Tag Archives: speculation

Oil deregulation

A billion pesos daily in extra profits, taxes for oil firms, BBM

Image from The Manila Times

The oil companies and the Marcos administration are earning almost a billion pesos per day in extra profits and taxes due to unreasonable weekly changes in pump prices. 

As the public grapple with high prices, it appears that the oil firms and the government are making a killing from the perverse and speculative adjustments in the prices of petroleum products.

Making a killing

For diesel and gasoline alone, they are collecting an additional income of around ₱966.33 million per day. Of the said amount, the oil companies take some ₱850.37 million per day in extra profits while the government collects about ₱115.96 million daily in additional value-added tax (VAT) revenues.

The amounts are based on the estimated overcharge that oil firms implement weekly. As of the Oct 18 price adjustments, diesel price changes are around ₱25.48 per liter higher than what is supposedly warranted by movements in international benchmark prices and the foreign exchange. For the same period, the estimates for gasoline are pegged at ₱12.27 per liter. The estimates used the benchmark Mean of Platts Singapore (MOPS), which the Department of Energy (DOE) says is the reference for determining local pump price movements. 

The estimated overcharge from the weekly price fluctuations is compared to the country’s diesel and gasoline consumption to reckon how much the oil firms and the government potentially make in additional profits and VAT revenues. In 2021, the demand for diesel was 10,590 million liters (ML), while it was marked at 6,757 ML for gasoline, according to the Oil Industry Management Bureau (OIMB).

Most of the extra profits the oil companies raked in went to the industry’s biggest players, based on their market share as of 2021. Petron, which accounts for 19% of the downstream oil market, cornered about ₱163.02 million daily. With a 15% market share, Shell gained around ₱127.21 million daily. Phoenix (7% share) got some ₱63.35 million, and Chevron (5%) was about ₱45.15 million. 

The additional tax revenues that the government amasses from high prices and unfair price adjustments explain why it wants to keep the Oil Deregulation Law despite energy officials recognizing that global price fluctuations are mainly speculative.

Excessive global prices

What we see as apparent price manipulation in the weekly price movements of petroleum products does not fully capture the extent of excessive oil pricing. To illustrate this, one can look at the reported production cost of a barrel of crude oil and compare it with the international benchmark prices. In 2016, for instance, the production cost of crude oil in Saudi Arabia, Iraq, and Iran ranged from just $9 to 11 per barrel. During the same year, Dubai crude averaged $41.47 per barrel – or a difference of $30.47 to 32.47 a barrel.   

Asian countries, including the Philippines, use Dubai crude prices to determine the cost of crude oil (and MOPS for refined petroleum products). In 2021, more than 60% of the country’s crude oil imports came from Saudi Arabia.

Oil importing nations refer to Dubai, MOPS, and other international benchmark prices to determine domestic pump prices and price changes. These benchmark prices reflect the price in the oil spot market – i.e., “on-the-spot purchases of a single shipment for prompt delivery at the current market price,” as defined by the US Energy Information Administration (EIA).

However, these volatile spot prices, prone to speculative assaults, do not accurately reflect the price of oil stored and sold in the local market. Long-term supply contracts, not spot prices, cover most of the physically traded oil and are retailed in refilling stations. Some estimates say the spot market accounts for 35-40% of physical crude oil sales.

In the Philippines, because of a deregulated and privatized downstream oil industry, policymakers and consumers are blind to how much of the oil in the market is covered by spot transactions and long-term supply contracts. We can assume, nonetheless, that the major players with ties to the transnational oil companies operate under the terms of supply contracts and not the spot market.  

Financialization and speculation

Meanwhile, the greater financialization of the global oil futures market since the early 2000s paved the way for increased speculation in oil commodities that impact spot prices. According to the EIA, the futures market is where futures contracts (i.e., a standard agreement to buy or sell a specific commodity of standardized quality, such as crude oil, at a certain date in the future) are bought and sold. 

The EIA explains, ” If oil producers want to sell oil in the future, they can lock in their desired price by selling a futures contract today. Alternatively, if consumers need to buy crude oil in the future, they can guarantee the price they will pay at a future date by buying a futures contract.”

But increasingly, under a highly financialized global economy, participants in the futures market are not only those with an actual commercial interest in buying and selling physical oil. They now include financial players who merely want to profit from the rise and fall in oil prices. 

“In addition to oil producers and consumers, futures contracts are also bought and sold by market participants or speculators who do not produce or consume crude oil. These types of traders buy and sell futures contracts in anticipation of price changes, hoping to make a profit from those changes,” the EIA says.  

Beyond fuel taxes

Economic fundamentals cannot explain the erratic behavior of oil prices in the past two decades. Global prices move based on the unregulated betting of big financial players on whether prices will go up or down in the future, taking a cue from emerging global events in geopolitics, economy, and even climate, among others. At one point this year, the pump price of diesel ballooned by ₱13.15 per liter, then fell by ₱11.45 the following week. Supply and demand do not account for these extreme price swings.  

The overpricing that the oil firms impose from the weekly price adjustments alone – on top of what they overcharge on the actual costs of oil, especially by the big global players, and the impact of speculation – makes calls to reduce, suspend or remove oil taxes ultimately inadequate. Removing the VAT and excise tax will provide immediate relief, but they are not enough in the context of escalating prices and price manipulation. Such demands should complement the primary call to end the Oil Deregulation Law, regulate oil prices, and curb manipulation and speculation as an immediate people’s demand. ###

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Oil deregulation

Record oil price hikes: People must rage vs neoliberalism

Photo from BusinessMirror

Nearly three decades ago, neoliberal apologists, multilateral creditors, and the big oil companies peddled the lie of the Oil Deregulation Law that the so-called free market will ensure reasonable pump prices for the benefit of all. Today, that free market is telling the jeepney drivers, farmers and fishers, ordinary motorists, and households to endure the most significant oil price hikes in the country’s history. 

