Brace for higher oil prices

The price of oil is heading towards the $100 mark but the bumper to bumper traffic on EDSA all day to as late as 12 midnight last week seems to indicate a state of denial among us. Oh well… it is the Christmas holidays and we don’t have to worry about money until after we all get back to business today.

When the price of gasoline here last reached the level of P50 to the liter, traffic on EDSA started getting more reasonable. So maybe that is the good news of the New Year. The bad news has to do with our finances. Rising oil prices have a way of pushing up the inflation rate. Everyone will be using the excuse of rising oil prices to raise retail prices of everything else.

Of course the leftist troublemakers will make a lot of noise again about the need to nationalize the oil industry, as if this is a solution to the problem of rising oil prices. Some other idiots will want the government to stop the rise of oil prices as if it has the power to influence price movements in world market.

Since we are almost totally import dependent on petroleum, the only thing we can reasonably do to ease the pain in the short term is to improve the efficiency by which we use imported oil. No, ethanol is not a short term solution. We don’t produce enough of it to supply the 10 percent mix mandated by law. And even if available, rising sugar prices make it more difficult for the price of ethanol to be competitive with petroleum-based fuel.

With over 90 percent of registered cars in Metro Manila, what we need is a really effective traffic management program. That’s simply because we waste an awful amount of gasoline and diesel in all those idling engines during traffic jams. The high retail prices of these products will hopefully induce a lot of us to do what we can to save on our own. But we may need more draconian measures than the number coding scheme.

Government will also have to fast track the expansion of the LRT/MRT services to provide a reasonable alternative to driving a car. And because at least half of our electricity is already produced from domestic resources, shifting public transport to use electricity or natural gas from Malampaya will increase our ability to control the rise in public transport fares.

Oil prices have jumped almost 30 percent since September. Benchmark crude hit a 26-month high a week ago near $92 per barrel and is forecast by some analysts to be headed to $100. Goldman Sachs suggested that crude will average $100 in 2011 and $110 in 2012. For its part, JPMorgan Chase & Co. forecasts that oil will average $93 in 2011, an increase from its previous estimate of $89.75, with a 24-month target of $120 before the end of 2012.

The rise in oil prices is now driven by quantitative easing in the United States. Investors fear that with all those dollars sloshing around and the American public debt fast growing way beyond a trillion dollars the American currency will weaken. That’s why they are turning to commodities like oil as safe haven for their money.

The robust growth in India and China is also putting upward pressure on oil prices. A cold snap across the northern hemisphere last week, with much of the American north east paralyzed by blizzards, is expected to further push demand for oil.

In the medium term, the recovery in the US economy will support a rise in oil prices. Despite stubbornly high unemployment and a very sluggish economy in the United States, the price of oil continues to creep upward because, as earlier explained, growing fears about a weakening dollar.

OPEC’s reluctance to increase output adds to the case for costlier oil in 2011. OPEC, which supplies about 40 percent of the world’s oil, has not changed quotas since late 2008, when it announced the biggest ever reduction in output as global demand collapsed.

Speculation is definitely part of the reason why oil prices are rising. Expectations are a very powerful thing, especially for financial markets. Right now there is an overwhelming consensus that oil prices are going to rise in 2011.

Joe Petrowski, the CEO of Gulf Oil and the Cumberland Gulf Group, recently told CNBC that “there’s 1 in 4 chance we’ll take out the $147 highs before Memorial Day.” Many of the OPEC nations are indicating that they will be supportive of a rise in the price of oil in 2011. Mohammad Ali Khatibi, Iran’s representative to OPEC, said he expects to see 100 dollar oil very soon.

The speculators smell money and are starting to jump on to the bandwagon. Options to buy oil at $100 per barrel next December are near a five-month high according to analyst reports.

Oil is now considered a “hot” investment for 2011. The underlying economic fundamentals seem to support a higher price for oil. The worldwide demand for oil just continues to increase with China now emerging as the largest consumer of oil, dislodging the United States.

Oil prices last hit the $100 mark in October 2008, after reaching an all-time high of $147 in the summer of that year. Prices have crashed to as low as $40 a barrel, and then kept within a $70 to $90 range for most of 2010. Speculators have been blamed for that ‘super spike’ in prices and they are playing a key role again now.

So brace yourselves for higher transportation and utility costs. That seems to be definite. Maybe government can mitigate the impact on other prime commodities by enforcing its police powers against unreasonable increases in prices at the retail level.

The other thing government can do is to move up the implementation of projects in mass transport and launch energy conservation measures, by force if necessary. Everything else, including what the populists in the streets will propose, are sheer posturing.

Reaction

Joe Nacilla of Las Piñas sent this reaction to last Friday’s column on the SWS survey findings about increased hope among Pinoys.

Even if we are in business of hoping for a miracle to happen, yet, it is very impossible to assume that 93% of Pinoys are facing 2011 with hope. In April 2010, we started to establish a water refilling station business in Cebu, but have to abort the project after 8 months because of several inflexible bureaucratic players wanting to share in the division of spoils.

To start a business in the Philippines, we have to pass tedious bureaucratic processes that allow a lot of powerbrokers to poke their noses into our business. Because we refused to get help from them, they did not act on our business permit application for 8 months, eroding our interest in the business that could have created jobs.

We are left at the mercy of the smallest unit in the bureaucracy who are investment insensitive and inhospitable to investors and are only inclined to make a quick buck. Maybe if we had more patience, we might have been able to secure proper business permit in due time. But that could often mean, only after the opportunity for the business had passed.  

New boots

This was sent by Atty Sonny Pulgar.

Bert always wanted a pair of authentic cowboy boots, so, seeing some on sale, he bought them and wore them home.

Walking proudly, he sauntered into the kitchen and said to his wife, “Notice anything different about me?”

Margaret looked him over. “Nope.”

Frustrated, Bert stormed off into the bathroom, undressed and walked back into the kitchen completely naked except for the boots.

Again he asked Margaret, a little louder this time, “Notice anything Different NOW?”

Margaret looked up and said in her best deadpan, “Bert, what’s different? It’s hanging down today, it was hanging down yesterday, it’ll be hanging down again tomorrow.”

Furious, Bert yelled, “AND DO YOU KNOW WHY IT’S HANGING DOWN, MARGARET?”

“Nope. Not a clue,” she replied.

“IT’S HANGING DOWN, BECAUSE IT’S LOOKING AT MY NEW BOOTS!!!!”

Without missing a beat Margaret replied, “Shoulda bought a hat, Bert. Shoulda bought a hat.”

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