GOVERNMENT SANCTIONED EXPLOITATION: ILLEGALITY OF THE

AUTOMATIC OIL PRICING MECHANISM IN THE DOWNSTREAM OIL

INDUSTRY DEREGULATION ACT OF 1998

A Thesis Presented to the Faculty of the

College of Law
De La Salle University

By

Francisco C. Banguis
Krisha Mariel B. Simagala
Alexandra G. Soledad

In partial fulfillment of
The requirements for the Degree
Juris Doctor

April 2019


THESIS ADVISER’S ENDORSEMENT

Atty. Virgilio R. De Los Reyes

Associate Dean
DLSU College of Law

Thru: Atty. Vyva M. Aguirre, Thesis Program Coordinator

Dear Associate Dean De Los Reyes:

I hereby certify that I have read the Thesis of BANGUIS, FRANCISCO C.,
SIMAGALA, KRISHA MARIEL B., and SOLEDAD, ALEXANDRA G. entitled
“Government Sanctioned Exploitation: Illegality of Automatic Oil Pricing
Mechanism of the Downstream Oil Industry Deregulation Act of 1998.”

I further certify that the Thesis satisfactorily meets the requirements for the degree
of Juris Doctor. In this regard, I hereby endorse the same for oral defense this 2nd
Semester, A.Y. 2018-2019.

Thank you.

________________________________,

Dr. Juan Arturo Iluminado C. De Castro, B.A., LL.B., LL.M., J.S.D.

Thesis Adviser
April 5, 2019


ACKNOWLEDGMENT

The proponents would like to extend their heartfelt gratitude to the following

who have been instrumental in the completion of this study:

First and foremost, to the omnipresent God for giving the proponents energy,

prudence and perseverance during the research study and throughout their lives, and for

the grit to continue despite the circumstances that they have encountered.

Second, to their Thesis Adviser, Dr. Juan Arturo Iluminado C. De Castro, B.A.,

LL.B., LL.M., J.S.D. for his immense knowledge and unwavering guidance that

enlightened the proponents in the research and writing of this thesis. Without his

persistent help, the proponents could not have formed this concept and pursue the

research.

Also, to Atty. Antonio P. Bonilla, our Taxation Law professor, for guiding us in

the TRAIN Law aspect of this thesis.

Moreover, to the Department of Energy for its responsive participation in giving

the proponents the data they need related to this thesis.



Last but not the least, to Alexandra’s parents’, Ma. Theresa and Alexius

Soledad, her sister Alexis, and brothers Michael and Walter; to Krisha’s mom, Cecilia

Peralta, her aunts, Mary Jean and Elisa and her special someone Ed Sanchez; to

Francisco’s parents, Annabelle and Francisco Banguis, their families, relatives and their

friends for their consistent encouragement and for their presence during difficult times.

The proponents hope that this thesis would greatly benefit the consumers,

especially those in the poverty line. They also hope that this would help mold the way

to materialize the true intent of the Constitution that is to promote free trade, fair

competition, and provide affordable and accessible energy as basic human right.


Abstract

The power crisis experienced by the Philippines in the early 1970’s decelerated the

progress of national economy prompting the government to plan reforms and

rehabilitation programs to resolve it. Former President Fidel V, Ramos revived the

plans to liberalize the oil industry.

In response, the Philippine Congress attempted to deregulate the downstream oil

industry in 1996 through the passage of Republic Act. No. 8180, but the same was

declared unconstitutional by the Supreme Court on 5 November 1997 on the rationale

that it encourages an anti-competitive behavior among stakeholders in the oil industry,

specifically oil companies engaged in the downstream oil industry, violative of Section

19, Article XII of the 1987 Constitution on which prohibits monopolies and

combinations of trade or unfair competition.

