Oil price rise & peso’s weakness: Double whammy

As the year began, oil (unleaded and premium gas) retail prices have started in the high P40s and low P50s for small and major players, respectively.  As the global prices increased by 5% towards the end of January, local retailers raised their prices by about the same rate, 5%, or to low P50s and to mid P50s per liter for small and major players, respectively.  In late February to early March, global prices have went down and even lower by 1% of the prices at the start of the year or about 6% from the prices towards the end of January.  Yet, disgustingly, then, both small and major players offered just token reductions (just a measly 3% from the end-of- January prices) of their retail prices.  Thus, sheepishly, some ideologues and political grandstanders then took advantage of these perceived malpractices and threatened to go on a nationwide transport strike to gain media mileage.  The main argument, oil companies have formed a cartel and are dictating the prices.  

Today, all oil price indicators are in the upward trajectory again.  Brent, Dubai, MOPS (Mean of Platts Singapore) and even West Texas Intermediate (which was at below US100.00 per barrel for quite a time) all bear over US$100.00 price tags per barrel.  Worst, there is a big possibility that it will continue to rise as the political turmoil in Egypt escalates.  Truth to tell, Egypt does not have huge oil production which any disruption can largely influence prices.  Unfortunately, however, Egypt controls the Suez Canal and the Suez-Mediterranean pipelines which deliver crude oil to North America and Europe.  These oil distribution channels account for 2.24 million barrels a day in 2011. 

Moreover, the economy in the USA has started to move and demand for oil has started to rise.  While this development is good for the world, to the non-oil producing countries, this is bad news.  Undeniably, with the rise in USA’s demand for oil comes corresponding hikes in oil prices.  Likewise, with USA’s economy rising, their dollar strengthened and our peso retreated.  Thus, for us, a double whammy, as basically, more than 90% of our oil needs are imported and are dollar denominated.     

With these developments, even in an era where deregulation encourages competition and have somehow brought fruition to consumers (such as, the airline industry), we shall hear more clamors for government control over the oil industry.  They shall surely demand for more serious efforts from lawmakers in abolishing the Oil Deregulation Law, or, that we shall go back to the government-controlled era.  Furthermore, they shall surely claim that these giant oil industry players are forming a cartel and are dictating prices.

While there is a big possibility that this proposal will gather steam and maybe popular in the end, its popularity may not be at all the solution we need.  It can be recalled that the Oil Price Stabilization Fund (OPSF) was set up in 1984.  Then, as part of the policy, the OPSF was supposed to help protect consumers from fluctuations in product prices while providing refiners with adequate margins.  In 1996, the OPSF was running a large deficit and was financed by taxpayers’ money to the tune of US$40 million a month.  Knowing fully well that crude oil is the Philippines’ largest single import (which accounts for 7 percent of the country’s total import bill) the amount involved was just too material.  Simply put, it was and shall be economically catastrophic.

Today, under the Deregulation Act, domestic fuel prices will be adjusted automatically based on MOPS (Mean of Platts Singapore) quoted prices.  Clearly, therefore, a base data is supposedly at hand for price determination purposes.  Palpably, it is purely mathematical and is therefore an exact science.  So that, arguments on prices are issues that are not suppose to surface.  Furthermore, while the general public accuses these oil companies of forming a cartel (it simply means an agreement among firms or companies for the primary purpose of controlling prices), the same act explicitly prohibits this practice.  .

Obviously, therefore, the law is broadly complete.  However, some unscrupulous businessmen are just toying with it and have unduly taken advantage of the general public’s helplessness.  Therefore, what is important now is for the Department of Energy to establish a “womb to tomb” formula that details conversions from the global prices to the oil company’s retail stations’ prices.  Hopefully too, the newly established Office for Competition under the Department of Justice can help consumers in making sure these measures are appropriately implemented.

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