How to compute prices of gasoline and diesel

Strategic Perspective
René B. Azurin

Posted on July 11, 2013

SINCE PUMP prices of oil products are again rising, prompting the usual round of demonstrations against "overpricing," I thought it would be useful to bring to everyone’s attention the pricing model developed by the Independent Oil Price Review Committee (IOPRC) which was tasked last year to study the reasonableness of retail prices of gasoline and diesel. The full pricing model was released with IOPRC’s 215-page Final Report in September 2012 in order that it might be used as a basis for determining the "correctness" of prices of gasoline and diesel at the pump, given prevailing world market prices for petroleum products. For all interested stakeholders, both the IOPRC’s Final Report and the complete pricing model is still available at the Department of Energy Web site.

Just to refresh everyone’s memory, the IOPRC was constituted on March 1, 2012 in response to a public clamor for an independent investigation into the price levels of local oil products. The seven members of the IOPRC were selected from nominees proposed by various sectors of society. The IOPRC was chaired by the distinguished economist Dr. Benjamin Diokno (and I was one of the members, representing academe).

The IOPRC’s Final Report was actually made up of the findings of four separate technical studies aimed at resolving different facets of the problem. One of these -- done principally by Technical Working Group member Marcial Ocampo, an international consultant on energy technology who has an MS in chemical engineering from the University of the Philippines and an MS in Combustion and Energy from the University of Leeds (in the UK) -- analyzed in detail the various cost factors that have to be embedded in the pump prices of gasoline and diesel. The result was an "Oil Pump Price Calculation Model" which essentially used a cost-build-up approach to arrive at the "reasonableness" of a given price level.

It is not possible to discuss the full pricing model in this space but the following table will provide an idea and an easy-to-follow example of how to compute pump prices for gasoline and diesel. Just be advised that this particular example was based on costs and prices and foreign exchange rates and taxes prevailing during the period January 2012 to June 2012. This particular example is also based on imported finished products -- which is what all local oil companies distribute, except for a part of the sales volumes of Petron and Shell which originate from their own local refineries -- and the price basis is what is referred to as the "Mean-of-Platts-Singapore" (or "MOPS"), basically a weighted average of oil product sales transacted daily on the Singapore exchange.

The model involves a two-step calculation. The first step is to calculate the "Tax Paid Landed Cost" (or "TPLC") from the shipment size, import costs, exchange rates and government taxes and imposts. In this step, all the importation value-adding activities are added up and a 12% value-added tax (VAT) is applied to arrive at the TPLC. This is shown in the first table.

The second step entails adding the pure petroleum part of the costs with the biofuels that will be added to the final fuel blend. As prescribed by law, gasoline sold today is made up of 90% petroleum and 10% ethanol, while diesel is made up of 98% petroleum and 2% CME biodiesel. This step also involves adding all the local costs -- such as oil company gross margins, transshipment, hauling, depot operations, and dealer’s margins -- and then tacking on the VAT on all these local costs to arrive at the final pump price. This is shown in the second table.

This "Oil Pump Price Calculation Model" can be used as a predictor for retail pump prices. What I’d suggest would be for interested consumer groups to use it to determine what levels of gasoline and diesel prices are in fact reasonable. What the IOPRC itself found was that local gasoline and diesel prices seem to just track the international prices of these fuels.