Learn to live with high oil prices

Energy Secretary Vince Perez is right. We have to learn to live with higher oil prices. It is an unpleasant reality, a fact of life. I wrote as much some months ago in this column. The signs are so obvious that the era of low oil prices is over. It isn’t just because they haven’t discovered a major oil field in recent years. They are not exploring for new fields as much as they should be.

The low oil prices in the 90s and strict environmental laws were serious disincentives for exploration companies. And even as the price of oil has now hit the stratosphere, there is still this residual skepticism that today’s prices would hold long enough for investors in exploration ventures to strike a hit and make a return on the massive risk capital required.

Geopolitical concerns have also made oil prices higher. At least $10 of the $40 a barrel oil price is conceded to be nothing more than "anxiety premium". Those selling oil are exploiting the anxiety of a market that is constantly afraid to be caught short of inventory, specially in the face of a very unstable situation in the Middle East. The problems in Russia with its major oil producer, Yukos, as well as problems in Venezuela and Nigeria add to the nervousness of the market.

We also have to reckon with China’s economic growth. China’s coming of age has changed the world’s energy demand and supply equation. It is proving to be one energy hungry country and its appetite will only grow as it takes its rightful place among the world’s great economic superpowers.

And let us not forget India, also increasing its energy demand as its economy heats up. No wonder OPEC used up its existing production capacity today, and as its president confessed, no longer able to produce more to meet increased world demand.

Analysts say it is possible for oil to hit the $50 a barrel price level soon. But if it is any comfort to us, they also say that after adjusting for inflation to make figures comparable, "even at $50 per barrel, prices would be about 12 percent less expensive than they were leading up to the first Gulf War, and more than 40 percent below the levels reached during the oil crisis of the early 1980s."

Contrary to the claims of local leftists, the oil majors are no longer the market powers they used to be. They no longer control supply, like they used to. "Just in time" inventory management has taken hold, which explains sharp rises in gasoline and diesel prices everywhere, specially when market demand spikes unexpectedly.

The communists amongst us who cry for an end to oil deregulation either do not understand the dynamics of the international oil market today or refuse to recognize the dynamics so they can exploit the issue for their domestic political agenda. Re-regulating the domestic oil market will not bring down the pump price of diesel. It will just politicize price setting to the point of gridlock.

We will end up with the Napocor situation in oil to the detriment of all consumers, except that private oil companies will not take the abuse Napocor was ordered to take. Oil companies will simply stop selling at a loss and we will add an oil supply problem to our current price problem. Why would any group wish this catastrophe on the Filipino? To heat up political unrest and make a communist power grab possible.

Petron

Vince is also correct when he rejected the suggestion of some politicians, including Senate President Franklin Drilon to regain control of Petron. Having worked in Petron when it was owned 100 percent by the government, I know that there is little Petron could do in the face of international market forces. We are not an oil producing country and therefore, we are dependent on what the market dictates. We are not like oil exporting Indonesia in the 70s, when it consciously priced domestic oil below the international market.

In fact, Petron’s partnership with Saudi Aramco is an even better situation than during our time because they now have assurance of supply. We had to go and secure government-to-government supply contracts to give us a measure of supply assurance, independent of the multinationals. It would be ill-advised to change the nature of Petron’s ownership structure today.

What Petron can do, even at the current level of government ownership, is to help keep the other players honest. Petron’s access to market information should give government the ability to check claims of the other players. If push comes to shove, Petron could hold the line on prices, as it tried to do last week (but much too briefly), and force the others down. I remember we did just that in the early 80s, and Shell and Caltex had no choice but to rollback. I am confident Saudi Aramco could be persuaded to help play the moderating role here that it plays internationally.

What I think government can do is to more closely monitor the world market and the importations of the local players. Government must be able to tell us if the oil players are taking us for a ride. Unfortunately, only Ronnie Concepcion is monitoring the industry and he is not in a position to get the most relevant data as government could. This is a job the Bureau of Energy Utilization should be doing, but apparently, isn’t.

What we need to do, long term, is to dust off some of our old programs to assure a greater degree of energy independence and update them to meet today’s changed environment. Energy conservation is the cheapest and easiest to do very quickly, assuming an informed and motivated citizenry. Put back the disincentives for gas guzzlers, because even if the rich can afford the gasoline consumption, guzzlers waste foreign exchange for no good reason.

Geothermal And Natural Gas

Develop geothermal. We found out during our time that this is one resource we have an almost inexhaustible supply of. But geothermal can only be used as electricity. Get the mass transit systems in Metro Manila done quickly because they use electricity that can be supplied locally by geothermal. That would save us the diesel used by all those buses and jeepneys.

Converting public buses to natural gas is a good and doable plan that can be in place faster than the various MRT routes in the drawing board. It will also not displace present operators and drivers. It will use natural gas from Malampaya thereby saving foreign exchange and resulting in a cleaner environment. However, I am not sure if it will be significantly cheaper than diesel.

But someone did President Arroyo a great disservice by including the Bataan Nuclear Plant in the list of power plants to be converted to natural gas. It made her sound ill informed by energy advisers who do not know their stuff. That’s a worrisome thought. We have studied that option a long time ago and I recall that the cost of conversion (if you can even call it such since for most part, only the site is usable) is equal to, if not more than the cost of a new power plant designed from scratch to use natural gas.

Besides, I recall the power line that connects the nuclear plant to the Luzon Grid has long ago been stolen. All those aluminum cookware along the highway to Bataan... they all used to be the transmission line wires. The right of way may still be there but Transco will still have to study the economics of re-stringing that line for just one plant.

Organizing public transport drivers and operators into cooperatives to run their own gasoline stations is a nice idea. But I doubt if they can manage the complexities of the business, the high financial risks involved and the low returns. DBP and other GFIs that will be asked to provide financing may be wasting scarce resources in an undertaking with little chance of success. But I can appreciate the political brownie points the administration can earn and the political heat it can deflect.

I totally sympathize with Vince. This is a very tough, no win situation because we are simply not in control of supply and price. Politicians should resist the temptation to open their mouths unintelligently on the situation. Or as one of them puts it, add fuel to the fire. It is a difficult problem as it is. We need all hands on deck to get us through the storm. As we said, we have to learn to live with the reality of high oil prices. We don’t have a choice.

Stoned

Here’s Dr. Ernie E.

Ancient Egyptians slept on pillows made of stone.

That’s actually what caused many of their deaths ... pillow fights.

Boo Chanco’s e-mail address is [email protected]