As the oil firms, economic managers, and energy officials have been telling the public for the past 26 years, these price adjustments are warranted. The crisis in Ukraine jolted world oil prices that have already been on a steady upswing since last year. A month before the conflict, crude oil prices as measured by the International Monetary Fund’s (IMF) index for global benchmark spot prices were 62% higher already than its level a year ago. 

Market forces

Oil price hikes in the first ten weeks of 2022 already surpassed the price increases in diesel and kerosene in the whole year of 2021. But we are told that it is only natural that the local pump prices are moving the way they do, given that the Philippines imports practically all its oil requirements. As always, under the Great Free Market, the price of oil will eventually find its proper place once the dust of uncertainties stirred by the inter-imperialist competition in Ukraine, the COVID-19 pandemic, etc., has settled. All of us just need to hang on tight and allow the forces of the free market to do their thing. In the meantime, policymakers hope that the most vulnerable sectors can get by the price shock through targeted cash assistance. 

Neoliberalism makes us believe that all we can do as hapless consumers is to try to survive the market’s wrath. This is what the fuel subsidy aims to achieve – a life jacket in a tumultuous and stormy sea of runaway prices. There is no guarantee of survival.

But who or what exactly are these market forces anyway? Neoliberal fundamentalists will tell us that they are the “supply and demand”. They do not say that supply and demand, and ultimately the determination of prices, are decided by people with vested commercial interests. They are not supernatural beings; they are just super-rich – the monopoly capitalists in the oil industry, the finance oligarchs, the OPEC+ cartel, and the local compradors. They are motivated by earning the most enormous profits in the fastest way possible. 

Paper barrels

The US ban on Russian oil triggered the latest surge in prices as Washington sought to widen the economic sanctions against its imperialist rival. The way that prices are behaving, it is as though a tenth of the global oil supply (the Russian production) has been wiped out from the market overnight, which is not the case. In addition, the US is only importing 8% of its crude oil and petroleum products needs from Russia, which it can easily offset from its domestic production or other oil-producing countries. 

According to the Organization of Petroleum Exporting Countries (OPEC), there is “no physical shortage” of oil. So, what is happening then? As in the case of major oil price volatilities this century, excessive speculation in the oil derivatives markets is pushing up prices, not the disruptions in oil’s actual or physical trading. 

Reports say that the volume of speculative trading in oil has surged since the Ukraine crisis erupted. In the US’s CME (the world’s largest financial derivatives exchange), the volume of buying and selling crude oil options or bets in oil’s future price has almost doubled from 126,000 daily in the first week of February to 240,000 contracts in the first week of March. These are all paper transactions, not actual, physical trading of oil, by financial players who profit from the volatility of oil prices. 

As OPEC said, futures markets are “paper barrels”, but in the physical market, supplies are guaranteed. And not only supplies are guaranteed in the physical market, but the prices also are covered by long-term supply contracts. In other words, the actual costs of physical oil – the diesel that a jeepney driver put in his tank – are not as volatile as the daily market reports make them appear.

The Philippines is not importing oil from Russia, whether crude or refined. Most of our crude oil imports come from Saudi Arabia (45%) and UAE (34%), while finished petroleum mainly comes from refineries in China (37%) and Singapore (18%). The Energy department said that there is no actual supply shortage in the country and that oil inventories or reserves can last for more than 40 days. 

Real impacts

But neoliberalism and deregulation exposed Filipino consumers to speculative paper barrels, resulting in weekly oil price hikes not justified by actual costs in production and trade. Worse, oil companies are exploiting the unregulated weekly price adjustments for profiteering. Based on this author’s estimates, the oil companies overpriced gasoline by around ₱6.58 per liter in 2021 by simply imposing higher oil price hikes or smaller rollbacks than they are supposed to implement based on regional price benchmarks. For diesel, the estimated overpricing is ₱4.74 per liter. In the first two months of 2022, gasoline is overpriced by ₱0.24 a liter and diesel by ₱2.22.

While prices are speculative, the impacts of the actual increases in pump prices are very much real and felt on the ground. The series of oil price hikes last year, for instance, potentially eroded a jeepney driver’s income to the tune of a month’s worth of his family’s rice consumption. The central bank fears that inflation could accelerate to as high as 4.7% in a worst-case scenario of $120-140 per barrel in global oil prices. At those levels, the average pump price of diesel and gasoline could be more than ₱69 and ₱78 per liter, respectively. Given the amount of speculation and the continued implementation of deregulation, it is not implausible. According to IBON Foundation, inflation has already eroded the minimum wage to just half of the family living wage in the capital region. Overall, the oil price crisis could wipe out around ₱330 billion of the domestic economy, and the Philippines is projected to have the sharpest drop in economic growth in Asia.

