Philippine Daily Inquirer: The oil cartel: “On the very same hour the other day, Caltex and Shell raised their prices by 50 centavos per liter. My lawyer tells me the move was clearly illegal and unconstitutional.”: Monday October 24, 2005
Honesto C. General
I DO NOT MEAN OPEC. I MEAN the cartel of local oil companies.
On the very same hour the other day, Caltex and Shell raised their prices by 50 centavos per liter. My lawyer tells me the move was clearly illegal and unconstitutional.
The constitution says, "Combinations in restraint of trade are not allowed." This props up the penal code's section 186, which says, "The penalty of prision correccional in its minimum period or a fine from P200 to P6,000, or both, shall be imposed upon ... any person who shall enter into any contract or agreement or shall take part in any conspiracy or combination in the form of any trust or otherwise, in restraint of trade or commerce or to prevent by artificial means free competition in the market."
"Trust" as used in the penal code is the American word for the European "cartel." Why is cartel or trust bad? Because it is a device used by manufacturers, suppliers, or sellers to prevent competition among themselves. As a result, consumer prices are kept artificially high.
The most common cartel involves an agreement on prices, just as Caltex and Shell have done. Of course, Caltex and Shell can claim that they imported their crude oil from the same source and probably even transported it on the same oil tanker. Hence, they can say, their selling prices are the same.
But the cost of the imported crude is only one component of the pump price. The other major component is the operating costs. These costs cannot be the same for the two companies. And even if these operating costs are the same, this is the area where they can compete to bring down their prices. But when they agree on the price, why should they cut down expenses in the spirit of competition in an open and free market?
The banking cartel runs on a simple rule. The banks agree to charge a minimum rate of interest.
Another common form of cartel involves an agreement on the sharing of the market. For example, if the oil companies here have agreed, as I suspect they have, to maintain their current respective shares of the market, then there is a cartel.
Still another form of cartel involves an agreement to divide the market by geographical area. This is found in the cement industry. A cement plant located in Northern Luzon is given the exclusive right to sell to Ilocandia. A plant located in the South has the exclusive right to sell to Bicolanos.
The age-old reason to justify cartels is the bugaboo that a free and open market leads to ruinous competition. The only ones ruined are those who are so inefficient that they cannot compete. Why should the consumers subsidize such inefficiency?
Let us take the fire insurance industry. For decades, the price of fire insurance was dictated by a cartel. Incredibly, it was the only cartel in our long history that had a government license.
Then, eleven years ago, in line with the Asean free trade agreement, the license was withdrawn and the cartel broken up. Today, the price of fire insurance is about one-fifth what it was 11 years ago. You can scan through thousands and thousands of goods and services for sale, fire insurance is the only thing you can buy more cheaply today than 11 years ago. Yet, the premium volume of the entire insurance industry has soared, as more and more people buy fire insurance. And, profitability has not suffered.
There is something magical about lean prices brought about by intense competition in a free and open market. Everybody wins. The sellers make more because they sell more. The buyers buy more because they pay less.
It seems to me that what the oil regulatory board ought to do is to enforce the penal code on cartels. Put some of the Caltex and Shell executives in prision correccional. And we will enjoy watching those gasoline prices come tumbling down.
By the way, if the Anti-Trust Division of the US Department of Justice hears about this cartel, Caltex could be in serious trouble.
In the meantime, a text message is going around to boycott Caltex and Shell. Damn good idea. I have shifted to the Total station near my place. How about you?
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