the difficulties faced by fellow Filipinos as a result of the rapid increase in oil prices. In view of our own resource constraints, however, we support the Department of Energy's moves to explore other means of offering price relief to the public.