High Oil Price?
Posted by butalidnl on 25 September 2011
The recent strike against high oil prices was not only unsuccessful, it was also futile. Because the government’s response was limited to two choices: either to leave things as they are, or decide to subsidize oil prices. There was no chance that the government could, or would, force oil companies to lower their prices. And I think that subsidizing oil prices is an entirely wrong thing for the government to do.
High International Prices
The price of oil products is indeed high. Compared to previous months, the prices of oil products have risen quite significantly. However, this is simply because of high international oil prices. The local oil companies may have prices than are a bit higher than they should be, but this would be because of inefficiency and not greed.
Oil prices in the Philippines, despite appearances, are in line with international prices. Filipinos point out to spot prices of $88/barrel, and ask why the price at the pump is similar to when the price was $130/barrel in 2007. Well, there are two reasons why this is so. First, the price of oil that the Philippines buys is based on the Dubai crude price, not on the West Texas Index of the US. Dubai crude price is similar to Brent crude at $112/barrel, while West Texas crude is $88/barrel (price of West Texas crude is 27% higher than Dubai crude). The second reason is that the quoted West Texas or Dubai prices are spot prices, i.e. they are the price for single shipments for immediate (within a month) delivery. Companies importing oil pay prices agreed to in long-term contracts (contracts of a year or more) where the price is lower. In 2007, the spot price may have reached $130/barrel, but long term contract prices were probably only half that. But now, with spot prices lower, the long-term contract price is only a few dollars lower than the spot price. It may be that the long-term contract prices now are higher than those of 2007.
A better approach to looking at prices is to compare the retail price of gasoline between countries. Retail prices would already include all costs that go into gasoline e.g. transport, refining, distribution, taxes etc. A ( comparison of international oil prices ) show that US prices are about $3.79/gallon, while that of the Philippines is $5.00/gallon (On 9 Sept, average price of gasoline was P55.95/liter ). If we consider than the price of West Texas crude is 27% more than Dubai crude, the Philippine price should be $4.81. And if we consider that WTI is the price of crude oil already in the US, while in our case, the crude has to travel from the Middle East all the way to the Philippines, or price of $5.00/barrel sounds fair enough. The countries near us (e.g. Malaysia, Indonesia) which have lower retail gasoline prices subsidize them.
Bayan Muna, Piston and other leftists would of course reject the above reasoning. They would point out that the oil companies are ripping off everybody. And in a sense, they have a point. But if this is so, then a strike in Manila would surely not be enough to reverse a policy that even manages to ‘rip off’ US consumers and consumers all over the world. The local oil companies that we have are not doing the big rip off. In fact, as we have shown above, they are probably ripping us off a lot less than their US-based counterparts are.
The government could still take meaningful steps against the high prices of petroleum products. First of all, it could promote gasoline efficiency, by providing tax incentives for people to buy hybrid cars. Or by having centers that check and improve the efficiency of engines, for a discounted price. The efficiency of many tricycle and jeepney engines could be significantly improved by relatively small changes to the engine.
Then, the government could also initiate the process of raising jeepney, bus and taxi fares. Not that an increase should be done now, but that there will already be a decision to raise fares when diesel price exceeds a certain amount. So that drivers and operators of public utility vehicles don’t need to do the whole process when the price does increase.
There may also be a need for the government to closely monitor the books of the oil companies, to make sure that any lowering of costs are passed on properly to the consumers, and that price increases are truly based on real increases in costs, and not merely in anticipation of them.