Dearer diesel

How did diesel get so dear that it now costs much more than gasoline, after decades of being cheaper? For both economic reasons and as a deliberate policy, it had always been the lower-priced fuel. Both are distilled and refined from crude oil, but diesel has traditionally cost less to produce as it is less refined than gasoline, requiring fewer steps and less energy in the distillation process.

On top of that, diesel has also been traditionally favored with lower, even zero taxes, with a pro-poor and anti-inflationary intent. Lowering diesel taxes is pro-poor because it fuels the public transport sector—jeepneys, buses, trucks, and interisland boats. Hence, keeping diesel cheap keeps passenger fares and cargo freight costs low. Lower freight costs, in turn, mean lower food and farm product prices, which embody transport and logistics costs that are typically higher here than in our Asean neighbors. This is because our archipelagic geography makes it more challenging and costlier to move products around, while our neighbors’ contiguous land masses make transport easier (except for also archipelagic Indonesia). Diesel price changes thus ripple throughout our economy, so lower diesel taxes are also seen to help contain inflation.

So what happened? Why is diesel much dearer now, with the perverse effect of giving the poor a harder time, while richer gasoline-using car owners pay less for their fuel? I looked up our diesel and gasoline prices over the past decades for a historical perspective on their prices and tax differentials. In 1985, gasoline was P10 to 11 per liter, while diesel was P7 to 8, or a relative 27.3 percent advantage. Regular gasoline had a specific tax of P1.575 and diesel P0.269 per liter and ad valorem taxes of 25 percent for gasoline and 22 percent for diesel, on top of an import tariff of 20 percent for both. In 1995, prices were lower at P7.06 per liter for gasoline and P4.96 for diesel, or a 29.7 percent advantage. The 20-percent import tariff still applies, plus a P1 special duty per liter, but also differential specific taxes of P0.33 per liter for gasoline and P0.145 per liter for diesel. By late 2005, gasoline sold at around P38 per liter, while diesel was at P32, with the relative difference down to 15.8 percent. The Expanded Value-Added Tax law (Republic Act No. 9337) extended the coverage of the 10 percent value-added tax to include both products, retained the P4.35 per liter gasoline excise tax that was in place since 1996, but eliminated the previous P1.63 excise tax on diesel.

The next milestone came in 2018, when the Tax Reform for Acceleration and Inclusion law (RA 10963) raised the excise tax on diesel in stages, from zero set in 2005 to P2.50 per liter, then P4.50 in 2019, and finally P6 in 2020. Gasoline was correspondingly taxed at P8, P9, then P10 per liter, maintaining the preferential taxation of diesel, although significantly narrowing the previous relative bias. Diesel peaked at nearly P50 versus gasoline at P57.80 in 2018, with a shrinking relative difference of 13.5 percent.

The great switch happened in 2022, when the Russia-Ukraine war caused great volatility in fuel prices. The year ended with diesel at P68.67 per liter, with gasoline lower at P63.88. By then, gasoline’s price per liter had risen by P14.90, while the diesel price rise was nearly twice that, at P27.30. Excise taxes remained at P10 for gasoline and P6 for diesel.

By then, the economics had changed. The new Euro IV low-sulphur fuel standard added the cost of more intensive desulfurization to diesel production cost, narrowing the gap with gasoline refining costs. But more telling were dramatic shifts in global diesel supply and demand. Refinery disruptions and Russia sanctions constricted supply. Meanwhile, world demand has swung strongly toward diesel that fuels freight and shipping, construction, and power generation. Unlike the inelastic demand for diesel, gasoline demand is tied more to private car use, which is more elastic or price sensitive, now seeing wide hybrid or electric vehicle adoption and reduced discretionary driving. All told, gasoline could be in relative oversupply, depressing its price below diesel, whereas the opposite condition prevails for diesel.

The other question being asked is: why has our diesel price gone up more than in our neighbors? A chart comparing recent diesel price hikes is going around social media, showing the Philippines topping the list with a 97-percent diesel price increase, vs Thailand’s 46, Malaysia’s 45, Vietnam’s 35, Singapore’s 29, and Indonesia’s 9 percent—seemingly implying that our government is mishandling the crisis. To be fair, it’s because our neighbors are able to subsidize their fuel prices more aggressively, but we can’t, with a slowing economy and an P18.16-trillion debt already hanging over our heads. Nor would I go for re-regulating the oil industry; our government already badly mishandled that before.

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