The people must rage against neoliberalism and deregulation. We can no longer allow being at the mercy of financial speculators, the profiteering oil companies, and the unaccountable global market. We can no longer afford to be content with cash aid and temporary relief while oil monopolies and finance oligarchs rake billions at the expense of our livelihoods. There are very concrete and doable steps that government can take to end the madness of the free market and truly protect the people and economy. ### 

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Consumer issues, Oil deregulation

Facts and figures you should know about oil prices

(The video above, produced by Mayday Multimedia, is a short but very useful visual presentation of the issues behind the high and increasing oil prices in the country. Below are some of the latest available official data as well as independent estimates that hopefully you may also find useful.)

  • P48.10 per liter – the common price of diesel in Metro Manila as of Mar. 8, 2012; P57.75 for gasoline; and P835 to P919 for an 11-kilogram (kg) cylinder tank of liquefied petroleum gas (LPG).
  • P3.20 per liter – the net increase in the pump price of diesel since the start of the year until the last round of oil price hikes on March 8-9; P5.85 for gasoline; and more than P190 per 11-kg cylinder tank of LPG.
  • 8 rounds of oil price hikes have already been implemented in the first 10 weeks of 2012.
  • P96 per day – the eroded amount from the income of jeepney drivers because of oil price hikes this year; P1,443 is their estimated daily consumption of diesel; P1,200 is the total amount loaded in a Pantawid Pasada card.
  • P62 million per day – the estimated increase in government revenues from the 12% value added tax (VAT) on diesel due to oil price hikes this year.
  • $116.16 per barrel – the published price of Dubai crude as of February 2012. Dubai crude is the benchmark for international crude oil prices that oil companies in the Philippines use in pricing their petroleum products.
  • $29 to $43 per barrel – the estimated amount needed to produce a barrel of crude oil. The estimate is based on the US Energy Information Administration’s (EIA) data showing that the finding cost (exploration and development) is about $6.99 to $18.31 a barrel while the lifting cost (operation and maintenance of wells) is about $5.75 to $8.26 a barrel. The EIA also said that royalties is about 14% of the selling price (or $16.26 a barrel based on Dubai crude’s selling price of $116.16 as of Feb. 2012).
  • $73 to $87 per barrel – the difference between the published price of Dubai crude and the estimated needed amount to produce a barrel of crude oil. This amount approximates the super profits squeezed through global monopoly pricing and speculation by oil monopoly capitalists and financial oligarchy (Goldman Sachs, Morgan Stanley, and other Wall Street firms) from the US, Europe, and other advanced capitalist countries.
  • Two-thirds – the estimated portion of physically sold oil in the world market that is traded through the production and distribution chain directly controlled by the oil monopoly capitalists such as Royal Dutch Shell (UK/Netherlands), ExxonMobil (US), British Petroleum (UK), Chevron (US), and Total (France). Such direct control allows the global oil monopoly to arbitrarily pad the price of oil as it goes through its production and distribution network.
  • At least 80% – the estimated portion of oil sold in the Philippine market that goes through the chain of production and distribution directly controlled by the global oil monopoly. As such, prices are not actually affected by the daily fluctuations in spot markets and futures market, as claimed by the big oil companies and government.
  • $378.15 billion – the total revenues in 2010 of Shell, the world’s largest oil monopoly capitalist. That’s almost twice the size of the domestic economy of the Philippines (gross domestic product or GDP of $199.59 B in 2010). Chevron, which like Shell is an oil monopoly capitalist operating in the country, posted revenues of $196.34 B, or almost the same size as our domestic economy.
  • P8.60 per liter – the estimated overpricing in the price of diesel in the Philippines since the Oil Deregulation Law was implemented (accumulated from January 1999 to February 2012). The amount is on top of global overpricing due to monopoly pricing and speculation and simply reflects the discrepancy in international crude prices and local pump prices.
  • P147 million every day – the estimated extra profits that oil firms earn from overpricing the local pump price of diesel alone. Almost 78% of this amount will go to the four biggest oil companies in the country (Petron – P55 M daily extra profits from overpriced diesel; Shell, P38 M; Chevron, P15 M; and Total, P8 M).
  • Almost P6 per liter – the estimated immediate reduction in the pump price of diesel if the VAT on oil is removed; almost P7 per liter for gasoline; and as much as P110 per 11-kg tank for LPG
  • 20 – the number of bills and resolutions filed so far at the 15th Congress that aim to review, amend, or repeal the Oil Deregulation Law; probe overpricing; reduce, suspend, or scrap the VAT on oil; institute a regime of effective state regulation or at least a price setting mechanism; and impose a cap on oil profits.
  • Zero – the number of bills and resolutions endorsed by President Aquino or substantially taken up and prioritized by the House and the Senate to reduce or control the price of oil. #
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Oil deregulation

Overpricing amid speculative oil price spikes, not supply, is more urgent concern

(This article was first published by the Philippine Online Chronicles)

On Tuesday (Mar. 8), oil firms implemented the eighth round of oil price hikes this year and the third round in one week. All in all, the pump price of diesel has already increased by P6.75 per liter since January; kerosene, P6.50; and gasoline, P6. The retail price of liquefied petroleum gas (LPG), on the other hand, posted a net decrease of P1.90 per kilogram (kg). But recent trends show an uptrend in the LPG international contract price, consequently hiking the local retail price by P2.50 per kg since March 1. (See Table 1)

Alarming pace

The pace with which pump prices are increasing is very alarming. This year, the price of diesel at the pump is rising by almost 68 centavos a liter per week and those of gasoline and kerosene by 65 centavos and 60 centavos, respectively. Just to give you an idea how bad the situation is, note that during the 2008 oil price crisis, the retail price rose by just 57 centavos a liter per week. This, of course, is just an average. At its peak (June and July), the 2008 crisis jacked up local pump prices by P1.42 a liter per week. Unfortunately, we all have no idea if the current surge in prices has already peaked or at least nearing the summit. As we speak, tension continues to build up in the Middle East, with protests now spreading to Saudi Arabia. Meanwhile, the US is planning to intervene militarily in the Libyan civil war. These fuel more speculations, driving wild spikes in prices like in 2008. But unlike in 2008, the oil rich regions are today embroiled in serious volatility that may actually disrupt supply which means more bad news for importing countries like ours.

