Putting the brakes on oil prices

I HAD hoped that a previous column on oil prices would have been the last but with local gasoline prices increasing upwards 15 times already this year alone (2011), answering the question of how to put the brakes on skyrocketing oil prices becomes imperative. Oil firms and government are singing the same tune as to the supposed reason for the increases: that it is the world market that dictates oil prices and that we are essentially helpless in this regard.

Yet even limiting ourselves to their argument, local pump prices do not elastically follow the ups and downs of world market prices. As clearly pointed out by militant transport groups and consumer advocates, profiteering comes in when oil companies raise their prices when world market prices rise up but fail to roll them back with the same magnitude when the reference prices go down. This translates to around as much as P7.50 per liter in sheer profiteering.

Government itself is happy with higher oil prices as it racks up windfall taxes due to the Value Added Tax on oil products. Proceeds from this 12 percent VAT amounted to around P47 billion in 2010. Government collects this revenue to the detriment of oil consumers. By removing the VAT and the profiteering margin of oil companies, prices of oil can come down by at least ten pesos per liter immediately.

Yet the high oil prices story is not simply about profiteering and indirect taxation. A paper on the academic physics journal Physica A in 2009 has shown clear evidence that the rapid increase in oil world market prices is mainly due to speculative pressure. Didier Sornette and co-authors pointed out that “the recent oil price run-up [2006-2008] was amplified by speculative behavior of the type found during a bubble-like expansion.” Analyzing the time-series data from observed prices of crude oil contract prices (using quantitative Log-Periodic Power Law analysis, for the curious), they noted that the “faster-than-exponential” price growth is indicative of a speculative bubble and not of an imbalance in supply and demand.

In simpler terms, there is enough oil around but market speculation pushed oil prices upwards at a rate that is simply too much faster than natural. Now it seems that the news in the Middle East has fueled another round of speculation that is again pushing current oil prices upwards.

Another big factor in the high oil prices is the monopoly power of a few corporations to manipulate oil prices at different levels due to their inherent vertical structure. The oil firms that both produce and sell crude oil as well those that buy and refine are largely the same. According to IBON Foundation, these companies can manipulate the price of oil by manipulating benchmark prices and intra-corporation term contracts and transactions (transfer pricing). One estimate is that only one-ninth of the price of oil is the actual production cost of bringing a barrel of oil to one’s shores.

What can we do as a country to control oil prices? Surprisingly (or perhaps not), there is a lot that we can do.

Natural gas and coal

We do have alternative energy sources that are available for us to use in lieu of oil. The Philippines has natural gas reserves of around 661 million barrels of oil equivalent (boe) and coal reserves of 1.74 billion boe. Potential reserves could bring this up to around 8.6 billion boe (coal) and 700 million boe (natural gas). Proper utilization of these resources for our own benefit instead of selling this off to foreign interests should be done. These reserves can power our growing needs up to a decade even without oil imports.

Centralized procurement

This just means that we can substantially reduce our dependence on oil. Yet we do need to import oil to produce petrochemical derivatives and other fuel. Government can start with a system of centralized procurement of imported crude oil and refined petroleum products. With this arrangement, government can enter into longer and stable oil term contracts that it can then refine locally. It can also enter into commodity swap and other non-traditional trade arrangements in making oil purchases such as that between Turkey and Nigeria as well as that of Venezuela and Cuba. A long term buffer supply should also be created as well as a fund (different from the oil price stabilization fund (OPSF) to cushion the impact on consumers of sudden increases in oil prices.

Government can actually do these in part already if it buys back Petron Corporation. Petron has refining capacity, storage facilities, distribution lines as well as 40 percent of the domestic market. Government can then actively transform the local oil industry into a nationalized industry that will not only establish mechanisms to ensure reasonable pump prices but harness the whole oil industry to support national industrial policy since oil has other uses such as producing plastics, lubricants and even farm inputs such as fertilizers and pesticides. –GIOVANNI TAPANG, Ph.D., Manila Times

Dr. Tapang is the chairperson of AGHAM-Advocates of Science and Technology for the People.