Unrefined

"Don’t leave your car at home just yet. "

Not everyone is happy over the recently passed Corporate Recovery and Tax Incentives for Enterprises (CREATE) law, which is intended to promote the country’s long-term competitiveness as well as addressing post-pandemic recovery.

In signing CREATE into law, the President exercised his line-item veto at several points. One of them was to allow the continuing exemption of crude oil imports from VAT and import duties. Another was to allow crude oil refining to be included in the country’s Strategic Investment Priorities Plan (SIPP).

This has raised the ire of the iconoclastic think tank Action for Economic Reform, or AER, headed by my friend Filomeno “Men” Sta. Ana. In various press releases, AER assailed this exemption as “distortionary, uncompetitive, unfair, rigid and redundant”—all strong words indeed.

They zeroed in on an unnamed “one local crude oil refinery” as being “objectively uncompetitive” and, presumably, thus unworthy to benefit from the exemption. And they implicated its ownership by “a very wealthy tycoon.”

Well, since Shell folded its refining operation some time back, there’s only been one refinery left in this country—Petron. And you only need the tiniest crystal ball to guess who that wealthy tycoon is: Ramon Ang, who runs San Miguel, who owns Petron.

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But when you get behind AER’s angry words, how much substance, really, do you find? Let’s go through their claims one by one:

AER claims that Petron’s refinery is uncompetitive, mainly because the local market for refinery products is much smaller compared to neighboring countries with similar operations. Compared to Petron’s maximum output of 180,000 bpd, for instance, the comparable number is at least 500,000 in Singapore, 700,000 in South Korea, up to 1.3 Million bpd in India.

This claim begs the question of whom is Petron trying to compete with. If the market being contested lies outside our borders, then, yes, economies of size and scale in larger and/or exporter countries will win out. But at less than 200,000 bpd, Petron would find it tough enough to fill up the demand of just our own domestic market.

AER claims that the exemption is “distortionary, uncompetitive, and unfair.”

The guys against whom Petron is contesting its home market are the refineries abroad whose refined petroleum products are directly imported by its retail competitors. In this light, the above claim can be turned on its head.

Refined importers only have to pay output VAT once: on sales at the pump. By comparison, Petron has to pay not only the output VAT on its pump sales, but also the input VAT on the crude oil it imports to be refined. And since it can take forever to get credited for the input VAT, this creates a working capital disadvantage against refined imports.

In short, exempting crude imports from tax and duties actually seeks to remedy—rather than create—unfair market distortions.

AER claims that the world is turning away from fossil fuel.

As a climate change skeptic, I think this claim seems to be the battiest one. First, it’s the already-developed countries who can afford to preach like Greta Thunberg, now that they’ve already achieved industrialization the old-fashioned, dirty, pollutive way. China can now start to sing the same song because they too have already arrived—and good for them.

Second, it’ll be a long, long time before the world totally abandons fossil fuels. Junking oil refining for that reason would be like leaving your car at home and walking to work just because Tesla has become the world’s most valuable stock.

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AER claims that domestic oil refining is not a vital industry.

Actually, the strategic importance of oil refining is probably the strongest argument in its favor. It’s an industry that supports thousands of jobs and accounts for as much as 5 percent of gross value-added, according to the CREATE law’s principal author, Rep. Joey Salceda. By comparison, importation of refined creates no GVA at all.

But an even bigger consideration is energy security. We must maintain refining capability at home, even if only as a backstop against worst-case scenarios of our refined imports being shut down by trade wars if not actual wars.

In Australia, the Kwinana refinery is already being shut down by British Petroleum. The remaining three refineries are in various stages of review by their owners for possible lockdown as well. This prompted the Australian government last December to provide financial support of one cent per litre out of government funds totalling $83.5 million over the next six months, thereafter to be replaced by a market-based funding mechanism.

This is a useful takeaway from down under. If oil refining is a financially compromised operation for a Filipino company like Petron, then government is well within its rights to consider sharing that financial burden, levelling the playing field, and upholding national security interests—simply by maintaining those tax and duty exemptions under CREATE.

Readers can write me at gbolivar1952@yahoo.com.