Pricing Formula

SO THE PUBLIC WOULD KNOW - OIL PRICING FORMULA IN A DEREGULATED DOWNSTREAM OIL INDUSTRY

The recent increase in demand for oil internationally, particularly in the Asian Region, has caused a surge in the domestic price of oil. Since November 15, 2010, diesel has increased by P4.75 per liter (with a decrease of P0.75 per liter, thus a net increase of P4.00 per liter), while gasoline has increased by P5.25 per liter (with a decrease of P0.25 per liter, thus a net increase of P5.00 per liter).

Amidst the increases in oil prices and consistent with its statutory mandate to protect the public, the Department of Energy has been closely monitoring actual oil price movements, both in the international and domestic market, to prevent unreasonable adjustments and abuses.

To address the request of the public to understand better the formula in determining movements in domestic oil prices, provided below is the pricing formula adopted by the Department of Energy that was previously used by the Energy Regulatory Board.

The ERB Formula

Computation of the estimated adjustment for the week

 

LANDED COST (Product) Past Week Present Week
US$ PER BARREL    
    FOB (MPOS) a1 a2
    FREIGHT PLUS b1 b2
    CNF c1=a1+b1 c2=a2+b2
EXCHANGE RATE d1 d2
PESO LANDED COST    
    CNF e1= c1*d1 e2= c2*d2
    DUTY: f1= e1*_% f2= e2*_% 
     
    OCEAN LOSS g1= e1*0.5% g2= e2*0.5% 
    TOTAL (Without VAT) h1= e1+f1+g1 h2= e2+f2+g2
    TOTAL (With VAT) i1= h1*1.12 i2= h2*1.12 
PESO LANDED COST, P/li j1= i/ 159 j2= i/ 159 
DIFFERENCE    
    Peso/barrel   k2= i- i1
    Peso/liter   l2= k/ 159

In this formula, the Department of Energy compares the peso landed cost of bringing in the finished oil products to the domestic market on a week-on-week basis using the price build-up.The peso landed cost for a given week is calculated as follows:

    1. Get components of the cost of importing oil products in dollars, i.e., free on board (FOB) price of the product based on the weekly average of the Mean of Platts Singapore (MOPS) plus freight, to arrive at cost and freight (CNF).
    2. Convert CNF into peso per barrel by multiplying CNF with the average exchange rate applicable for the said week.
    3. Get the applicable duty, if any. Currently, there is no duty imposed on oil products in the Philippines.
    4. Get the ocean loss by multiplying the CNF in pesos (product in step 2 above) with the industry standard of 0.5%.
    5. Add the results in items 2, 3 and 4 above to arrive at peso landed cost without value-added tax (VAT).
    6. Multiply result in item 5 above by 1.12 to arrive at peso landed cost with VAT.
    7. Divide the result in item 6 by 159 to arrive at the peso landed cost in liters.
    8. Follow the calculation formula above in computing the peso landed cost in liters for the previous and the present week. Get the difference to determine the estimated price adjustment expected the following week.

It may be noted that while the original ERB formula was applied on a monthly basis, the present weekly timing was adopted starting 2009 upon consultation by the Department of Energy with both the oil industry players and the consumers, including the transport and industrial sectors, with the objective of implementing more timely adjustments. Moreover, the weekly timing considers the fact that products bought last week from Singapore are likely the ones being sold in the Philippine market this week.

It may be noted further that this formula does not consider costs beyond importation, e.g. storage, handling, distribution/retailing, as well as costs associated with the biofuels program such as the cost of the biofuels - bioethanol and biodiesel and logistics.

Are there alternative formulas?

Yes. Different groups and individuals suggested different formulas considering the limitations on MOPS data sharing.

    1. The Alternative Formula 1
                            P1.00/liter per $3.00/bbl1change in MOPS

This formula is simple in that it assumes a P1.00/liter increase or decrease in domestic oil price for every $3.00 change in MOPS. Although simplified and easy to calculate, this formula has many assumed variables such that a significant change in any variable will no longer make the formula reliable. For example, this formula may be valid for a certain $/bbl FOB range and peso-dollar exchange rate range.

    1. The Alternative Formula 2
[($/bbl change in MOPS for 2 immediate past consecutive weeks x forex2of 2nd week) / (159 x 1.12)]

This formula was suggested by UP Professor Winnie Monsod since information on international prices of petroleum products available to the public is limited. Professor Monsod refers to the DOE Oil Monitor posted in the DOE website every Tuesday for the change in MOPS and the value of the peso-dollar exchange rate. The result of this computation would be the estimated adjustment for the week.

    1. The Alternative Formula 3
                                      {[(MOPSw-2– MOPSw-1) x 0.30] + [(forexw-2 – forexw-1) x 0.60]} x 1.1.2

This formula considers both the change in international prices of oil and the change in peso-dollar exchange rate with each item having its respective factor. As in the previous formulas, the factors are valid for a range of FOB prices and peso-dollar exchange rates. Like Alternative Formula 1, any significant change in variables will no longer make the formula reliable.

Conclusion

Consistent with the regime of deregulation, the Oil Deregulation Law did not prescribe a specific formula. The market is expected to set the prices. Notwithstanding deregulation however, players in the industry must adhere to the fundamental principle of fair prices as provided under the Oil Deregulation Law. We assure the public that the Department of Energy will continue to actively monitor the oil price movement to ensure that the price adjustment is reasonable.


1bbl - barrels
2Forex – Foreign Exchange

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