No shortage

Certainly, there is no actual shortage yet with most members of the Organization of Petroleum Exporting Countries (OPEC) pumping more oil than their individual quotas even before the unrest in Libya. The spare capacity of OPEC is pegged by the International Energy Agency (IEA) at 4.9 million barrels a day or about three times Libya’s output. Spare capacity means capacity levels that can be achieved in 30 days and sustained for 90 days. Oil inventories of the world’s largest economies under the Organization for Economic Cooperation and Development (OECD) also exceed the normal 52-54 days with 57.5 days in December. Nevertheless, taking early measures to prepare for a possible supply disruption is a prudent decision on the part of President Aquino who created an Inter-Agency Contingency Committee (IACC). The Department of Energy (DOE) has also imposed a minimum inventory of 30 days for refiners and 15 days for importers of finished products.

Real problem

However, the real problem right now is not supply but the skyrocketing costs of oil and its impact on the people, especially the poor. Although much of the increases in the global oil prices are speculative (there is no actual shortage, only fears of shortage), Filipino consumers bear the full brunt of soaring prices because of the Oil Deregulation Law or Republic Act (RA) 8479. Worse, oil companies have been taking advantage of the deregulated downstream oil industry to overprice their products. In a deregulated environment, oil firms simply “text” someone in the DOE that they are increasing prices, as a matter of FYI. This system obviously creates a lot of room for abuses. To illustrate, from 2008 to January this year, oil firms have implemented price hikes that were bigger than what changes in global prices and foreign exchange warrant. Similarly, they also implemented smaller rollbacks. The net result is an overpricing of around P7.50 per liter.

P7.50 per liter in overpricing

Thus, on top of the speculative increases, consumers also shoulder the cost of overpriced oil which is an enormous burden for ordinary folks. Consider, for instance, a lowly tsuper who uses 30 liters of diesel for his jeepney in a one day. Through overpricing, oil firms are robbing each of the more than 400,000 jeepney drivers nationwide and their families around P225 per day. About 8.6 million households that use LPG are being robbed of some P147.58 per month. More than 700,000 fishers, who are the poorest sector in this country (50% of them try to survive on just P41 a day), shell out P75 per fishing trip to cover the cost of overpriced gasoline. The poorest Filipino households use kerosene for lighting and cooking and even they are being squeezed dry by the oil companies. (See Table 2)

From the burden of these poor sectors and the rest of consumers, oil companies squeeze P369.65 million everyday in extra profits from overpricing. Of this amount, Petron accounts for P124.59 million, followed by Shell with P91.41 million; Chevron, P40.66 million; Total, P14.31 million; and other players, P54.32 million. Even the Aquino administration gets its share from the profiteering of the oil companies through the 12% value added tax (VAT) imposed on oil to the tune of P44.36 million daily. (See Chart)

Regulate prices now

The Aquino administration at first refused to engage the issue of skyrocketing prices, as it has done on the general increase in prices of basic goods and services. (Read “A regime of high prices: Aquino’s apathy towards the poor”). But as the oil price hikes rage on and escalating people’s protests over high prices loom, government is now at least showing a semblance of concern. The Department of Finance (DOF) is reportedly considering subsidizing oil products consumed by the poor and reducing the VAT on petroleum. These measures are apparently the most “drastic” proposals that government is ready to make.

While any measure that can immediately bring down the price of oil (especially the scrapping of the 12% oil VAT) to provide much needed relief is welcome, we need a truly drastic reform. Overpricing must be addressed because even during times of low prices, consumers are still being exploited by the oil companies. Of course, there is a task force composed of the DOE and the Department of Justice (DOJ) that the Oil Deregulation Law created to look into the abuses of the oil players. But in the 13 years that this task force has existed, not a single oil company has ever been penalized for overpricing. Not even when the Director General of the National Economic and Development Authority (NEDA) himself is saying that they are overpricing (remember now Sen. Ralph Recto’s allegation in 2009 that oil products were overpriced by P8 a liter?).

The excuse for this is simple. As argued by the late Angelo Reyes, who as the then DOE chief lambasted Recto’s claim, there is no such thing as overpricing or a standard formula under deregulation. Every price adjustment is justified as a business decision in the name of competition and driven by the world market. But we all know that this is hogwash. More than eight out of every 10 liters of oil sold in the domestic market are from just four companies (Petron, Shell, Chevron, and Total) with tight links to the global oil cartel. They set the price adjustment and everyone else just follows. Government should stop using the world market as an excuse for being helpless. Otherwise, there is no more need for a government. At the very minimum and as an immediate policy reform, we need to regulate the price adjustments through a system of credible, democratic, and transparent public hearing. Hindi pwedeng “text-text” lang ang oil price hikes. (end)

