[ANALYSIS] Why are petroleum products so expensive again?

JC Punongbayan
Maybe this is as good a time as any to rethink our country’s long-term relationship with oil

Photo by Jire Carreon/Rappler  

It seems our inflation woes are far from over. 

Figure 1 shows that Brent Crude, a global benchmark of oil prices, has reached $80 per barrel, the highest in almost 4 years. In recent days, it climbed further to $85.45 per barrel. 

This steady rise of oil prices worldwide affects Filipinos in two ways. 

First, it directly raises local pump prices. On October 2, diesel prices went up by P1.35 per liter (reaching P49.6 per liter on average), while gasoline prices went up by P1 per liter (reaching P60.5 per liter on average).

Needless to say, anyone consuming petroleum products – like bus operators, jeepney drivers, and private car owners – will definitely feel the brunt. All of a sudden, commuting or walking never seemed more palatable.

Figure 1.

But there is a second, indirect, more insidious effect: insofar as petroleum is an input to the production of most goods and services, we can expect even higher inflation (accelerating prices) in the coming months. As of August, the inflation rate reached 6.4%, the highest in 9.4 years and in ASEAN.

Why are oil prices skyrocketing? Can government do anything about it?

Supply and demand

By and large, local pump prices follow the vagaries of world oil supply and demand. 

As for supply, many key oil exporting countries have had trouble exporting oil in recent months. 

For example, Iran supplies almost 3% of the world’s daily oil consumption. Yet its oil exports recently fell to a 2.5-year low after the US government – at the behest of President Donald Trump – reimposed sanctions on Iranian oil. 

Venezuela, too, is gripped by a severe economic crisis that has choked its oil exports.

Other exporters like Saudi Arabia and Russia seem reluctant to fill the gap left by Iran and Venezuela, even if some say they could, and despite the request of Trump (on Twitter). There’s simply no incentive for them to do so: not only do they want to keep buffer stocks for themselves, their reserves have also become more valuable amid tighter world supply.

As for global oil demand, it remains steady notwithstanding an ongoing trade war between the world’s economic superpowers: US and China.

All these lead analysts to say that Brent Crude could reach as much as $100 per barrel within the year.

This could stoke inflation worldwide, including the Philippines. 

In ASEAN, we’re also one of the hardest hit because we import so much of our oil requirements (94% as of 2016), compared to Thailand (70%), Indonesia (41%), Vietnam (20%), and Malaysia (10%).

Even a meager increase in world oil prices has an outsize impact on us relative to our neighbors. 

Moreover, accelerating prices could in turn discourage consumption and pull down overall demand, stifling our economic growth.

Government response

What can government do?

First, some have floated the idea of the Philippine government subsidizing petroleum prices. They argue that some of our ASEAN neighbors pursue such a policy so their consumers can enjoy cheaper diesel and gasoline. 

But we’ve been there before, and it didn’t turn out well. Back in 1984, then-president Ferdinand Marcos established the Oil Price Stabilization Fund (OPSF) to iron out the volatility of oil prices brought about by the unstable peso-dollar exchange rate.

But the OPSF only turned out to be a colossal burden on the country’s finances, one that ate away at other important budget items such as infrastructure. It has since been abolished.

Second, some have proposed price ceilings on basic commodities – not just for oil but other necessities like food – beyond which prices cannot go.

But this will almost assuredly worsen the situation. Fixing prices will only create gaps between demand and supply, thus inducing shortage and rationing. Sooner or later, we’ll have to form long queues outside our favorite gas stations.

Third, some have proposed to stop the excise taxes on petroleum products imposed by TRAIN 1. The law provided for 3 rounds of higher taxes on petroleum products:  

  • On January 1, 2018, P2.50 per liter of diesel, and P7 per liter of gasoline
  • On January 1, 2019, both will rise to P4.50 and P9, respectively
  • On January 1, 2020, both will rise to P6 and P10, respectively

But because of runaway inflation, some lawmakers have pushed a bill (the Bawas Presyo Bill) aiming to stop the second and third tax hikes if the average inflation rate for 3 months breaches the government’s annual inflation target. 

Note that a similar provision was already included in the original Senate version of TRAIN 1, but it did not survive the legislative process.

Proponents of TRAIN 1 say the law already features a built-in circuit breaker: if Dubai Crude (another oil benchmark) breaches $80 per barrel, then the automatic tax hikes won’t occur.

But Dubai Crude is now hovering at just $77 per barrel. The implementing rules of TRAIN 1 also provide that the $80 threshold must be breached for at least 3 months before January 1, 2019. In all likelihood, therefore, the circuit breaker won’t kick into action. 

 Is there still any doubt that TRAIN 1’s petroleum taxes are ill-timed?

One official of the Department of Finance assured the public that, anyway, the government has placed certain palliatives, namely: unconditional cash transfers and Pantawid Pasada (fuel vouchers for jeepney drivers). 

But the first is now widely deemed inadequate (P200 per month per family) and has also been distributed at a glacial pace. Meanwhile, drivers have also found it difficult to avail the second (not all gas stations are equipped to receive such fuel vouchers).

Time for a rethink

All in all, there seems to be little relief in sight. 

Unless the Bawas Presyo Bill passes soon, or unless Dubai Crude exceeds $80 per barrel (and stays that way till December), we are likely to suffer both higher world oil prices and higher petroleum excise taxes on New Year. 

On top of a steadily weakening peso (which makes imports costlier), we can expect even higher inflation soon.

What worries me most is that runaway world oil prices could only compound people’s expectations about future inflation. Right now the government must signal to the people they’re doing something to arrest inflation. But runaway oil prices make that task so much more difficult.

Finally, why are we so dependent on oil in the first place, and what can we do about it? 

Should Filipinos now embrace renewable energy sources and “greener” goods and services? Should the Duterte administration now actively protect our claims in the West Philippine Sea, insofar as it contains massive oil resources?

Maybe this is as good a time as any to rethink our country’s long-term relationship with oil. – Rappler.com

The author is a PhD candidate at the UP School of Economics. His views are independent of the views of his affiliations. Follow JC on Twitter: @jcpunongbayan. 

JC Punongbayan

JC Punongbayan, PhD is a senior lecturer at the UP School of Economics. His views are independent of the views of his affiliations.