Oil at $200/barrel by yearend?

It no longer sounds far-fetched… the $200 barrel of oil by year end. Last Wednesday, crude oil climbed above $144 a barrel before settling at $143.57, up $2.60 for the day. Oil prices briefly soared to a new high near $146 a barrel last Thursday, before easing as the dollar gained ground against the euro.

Lingering concerns about conflict with Iran and comments by Saudi Arabia’s oil minister suggesting his country would not boost production are exerting upward pressures. The US Energy Department also reported an unexpected decline in inventories, sending oil prices to slowly close in on $150 a barrel, the next psychological milestone to be crossed.

The weak dollar has been a key driver pushing oil prices up. Many investors buy commodities such as oil as a hedge against inflation when the greenback weakens, and a falling dollar makes oil less expensive to investors overseas. But when the dollar strengthens, traders have less incentive to buy commodities.

How high an oil price can the world economy take? Recent data on industrial activity and driving habits already suggest that higher prices are damping demand and slowing down the global economy. An equity strategist at Citigroup commented that a high oil price is “starting to be a real challenge for global economies.”

But blaming the speculators, an article at the Financial Times notes, is counterproductive. “Despite their dismal reputation, the oil speculators provide a vital service. They help airlines and other big oil consumers to hedge against rising prices, and so to reduce risk—a massive boon amid the economic turmoil. By the same token, they provide oil producers with more predictable future revenues, and so allow them to expand more confidently and borrow more cheaply. That, in turn, should help to lower the price of oil in the long run. Any attempt to curtail speculation, by contrast, is likely to make life harder for firms and oil more expensive.”

All we can do now is buckle up for the rough ride ahead. The market is keeping a close watch on political instability in the Middle East, Nigeria and Venezuela. It does not help that in its latest weekly statistical bulletin, the US Energy Department reported that crude oil stocks had slipped by nearly two million barrels to below 300 million barrels.

Analysts say that level is psychologically important because crude oil stocks as recently as last year were above 350 million barrels. The inventory level was the lowest since January, and below what most analysts had expected. The crude oil inventory figure was 54 million barrels below a year ago, and nearly 22 million barrels below the five-year average, according to tabulations by Barclays Capital.What does that mean for us in this struggling developing country? I guess we have to start psyching ourselves for P100 a liter gasoline and diesel. That is no longer a wild estimate. Even economists trying to understand what is going on are playing catch up with the headlines.

Take Dr. Victor Abola of the University of Asia and the Pacific. By the time I received his paper analyzing the oil price situation by e-mail, it is already outdated. It is not his fault. It is just the nature of things as they are today. In all likelihood, the numbers quoted in this column are outdated too by the time you read it.

In Dr. Abola’s July 2 paper, he wrote that if oil does break $150/barrel and reaches $165/barrel enough to average $150/barrel in any given month… then high-end gasoline would reach P71/liter while diesel could well hit P60/liter. These “extreme” outcomes, he wrote, would then add another 0.7 percent to the average inflation rate, and bring it to 9.5 percent for 2008. Besides, GDP growth will have to be pared down to 4.5 percent, assuming the government is unable to offset part of this with some timely stimulative action.

The thing is, whatever we can do about this situation, we should have done some years ago. We should have learned from the first energy crisis in the 80s that it made sense to invest in alternative energy sources, and energy efficiency. The technology existed even at that time. But we abandoned our gains after the energy crisis of the 80s waned. I blame Tita Cory’s advisers for that.

Ironically, the Philippines was leading the world in harnessing these technologies until the post EDSA governments became complacent. The first expert in non-conventional energy in the World Bank is a Filipino who started at the Ministry of Energy, Dr. Ernesto Terrado. I had the pleasure of working with him during my stint with the Velasco era Ministry of Energy/PNOC.

Someone should get in touch with Dr. Terrado. He is now retired from the World Bank, and he may just say yes if someone asked him to once more lead the nation in this struggle for energy independence. I am sure that with his experience in many other countries in the course of his World Bank stint, Dr. Terrado’s insights will be most useful as we navigate the challenging and dangerous days of expensive energy ahead of us.

The technology for solar, wind, geothermal energy has been improved since the early days when Dr. Terrado was tinkering with them at his MOE laboratory at the UP campus. We should quickly harness such locally available energy sources specially for agri-industrial businesses that are the backbone of livelihood in the provincial areas.

It is interesting that some of the alternative energy resources suggested by Dr. Abola like agro-industrial firms generating their own electricity by using rice hulls (a waste from milled palay) are precisely the same ones Dr. Terrado successfully tested 30 years ago. “Operating costs are estimated to be only 15 percent of power using bunker fuel, while the estimated investment cost is only P38 million for one MW,” according to Dr. Abola.

Apart from car pooling to reduce gas expenses, Dr. Abola suggests middle to high income families, should try to take more public transportation like the LRT-MRT which is clean, reliable, and safe, even though the operators of these systems should increase the frequency of the trains and address the long queues that, at times, extend to outside the station. 

The government should also provide funding so that the number of carriages per train trip may be increased. Companies, on the other hand, should consider company-chartered shuttle buses or some cost-effective transport or food subsidies, and convert some company cars/vans to LPG.

In short, Dr. Abola explains, the present crisis, while difficult, should lead us to a well-defined and implemented plan to be significantly more energy efficient and save on power and fuel costs. Alternative energy has become not only viable but quite profitable. Business competitiveness can be enhanced by it. And a household’s budget can be stretched by it. Conserving energy through more efficient energy use even at just a 10 percent level, is also the equivalent of a Palawan oil well. That’s not bad at all.

Teachers and the GSIS

Ella Valencerina of the GSIS reacted to our column item last week citing the position of a group of public school teachers regarding GSIS’s own system loss. 

According to Ms Valencerina, GSIS has no choice “in cases where GSIS obligations of teachers were deducted from their salary, but were not remitted to the GSIS by the DepEd, but to apply what RA 8291 (GSIS Charter) tells us to do. In Section 3.7 of the Implementing Rules and Regulation of RA 8291: Basis for Crediting of Payments. – Payments shall be credited to the account of the employee/borrower only if officially receipted for by the GSIS with appropriate supporting documents.”

In other words, the poor teachers will have to bear the consequences of the inefficiency of DepEd in remitting the contributions of teachers. That does not sound fair but that’s typical government. I guess this is something our legislators must do something about. At the very least, the accountable officer at DepEd should be penalized for such a failure. It does not seem fair to penalize a poor teacher for a bureaucratic lapse not of his making.

Thief

Vincent Chua sent this one.

One night, a mugger wearing a ski mask jumped into the path of a well-dressed man and stuck a gun in his ribs... “Give me your money,” he demanded.

Indignant, the affluent man replied, “You can’t do this. I’m a politician!”

“In that case,” replied the robber, “give me my money!”

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