Economics Homework: Race to Oil Price Hike

Gov’t gains P1.2B from high oil prices 

2-month windfall to finance subsidy program

By Ronnel Domingo
Philippine Daily Inquirer
First Posted 20:24:00 04/13/2011

Filed Under: Oil & Gas - Downstream activities, Earnings,State Budget & Taxes, Government

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MANILA, Philippines—The Aquino administration enjoyed a windfall of some P1.2 billion in January and February from surging prices of oil imports, Finance Undersecretary Gil S. Beltran said.

Beltran said in an interview that the unexpected gain came from collections of value-added tax on petroleumproducts, the prices of which were pegged at about $89 a barrel in the first two months of the year.

Tax collections rise along with world oil prices since the higher the price, the higher the proportionate and corresponding value of the 12-percent VAT.

Citing preliminary figures, Beltran said that P500 million of the total windfall was registered in January alone.

“Around P700 million was collected in February but this figure is not yet final,” he said, adding that the windfall probably continued in March along with the sustained increase in international oil prices.

Last Tuesday, oil companies jacked up pump prices of gasoline and diesel by P1.50 to P1.75 a liter.

This was the 12th time that prices increased since the start of 2011, bringing to P9.60 and P9.85 the cumulative increases per liter of gasoline and diesel, respectively.

The Department of Finance (DoF) recommended that the VAT on petroleum products be collected as usual despite calls for its removal as prices shoot up due to tensions in the Middle East.

Based on a DoF document, the department said removing the tax or putting a cap on it was ill-advised considering that VAT on oil amounted to P47 billion in 2010, representing 12.5 percent of total VAT collections for the year and 4.3 percent of total tax revenues.

“Removal of the VAT on oil will cause major dislocation in the finances of the government,” the DoF said.

“A cap on VAT on oil will also render revenue programming uncertain since it will be made hostage to the movement in oil prices,” the agency added.

For 2011 when the government expects to spend P300 billion over the budget, Malacañang hopes to raise a total of P1.41 trillion in revenues.

The DoF said the abolition of the VAT on oil was also bound to benefit the rich more than the poor because petroleum products were consumed directly more by those in the middle- and high-income economic groups.

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Personal reaction:

We all know that petroleum industry holds most of the primer ladder in economics. The world consumes 30 billion barrels (4.8 km³) of oil per year, with developed nations being the largest consumers. With the oil price hike, economists would also opt to change the prices of other goods and commodities sold in the market.
The high oil prices played a critical role in substantially reducing economic growth in most of these cases. But let us not put all the blame to the increasing price of oil in the global market. In this article, the variable of the case goes solely to the major setbacks in tax rates supplemented to petroleum. I believe the author is right. With the staggering oil price increase and a decrease in tax for petroleum products, a slight change would be seen by other people which is mostly from the middle to the high class society. Prices of commodities would be the same, which is high for that matter. The people more affected are those in the average and poverty level. 


Consider this:
Middle to High Class: they can afford cars(those who consume more on petrol) meaning they have stable jobs, they  have businesses, they can afford loans, they have houses, they can pay rent. Although they spent a lot on petroleum, they also have a source of income.
Low to Poverty Level: they don't have cars (so this does not affect them much), however, if oil prices increases, so would the other commodities. These people don't have a stable jobs, they can be manual laborers, low paid workers and limited budget workers like sales ladies in the supermarket. Imagine, if they have 6,000/month salary, the budget goes to food, for family consumption, light and water bills, some for rent, to pay other dues. Let us consider the fact that we are living in a world that everything has a price to pay.


So, Removal of the VAT on oil will cause major dislocation in the finances of the government , TRUE. The allocation of other levels in the pie would be disturbed. Maybe the only reason for such removal is because the government themselves are major consumers in the market for oil.
Statement two, A cap on VAT on oil will also render revenue programming uncertain since it will be made hostage to the movement in oil prices, then again I agree. There would be major setbacks in the allocation of tax rates to other areas. There would again be issues concerning where to allocate the tax apprehended from petroleum that was removed, and that we all know that petroleum tax has the highest effect according to empirical studies.
As as I have pointed earlier, we have to look for solutions to problems that can remove the escalating poverty levels in the Philippines. They scarcity of resources should not be blamed but the efficiency of the government who handles the decision making in the market. They should think out of the box, better yet, they should put themselves in the shoes of the poor.


-beth-