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Oil deregulation

Speculation continues to dictate oil price movement

Since August, oil prices have been steadily falling after reaching peak prices in June and July. The monthly spot price of the benchmark Dubai crude fell to $112.86 per barrel in August and drastically further went down to an average of $96.49 from September 1-26. It peaked at a July average of $131.27 per barrel after starting off the year at $87.37 in January. Meanwhile, the Mean of Platts Singapore (MOPS) spot price of unleaded gasoline averaged $107.41 per barrel from September 1-26 from $115.49 in August and $140.30 in July. The MOPS spot price of diesel also fell to $121.07 per barrel in September, down from $135.26 last month and its peak price of $169.36 in June. (See Chart)

Consequently, local pump prices have posted nine rounds of reductions since August to the tune of P10.50 per liter for gasoline products and P8.50 for diesel and kerosene. The rollbacks have brought down the pump price of gasoline products to around P49.51 (regular) to P53.91 (premium plus) a liter, as of September 26, and those of diesel to P51.19 and kerosene to P53.77 a liter. The monthly average of local pump prices peaked in July (for gasoline products) and August (for diesel and kerosene) after progressively climbing since February, with prices posting weekly increases from the last week of April to the last week of July. (See Table)

Pump prices of selected petroleum products, monthly average 2008 (in P per liter)
Month

Premium plus

Premium

Unleaded

Regular

Kerosene

Diesel
January

46.15

45.08

44.45

41.76

39.99

38.45
February

45.75

44.66

44.04

41.35

39.61

37.03
March

47.03

45.95

45.33

42.63

40.90

38.31
April

48.99

47.91

47.29

44.59

42.86

40.28
May

52.10

51.01

50.39

47.70

45.85

43.27
June

57.86

56.77

56.16

53.46

51.72

49.14
July

61.74

60.66

60.04

57.34

58.45

55.99
August

58.98

57.90

57.28

54.58

58.73

56.15
Sep 1-12 ave.

55.91

54.82

54.21

51.51

55.77

53.19
Sep latest*

53.91

52.82

52.21

49.51

53.77

51.19
*As of September 26; Bayan estimates (deducting P2, total rollbacks on Sep 18-19 & 26, from the Sep 1-12 averages of gasoline products, kerosene and diesel)Compiled by IBON using DOE data

Some analysts have identified the “combination of the slowdown in the global economy, which is damping oil demand, and higher production from the Organization of Petroleum Exporting Countries (OPEC)” as the major reason for the reductions in world oil prices since July. OPEC, for its part, listed “lower demand especially in the developed countries, increased oil supply, the strengthening of the US dollar and easing of geopolitical tensions” as the factors behind the decline in global prices. [1]

But an independent report released recently by the US Senate pointed to speculators as responsible behind the rapid rise and subsequent steep fall in oil prices this year. The report said that from January to May, index traders poured $60 billion into commodity markets causing a big spike in oil prices. But when the US Congress held hearings in May to July to curb speculation, traders pulled $39 billion from the market. One of the authors of the report summed up their findings, to wit: “The bottom line here is with regard to commodities, money going in pushes prices up, money going out pushes prices down”. [2]

This underscores the fundamental defect of Republic Act (RA) 8479 or the Oil Deregulation Law (ODL). Because the downstream oil industry is deregulated, local firms are allowed to automatically adjust pump prices as supposedly determined by “free market” forces. But the global oil market has always been under the control of a few giant transnational oil corporations from the US and Europe which impose monopoly prices. This has been aggravated by massive speculation in recent years that has further artificially pushed up prices and because of ODL, all these are easily passed on to end consumers. An energy and financial markets expert estimated in May 2008 that “as much as 60% of today’s crude oil price is pure speculation driven by large trader banks and hedge funds”. [3]

Indeed, the global oil market remains vulnerable to speculation and as such local pump prices could again steeply climb in the coming months primarily due to renewed speculative attacks. The volatile financial market, which in one week saw the demise of two of the US’s mightiest investment banks – Lehman Brothers (which went bankrupt) and Merrill Lynch (which sold out to the Bank of America) and could have claimed a third one, the AIG, if not for the bailout by the US Federal Reserve – triggered fresh rounds of speculation. Trading of crude oil futures contracts at the New York Mercantile Exchange (NYMEX) for October delivery jumped at one point by $25 per barrel on September 22 – its biggest single-day surge ever – one week after the upheaval at Wall Street. The unusual price hike compelled the Commodity Futures Trading Commission (CFTC) to subpoena trading records from some NYMEX traders to look into possible “illegal manipulation” of prices. [4]

Speculators are currently betting on a weaker oil demand from the US, the world’s largest oil consumer, following the Wall Street turmoil in September and uncertainties on the Bush administration’s $700-billion bailout plan. NYMEX crude oil for November delivery fell to $106.70 per barrel on September 26 while London Brent crude declined to $103.47. [5]

With the bursting of the housing bubble, more speculators are expected to shift from real estate speculation to speculation in the futures market on commodities including oil. The expected slowdown in real demand as a result of the worsening US recession may not deter traders from speculating on oil since the backdrop for continuing speculation on supply such as the political instability in the Middle East remains.