Congress again pursued the deregulation of the downstream oil industry by enacting

Republic Act No. 8479 or known as the Deregulation of the Downstream Oil Industry

Act of 1998 on 10 February 1998. It became effective on 14 March 1998. Finally, the

downstream oil industry was fully-deregulated when Executive Order No. 471 was then

enacted by former President Fidel V. Ramos. It was enacted to propel competition

among oil companies in the local market which is dominated by the Big Three


Companies such as Petron, Shell and Caltex (Big 3 Companies); and to remove from

the government the burden of maintaining price subsidy due to the deficit of the Oil

Price Stabilization Fund (OPSF). The deregulation law allowed the oil companies to set

oil prices which was previously fixed by the abolished Energy Regulatory Board

(ERB).

In an attempt to question the validity of R.A. 8479 as a policy, the Supreme Court

upheld its constitutionality and avoided trespassing on the powers of Congress and its

wisdom on its enactment. However, it did not prevent the end-users or consumers and

other militant groups to inquire on the law’s constitutionality and allege that the effects

of the same runs counter from its purpose. Oil companies are accused of price fixing,

through cartelization among Big 3 Companies, and the existence of asymmetry in oil

prices. Apparently, the automatic oil pricing mechanism that is previously the function

of the ERB is a major why the prices of oil since 1998 consistently increased, and it has

been subject to abuse by the oil cartel to the detriment of the general public.

Chapter 2 of this study will show the transition of the downstream oil industry from

a regulated phase to a deregulated phase and how it affects the increase of oil prices.

Further, it will show how the law promoted an anti-competitive behavior due to the

unfair trade practices and monopoly of foreign-owned oil companies thereby causing

asymmetry in oil prices negatively affecting the poor Filipinos, and other end-use or


consumers. It also reviews the proposed national oil exchange, and the stand of

opposition groups vying to declare R.A.8479 as unconstitutional. Moreover, it will

show the relationship between oil prices and alternative and/or renewable source of

energy, as well as other oil and petroleum products.

Chapter 3 uses consultative interviews, case law analysis, and documentation

analysis to come up with the information provided in the preceding chapter, as well as

interview key informants to validate the same.

Chapter 4 examines the effects of the deregulation law, and the proposed oil

exchange. Moreover, a welfare analysis is utilized to show that asymmetry in oil prices

is caused by cartelization by the Big Three Companies (Caltex, Shell and Petron)

which defeats the purpose of the law’s enactment. It will expose how automatic oil

pricing mechanism in the downstream oil industry has been exploited by oil companies,

which is why the Department of Energy intervene in the industry more than merely

assessing and monitoring oil prices. The rising standard of living of Filipinos will also

be discussed and how their quality of life mandated by the 1987 Constitution is

prejudiced by the deregulation of the downstream oil industry. An analysis of how the

lowering of oil prices could increase the consumption of petroleum products which

eventually is not good for the environment is also provided. However, suggestions on

the use of alternative and other renewable energy sources is not the only solution to


solve the problem because the same is also limited, and replenishable. The effects of

the effectivity of the TRAIN law also shows that the burden of the taxpayers will

increase.

Finally, Chapter 5 concludes that although new players entered the country’s

downstream oil industry and participated in the retail gasoline market, the public

experienced the negative effects of its deregulation due to the monopoly engineered by

the Organization of Petroleum Exporting Countries, and the domestic cartelization of

the Big 3 Companies. As crude oil import costs increased, so did the retail of petroleum

products prices continued to move in the same trend. The study recommends that oil

exchange should be nationalized though buy-back of Petron by the government, and a

review committee be established to prevent unfair practices and oil cartelization. In

addition, the generation of more renewable energy resources is also recommended.



