$80 per barrel

In case you have been too distracted the past few days to notice, international prices for crude oil has climbed up above $80 per barrel. Expect pain at the pumps the next few weeks.

A period of cheap oil, when prices climbed down to $32 per barrel, is over. The oil-producers are winning the game by voluntarily limiting supply and choking supply. Saudi Arabia, if it gets its way, wants oil prices to move closer to $100 per barrel.

A few things help the OPEC countries achieve their goal of raising global prices. Russia, a major oil producer, has participated in the effort to cap supply.

Even as they conserve their oil deposits, Putin’s oligarchs will still be raking in more money with the upward pricing trend. Putin will probably elbow China’s Xi aside at the top of the most powerful persons’ list.

Venezuela’s Maduro will probably survive the sanctions imposed against him. The socialist leader heads a subsidy-driven regime dependent on oil revenues. However, with its backward technology, Venezuela is exporting at less than capacity.

Donald Trump’s decision to abandon the Iran nuclear deal could effectively block off the country’s oil exports, further limiting supply. The insistence of the Iraqi Kurds to establish an independent state could create a political crisis that will imperil the supply from the oil-rich Kurdish region.

In a word, the geopolitics of oil militates against any price reduction in the foreseeable future. Given OPEC’s orchestrated price cuts, only a surge in US shale production will save the oil importers from recession inducing oil prices.

Asia, whose economies drive global growth, will be hit hardest by the upward trend in oil prices. At present price levels, Asia’s oil bill is estimated to add up to $1 trillion a year. That is double the oil bill the region paid in 2015-2016, when the most dynamic Asian economies began ramping up growth rates.

Needless to say, the new oil price regime aggravates our inflation prospects. We might have to revise inflation forecasts closer to five percent.

A higher oil importation bill will likewise exert pressure on the peso’s exchange rate. We do not have a strong export sector and therefore we have little to offset what we pay out for oil. This leads to a vicious cycle: a wider trade deficit will push the peso downward as a weaker peso pushes inflation upward.

The excise taxes on oil helps rein in domestic demand for a highly polluting imported commodity whose global price dynamics we could not control.

Deposit

Some needless noise is being made about adjustments in the update of bill deposit to reflect the prevailing price regime for electricity.

The deposits are mandated by the Energy Regulatory Commission (ERC) and are not whimsically collected by the distribution utilities (DU). They represent the average monthly bill a customer pays. There are provisions for refunding the deposit when the average consumption falls.

The deposit based on electricity billing is exactly similar to the deposit one pays when renting an apartment. The rental deposit cover whatever damage happens to the apartment unit while in the care of the tenant. It also protects the property owner against the possibility of default on the last payment for rent of the property.

In the same manner, the billing deposit collected by the DUs is a tool for risk management. It protects the DUs from clients who simply default on their last payment when they close business or move to a new residence. Without the deposit, there is no disincentive for people defaulting on their terminal payments.

The ERC is currently reviewing the rules and regulations on the bill deposit to allow for greater transparency and enable electricity consumers to be better informed about it. The annual review of bill deposits orders the DUs not only to raise deposit levels if warranted but also to refund part of deposits to reflect consumption declines.

Consumers will receive a refund if their recent monthly consumption is 10 percent less than the deposit. On the other hand, they will be charged an additional 10 percent of the deposit if their monthly consumption increased by that margin.

The bill deposit does not accrue to the DU. It is not part of the income of distribution companies such as Meralco. In the case of the biggest distribution utility in the country, only about 17 percent of the amount reflected in our monthly bill actually goes to the company. Meralco simply functions as collection agent for the power generating companies, the transmission company and others.

Most of the customers served by the distribution utility seem to be of the wrong impression that any increase in the power rates mean an increase in income for companies like Meralco. In fact, it could happen that power rates rise without incremental income for the distributors. This happened recently.

We are currently in an elevated inflation situation. As mentioned above, we are likely to experience elevated inflation if only because of the sharp increase in oil prices. Higher oil prices will reflect not only in higher transport costs but also in general operations cost for all companies. The power distribution companies are not immune to this economic reality.

As power costs rise, so will our average monthly billing. Unavoidably, the billings deposit will follow suit. If it is any consolation, the incremental billing deposit will not be of an earthshaking, poverty-inducing amount.

We can rant about it, but inflation is unavoidable. It can be managed, but it cannot be banned.