Sources:

1. “Surprise OPEC cut pushes oil above $100” by Carlos Hoyos, Financial Times, September 10, 2008

2. “Big oil price swings caused by speculators, says report”, Reuters, Inquirer Money, September 11, 2008

3. “Perhaps 60% of today’s oil price is pure speculation” by F. William Engdahl, FSO Editorials, May 2, 2008

4. “Investigation widens into unusual oil price rise” by Diana B. Henriques, The New York Times, September 24, 2008

5. “Oil falls below $107 on doubts over US rescue plan” by Fayen Wong, Reuters, Inquirer Money, September 26, 2008

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Oil deregulation

$130 a barrel oil: notes on recent oil price trends

The Inquirer’s headline today says that world oil prices have already reached $130 a barrel and that domestic oil companies are implementing weekly price increases supposedly to reflect the uptrend in international prices. But the article is actually referring to the New York Mercantile Exchange (NYMEX) futures price for July delivery. It does not have anything to do with the actual or physical supply and demand of oil in the Philippines but is only a speculative price based on speculative supply and demand.

However, it indirectly pushes local oil prices up as physical spot market prices are also affected. So is it reasonable to implement oil price hikes based on the spot price movements? In the Philippines, more than 90% of oil come from long-term supply contracts of transnational oil companies and not from the spot market. But why are oil companies allowed to implement weekly increases in local prices to reflect these movements in the spot market as well as speculative prices? Answer: deregulation which allows oil companies to automatically adjust pump prices. But why does the Arroyo government allow automatic oil price hikes? Answer: VAT.

Price movement

Oil companies, including the Big 3 (Petron, Shell and Chevron) claim that they use benchmark prices in the international oil market to determine domestic pump prices. For crude oil importers such as Petron and Shell, they refer to the Dubai crude spot price while other players that import refined petroleum products like Chevron refer to the Mean of Platt’s Singapore (MOPS) spot prices.

Table 1 shows that the spot price of the benchmark Dubai crude is now pegged at $110.72 per barrel as of the first seven days of May. It breached the $100 a barrel monthly average in April and is now 26.7% higher than its average last January. On the other hand, MOPS-based unleaded gasoline averaged $122.37 per barrel in the first nine days of May while diesel, $146.34 per barrel. The said figures are 21.7% and 35.6% higher, respectively than their averages last January. 

Table 1. Crude benchmarks & foreign exchange, Monthly average, 2008 (crude prices in $ per bbl; forex in P per $)

Month

Dubai

Brent

WTI

Forex

Dec 2007

86.87

92.51

94.67

43.20

Jan

87.37

92.19

94.24

40.90

Feb

90.02

94.73

95.53

40.66

Mar

96.76

103.26

106.07

41.35

Apr

103.41

109.98

112.80

41.84

May*

110.72

116.42

118.85

42.49

*May 1-7 ave only

Source: Department of Energy/Platt’s

Meanwhile, the country’s foreign exchange has been declining since the start of the year with a 1-7 May average of P42.49 per US dollar, weaker by P1.59 from its January average.

These factors have supposedly combined to push domestic pump prices up. Table 2 shows that during the period in review, the prevailing pump price of unleaded gasoline in the National Capital Region (NCR) surged by P4.11 per liter between its January average and 1-7 May average; kerosene, by P4.13; and diesel, by P3.09. Overall, the average retail price of various petroleum products increased by P3.58 per liter during the said period.  

Table 2. Prevailing pump prices in NCR, Monthly ave, 2008 (in P per liter)

Month

Premium

Unleaded

Regular

Kerosene

Diesel

LPG (per 11-kg tank)

Ave retail

Jan

45.08

44.45

41.76

39.99

38.45

602.93

41.10

Feb

44.66

44.04

41.35

39.61

37.03

580.89

40.16

Mar

45.95

45.33

42.63

40.90

38.31

571.84

41.45

Apr

47.91

47.29

44.60

42.86

40.28

566.14

43.41

May*

49.17

48.56

45.86

44.12

41.54

573.61

44.68

* As of 7 May

Source: Department of Energy

Domestic pump prices have increased much more rapidly this year than in the previous years. Table 3 shows that the prevailing price of diesel in NCR as 7 May, for example, has already exceeded the Bagong Alyansang Makabayan’s (New Patriotic Alliance or Bayan) simulated monthly price for May 2008 based on the monthly average growth rate for 1996-2007 (deregulation period) and for 2005-2007. Note that the said prevailing price does not yet reflect the latest round (as of this writing) of P1 a liter oil price hike (OPH) implemented by the oil firms last 10 May. Five days before the said OPH round, Shell has warned that oil firms allegedly still need to recover P6-7 per liter more in the coming weeks.

Table 3. Actual pump price movement vs Bayan’s simulated prices for diesel, 2008 (in P per liter)

Month

Actual diesel pump price

Based on 1996-2007 growth rate

Based on 2005-2007 growth rate

Jan

38.45

38.50

38.76

Feb

37.03

39.00

39.39

Mar

38.31

39.50

40.03

Apr

40.28

40.01

40.69

May*

41.54

40.53

41.35

*Actual diesel pump price for May as of 7 May only

Source of basic data: DOE

Unmitigated price increases allowed under Republic Act (RA) 8479 or the Oil Deregulation Law of 1998 has only worsened the fundamental problem of transfer pricing by the global oil cartel and the speculative attacks by transnational banks and other giant financial firms that further artificially push oil prices up in the international market and taken advantage by the local Big 3 cartel (local units of the global cartel).

Massive speculation, and not physical supply and demand balance, continues to account for recent global oil price surges with the Goldman Sachs predicting in May that prices could rise as high as $200 a barrel over the next six months to two years. One estimate claims that speculation now comprises as much as 60% of current global oil prices.