TABLE OF CONTENTS

Chapter I – Introduction
A. Background of the Study 1
1. Thesis Statement 7
2. Objectives of the Study 7
3. Significance of the Study 7
4. Scope and Limitation 8

Chapter II - Review of Related Literature

A. Developments and History of Oil Industry in the Philippines 10
1. Regulation of the Downstream Oil Industry in the Philippines 12
a. Regulation under Republic Act No. 387 or the Petroleum Act of 12
1949
b. Passage of R.A. 6173 creating the Oil Industry Commission in 14
1971
c. Enactment of Presidential Decree No. 43 creating the Philippine 15
National Oil Company in 1973
d. Enactment of Presidential Decree No. 1956 creating the Oil Price 16
Stabilization Fund (OPSF)
2. Oil Prices during the Regulated Phase 17
a. During the regulated phase (January 1971- March 1996) 18
3. Deregulation of the Downstream Oil Industry in the Philippines 20
a. Deregulation in the year 1997 through Republic Act No. 8180 20
b. Enactment of the Deregulation of Downstream Oil Industry Act 22
of 1998 or Republic Act No. 8479 which fully-deregulated
downstream oil industry
c. List of New Key Players in Downstream Oil Industry 24
4. Oil Prices during the Deregulated Phase 28
a. During the deregulated phase (April 1996-December 2018 only) 28
5. Creation of the Energy Regulatory Commission under R.A. 9136 or the 29
“Electric Power Industry Reform Act of 2001” or known as EPIRA
a. The jurisdiction of the ERB over the downstream oil industry 29
b. The creation of the ERC abolished the ERB 30


B. Automatic Oil Pricing Mechanism 33

1. Pricing Mechanism 33
a. Prices defined 34
b. How prices are affected 35
c. Effect of Geopolitics 37
d. USA and OPEC as Key Oil Producers 38
e. Effect of pricing mechanism 38
2. Automatic Pricing Mechanism 40
a. Automatic Oil Pricing Mechanism in the Philippines 41
b. What Affects Philippine Oil Prices 42
c. Fuel Pricing Systems Comparable to the Philippines 45
d. Impact of TRAIN Law 46
e. Estimated Profiteering of the Key Oil Companies 50

C. Energy as a Basic Human Right 54

D. Standard of Living 57
E. Minimum Wage 59
F. Renewable Energy 60
1. Renewable Energy 61
a. Renewable Energy Defined 61
b. Renewable Energy in the Philippines 61
c. Relationship of Rising Oil Prices in the face of Renewable Energy 62
Sources

Chapter III - Research Methodology

A. Introduction 63
B. Participants of the Study 63
C. Research Design 64
1. Data Resources 64
2. Data Collection and Analysis 65
3. Summary 65

Chapter IV - Analysis and Conclusion

A. Automatic Oil Pricing Mechanism, a mechanism exploited by Oil 66
Companies


B. Rising standard of living and quality of life mandated by the 1987 70

Constitution
C. Consumer participation in economic decision-making guaranteed by 71
the 1987 Constitution
D. Intense Domination and Profiteering of the Big Three Companies 72
E. The Weekly Price Adjustment Impact on Taxation 73
1. The effectivity of TRAIN Law caused successive increase in the 73
prices of goods which heavily burdened the consumers especially the
poor
2. Oil price hikes due to automatic adjustment of oil prices by oil 77
companies at pump
3. Oil companies abused APM by greatly profiteering from excessive 79
oil price hikes
4. The government promoting a culture of acclimatization 80
F. Effect of Cheap Oil Prices against Renewable Energy Sources 82
1. Effect of Cheap Oil Prices against Renewable Energy Sources 82
G. Renewable Energy as an Alternative to Increasing Oil Prices 83

Chapter V – Recommendation
A. Amendment of the Downstream Oil Industry Deregulation Act of 86
1998
1. Amendment of Sec. 18 on Automatic Pricing Mechanism 86
a. The power to determine the automatic pricing mechanism should 86
be expressly granted to the DOE- Oil Industry Management
Bureau.

B. Nationalization of the Downstream Oil Industry 86

1. Nationalization of Petron 87
2. Centralized Procurement of Crude Oil and other Petroleum Products 88

C. Taxes insofar as Oil and Other Petroleum Products under the TRAIN 89
law should be lowered down
D. Institutionalizing an Independent Review Committee comprised of all 91
parties involved in reassessing the effects of the deregulation law and as
well as the TRAIN law
E. Renewable Energy in the Country must be strengthened as it 92
promotes more benefits than drawbacks