Report of the SGV-UA&P Independent Study on Oil Prices

Executive Summary

This study has sought to assess the reasonableness of oil prices of the two refiners Petron and Pilipinas Shell (and also the largest players in the country) by:   
a.) Comparing the trend of international benchmark crude oil (the raw material) and refined products (the finished products) prices with local pump prices of oil products.  
b.) Constructing a price build-up of prices and look at whether the share going to oil companies has grown or shrunk.
c.) Looking at financial performance indicators of the major oil companies.  

Price data from Jan. 2005 to Jan 2008 suggests that local pump prices have not gone up as fast as the price of crude abroad or the MOPS prices for diesel and unleaded gasoline during the period. This means that oil companies’ margins have probably shrunk. Statistical correlations seem to bear this out as well. Philippine pump prices simply tracked MOPS prices. A comparison of the share of the oil company take in 2007 with that in 1998 shows the same trend of a declining share of the pump price that goes to the oil company.   

If oil companies have been overpricing, it should show up in higher profit rates. However, the adjusted return on equity figures for Petron and Shell do not appear extraordinary when compared with benchmark market interest rates. From another perspective, that of the stock market, if an oil company like Petron had been performing very well, one would expect its stock price to have appreciated significantly too. If Petron had been significantly more profitable than other companies listed on the stock exchange, its stock should have outperformed the stock market index. However, the performance of Petron’s stock price has not been outstanding. If an investor had been able to acquire a share of Petron at the IPO price of PhP 9.00 in 1994 and held it until the close of 2007, he would have only earned an IRR of 4% for the period. This already accounts for the dividends earned in between. Thus, the stock market investors do not seem to have perceived Petron as having been extraordinarily profitable.   

For these reasons, in the opinion of the author, the oil prices do not seem to have been unreasonably high for the period covered by the data in this study.

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