Token measures

Note that there was a general decline in domestic pump prices in February in spite of an uptrend in Dubai crude and MOPS spot prices apparently due to the Arroyo government’s efforts to gain political points for the Energy Summit it organized from 29-31 January and 5 February. It was also the period that the clamor to scrap the 12% value added tax (VAT) on oil products to immediately lower pump prices started to gain ground.

To fend off criticisms that the Energy Summit does not offer anything concrete that could bring down pump prices as well as to derail the campaign to scrap the oil VAT, GMA rehashed the oil tariff adjustment mechanism through Executive Order (EO) 691. Under this system, tariffs on imported crude oil and petroleum products will be reduced or waived based on certain trigger prices. For February, GMA ordered a tariff cut of one percentage point.

Taking their cue from Malacañang, the biggest oil companies Petron and Shell implemented an oil price rollback of as much as P1 per liter starting 29 January and the other players followed suit. But it has been a steep climb for domestic pump prices since then, starting with the 50 centavo a liter hike implemented by the oil firms on 1 March.

Overall, oil companies have implemented 10 rounds of oil price hikes that increased the pump prices of gasoline, kerosene and diesel by P6 per liter between 1 March and 10 May, or an average of one OPH round per week. The biggest increases were implemented on 3 May and 10 May, when pump prices were raised by P1 per liter in each round from the usual 50 centavos a liter in the previous weekly increases.

The price increases since March has exposed the worthlessness of the oil tariff cut mechanism in lowering pump prices. For instance, the trigger price set by the Department of Finance (DOF) to reduce oil tariff from 3% to 0% for MOPS-based diesel is $115.2 per barrel and $103.25 per barrel for Dubai crude. Table 4 shows that since March, MOPS-based diesel price has already breached the DOF trigger price and Dubai crude, since April. This means that the government is no longer collecting oil tariffs to supposedly mitigate domestic pump price increases but such intervention has not been felt at all.

Table 4. Oil tariff cut trigger prices vs actual global prices, March-May 2008 (in $ per bbl)

Benchmark

Trigger price to reduce tariff to 2%

Trigger price to reduce tariff to 1%

Trigger price to waive tariff

March monthly ave

April monthly ave

1-7 May monthly ave

MOPS diesel

105.00

110.00

115.70

128.00

141.98

146.34

Dubai crude

83.37

92.41

103.25

96.76

103.41

110.72

Sources of basic data: DOF, DOE & MOPS

In the face of more and bigger price hikes in the coming weeks, the Department of Energy (DOE) asked the oil firms to justify the increases but then later retreated to its usual helpless mode of pleading the oil companies to implement staggered increases. In response, Petron announced that it will revert to 50 centavo weekly price hikes until July to recover its supposed losses. But note also that Petron made the announcement on the same day that the nationwide transport strike and people’s protest against the oil VAT and the Oil Deregulation Law was held. Thus the announcement was an obvious, albeit meaningless, effort to appease the public.

VAT cancellation

Meanwhile, the Arroyo government continues to ignore the demand to cancel the VAT on oil products as a doable measure to immediately bring down pump prices. The latest statement came from the DOF which argued that the “VAT on oil should be collected to fund the 2008 budget.” Instead of oil VAT cancellation, the DOF is proposing to “use the revenues (from VAT) for targeted expenditures to cushion the impact of oil price hikes on the poorest of the poor.”

However, scrapping the VAT on oil remains the most immediately doable policy option which can significantly lower pump prices and provide relief to the consumers. Table 5 shows that based on the prevailing prices in NCR as of 7 May, VAT cancellation can immediately bring down pump prices of unleaded gasoline by P5.83 per liter; kerosene, P5.29; diesel, P4.98; and liquefied petroleum gas (LPG), P68.83 per 11-kilogram cylinder tank.

Table 5. Comparative pump prices, with VAT & without VAT, as of 7 May 2008

Product

With VAT

Without VAT

Difference

Premium plus

50.26

44.23

6.03

Premium

49.17

43.27

5.90

Unleaded

48.56

42.73

5.83

Regular

45.86

40.36

5.50

AV turbo

48.17

42.39

5.78

Kerosene

44.12

38.83

5.29

Diesel

41.54

36.56

4.98

Fuel oil

31.57

27.78

3.79

LPG*

29.15

25.65

3.50

* LPG prices equivalent to P573.61 per 11-kg tank with VAT & P504.78 w/o VAT

Source of basic data: DOE

In justifying the oil VAT, the DOF said that scrapping the said regressive tax will “bring minimal benefits to the lowest income groups.” But Bayan has already pointed out the concrete and direct benefits that the poor will reap from the oil VAT cancellation, including the jeepney and tricycle drivers, small fishers, and poor households using kerosene and LPG, as summarized in Table 6.

Table 6. Estimated benefits of oil VAT cancellation based on 7 May 2008 prevailing prices in NCR

Sector

How much do they spend on oil?

How much will they save without the oil VAT?

How many will benefit? (nationwide)

With VAT

Without VAT

Jeepney drivers using 30 liters of diesel per daily trip

P1,246.20 per daily trip

P1,096.66 per daily trip

P149.54 per daily trip

426,572 jeepney drivers

Tricycle drivers using 4 liters of unleaded gasoline per daily trip

P194.24 per daily trip

P170.93 per daily trip

P23.21 per daily trip

581,578 tricycle drivers

Small fishers using motorized bancas with 10 liters of regular gasoline per fishing trip

P458.60 per fishing trip

P403.57 per fishing trip

P55.03 per fishing trip

708,000 small fishers

Households using 11-kg LPG tank

P573.61 per tank

P504.78 per tank

P68.63 per tank

8.6 million households

Households using 4.2 liters of kerosene per month for lighting & cooking

P185.30 per month

P163.07 per month

P22.24 per month

9.4 million households

Sources of basic data: DOE, LTO, IMF, NSO, Piston, Pamalakaya, interviews

The real reason behind Malacañang’s persistent refusal to scrap the oil VAT is its impact on the national budget deficit that could affect the regime’s foreign borrowings. The oil VAT provides a steady stream of revenues for the government, especially amidst high oil prices, which is favorable for the country’s credit worthiness. The DOF estimated that removing the VAT on oil products will result in P54 billion annual revenue losses for the national government. Table 7 also shows that the oil VAT accounted for 56.2% of total VAT revenues raised by the GMA regime from 2006 to the first half of 2007.

Table 7. VAT collections, 2006 & 1st sem 2007 (in P billion)

Period

Oil VAT

Others

Total VAT

Jan-Dec 2006

49.20

27.70

76.90

Jan-Jul 2007

18.60

25.10

43.70

Total

67.80

52.80

120.60

Source: DOF

Higher oil prices mean more revenues for the GMA regime that will assure its foreign creditors of debt repayments. In 2006, for example, Bayan estimates show that the government collected an average of P4.34 per liter in VAT for all petroleum products. This year, it is collecting 72 centavos per liter more in oil VAT due to unabated price increases. (See Chart 7)

Table 7. Annual average retail price of all petroleum products & VAT collections (in P per liter)

Year

Ave retail price

VAT collection

2006

36.17

4.34

2007

36.48

4.38

2008*

42.16

5.06

*Jan-7 May only

Source of basic data: DOF

The regime’s so-called fiscal health should take a backseat to the more pressing problem of the ordinary people on high and increasing oil prices. In the first place, the government is raising revenues to supposedly help ease the people’s burden – a responsibility that it has not been fulfilling as most revenues go to debt servicing and lost to corruption. Cancelling the oil VAT thus simply means returning back the people’s money which will translate to actual, immediate and direct benefits (in the form of lower oil prices and improved incomes) instead of entrusting that money to a corrupt and anti-poor regime through the oil VAT.

Furthermore, even if the oil VAT is removed, there are other measures that government can do to raise revenues. Tax effort, for instance is dismal – in 2007, tax effort was only 10.3%, a significant drop from 2006’s 14.3 percent. Certainly, improving efficiency in tax collections will result in billions of pesos in additional revenues. Addressing bureaucratic corruption can raise revenues as well as an estimated P30 billion in public funds are lost annually due anomalous contracts alone such as the NBN-ZTE scam. Tax perks and fiscal incentives to big foreign corporations and the liberalization of trade have also resulted in billions of pesos in foregone revenues and these policies must be reversed.

At present, there are two bills pending at the Senate that seek to suspend or scrap the oil VAT. Senate Bill (SB) 1962 filed by Senator Mar Roxas proposes to suspend the imposition of the oil VAT for six months. SB 1977 of Senator Miguel Zubiri, on the other hand, offers to exempt petroleum products (as well as electricity) from the VAT. SB 1962 and SB 1977 have been pending at the ways and means committee of the Senate since December 2007. At the House of Representatives, the Bayan Muna (People First) party-list has filed House Bill (HB) 3442 to cancel the VAT on petroleum products but has yet to be scheduled for first reading.

But while the VAT removal could provide immediate relief, such respite is only temporary. It can be wiped out in the coming months as oil prices continue to escalate. Thus, the call to scrap the VAT on oil must be complemented by price control and repeal of the ODL with the direction towards the nationalization of the Philippine oil industry. This is the only way that we can protect our people and the economy from the merciless attacks of speculation and price manipulation by transnational corporations.

Sources and notes

P6-7 fuel price increase seen, Philippine Daily Inquirer online, 6 May 2008

RA 8479 is actually the second Oil Deregulation Law. The first, RA 8180, was passed in 1996 but was declared unconstitutional by the Supreme Court in 1997

For further discussion, please refer to Hinggil sa pagtaas ng presyo ng langis, Bayan’s powerpoint presentation downloadable from its website < http://www.bayan.ph/>

Democrats: close speculation loophole, CNNMoney.com, 8 May 2008

Perhaps 60% of today’s oil is pure speculation by F. William Engdahl, Financial Sense Editorials, 2 May 2008

EO 691 was signed by GMA on 10 January 2008

Palace: no cut in VAT on oil, Philippine Daily Inquirer online, 15 January 2008

(2nd update) Oil firms to cut prices by P1/liter, ABS-CBN news online, 29 January 2008

Oil firms decide week not complete without price hike, Philippine Daily Inquirer online, 10 May 2008

Major oil firm to revert fuel price hikes P0.50, Business World online, 13 May 2008

DOF counts cost of suspending VAT on oil, Business World online, 13 May 2008

ibid

Sen. Roxas, on the other hand, claims that net yearly revenue losses if the oil VAT is removed is only around P30 billion because the amount saved by consumers from the VAT removal can be translated to increased consumption of other VAT-able goods and services.

There is no available data yet on full-year VAT collections for 2007 showing revenues from the oil VAT. Latest data from the Bureau of Treasury peg total VAT revenues at P69.47 billion from January to September 2007.

Corruption, inefficiency cost govt P30B yearly, Manila Times internet edition, 4 April 2008

Addressing the oil price increase, Senate Economic Planning Office policy brief, January 2008

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