Oil prices going up

Another conflict in the Middle East is inflicting another round of price increases in the world oil market.

Media reports, including one from ABS-CBN’s energy reporter Alvin Elchico, are warning us that tomorrow’s oil price adjustment may see the price of gasoline rise to between P3.30-P3.50 a liter. Diesel may go up to between P5.00-P5.20 a liter. Kerosene may go up to between P4.50-P4.70 a liter. If that happens, that’s a horrible big-time increase that will impact heavily on our transport sector.

Gasoline and diesel account for about 90?percent of all energy consumption in transport. Electric vehicles or EVs are getting popular but nowhere near being able to significantly replace petroleum for transport. Ethanol and coconut oil are more expensive than gasoline and diesel and not as efficient.

Too bad the electricity powered commuter train projects are delayed. That would have lessened the blow of oil price increases on commuters.

Expensive oil is bad enough. But what if the supply dries out? Our economy would be at a standstill.

Iran has warned that they will block the Strait of Hormuz should the United States join the war Israel is waging.

Roughly 20?million barrels of oil – about 1/5 of all sea-traded oil – flows daily through Hormuz. The strait is narrow (only about 40?kilometers wide) and lies close to Iran’s coast – perfect for asymmetric warfare: small boats, anti-ship missiles, naval mines, drones and swarming tactics.

The mere threat of blocking the strait is enough to raise oil prices. So far, prices have gone up by 10 percent, reflecting a surge in the geopolitical risk premium tied to the strait’s strategic importance.

The good news is, major consuming countries have high inventories and there is the possibility of increasing production from OPEC and non-OPEC countries. The oil price spike has started to level off after Trump called for two weeks to decide bombing Iran. But now that Trump started bombing nuclear sites in Iran, all bets are off.

If Iran starts to block the strait by mining it and disrupting shipping lanes, some analysts say prices could push beyond $80–$100/bbl. The settled closing price for Dubai crude from the last session is $73.71.

Our energy department has pointed out that oil companies are mandated to maintain a 30-day inventory of crude oil and a 15-day inventory of finished petroleum products. DOE also appealed to industry players to implement staggered fuel price adjustments, especially in cases of sudden and significant spikes in global oil prices, to cushion the impact on local consumers.

Fat chance the small oil companies with capitalization good only for hand-to-mouth operations can afford the cost of staggered increases. Even the increased cost of importing oil products will strain their financial capabilities. The small players control 59 percent of the retail oil market.

In the olden days when we had three oil refineries with deep pocketed owners, a delay in retail price increases is possible. Given that Petron has an inventory of 35 days for crude, there is that theoretical cushion before a higher priced freshly offloaded crude is processed.

The small oil companies order their supply weekly, aligning deliveries to coincide with spot market landings into depots, typically on Mondays. Price resets take effect every Tuesday morning, following Monday landings of MOPS-priced fuel. This just-in-time inventory operation provides no cushion for sudden price increases in the world market.

We ought to use this Iran conflict as an opportunity to revisit our oil deregulation policies. Having the government maintain a national strategic storage for crude oil is worth considering. That would buy us time to adjust in case all hell breaks loose in the Middle East as it is threatening to happen now.

We are lucky that San Miguel decided to keep the Petron refinery working. It even invested $3 billion to improve its refining efficiency so that it now produces 99 percent white products (gasoline, diesel, kerosene, jet fuel) from every barrel of crude.

If all San Miguel wanted was quick cash flow and profits, they could have closed the refinery and started purchasing the products in the spot market like the rest of the local industry. Even Shell and Caltex shuttered their refineries for this reason.

Today, the only cushion we have for supply is Petron because it has about 35 days crude inventory and 20 days products inventory, more than what is required under DOE rules.

In 2022, the Independent Philippine Petroleum Companies Association (IPPCA) noted that raising the 15-day inventory requirement to 30 days would double working capital needs, stretching small players’ finances to the limit.

The only other cushion consumers have is fuel subsidy for public transport operators. Under existing policy, fuel assistance for public transport drivers and farmers is automatically activated when the price of Dubai crude breaches $80 per barrel.

The 2025 General Appropriations Act provides P2.5 billion through the Department of Transportation for fuel subsidies to drivers of public utility vehicles, taxis, ride-hailing services, and delivery platforms nationwide.

That doesn’t sound nearly enough specially if the crisis gets prolonged. A blockage of the strait means Dubai crude will be stuck so the price of crude oil outside the Persian Gulf will simply be a lot higher.

We now consume approximately 472,000 barrels of oil per day. But including smuggled oil, that may be understated by 30 percent.

The official consumption level is not that high. It is just worth about $35 million a day based on current Dubai pricing. Investing in a strategic reserve should be affordable.

With a strategic reserve we could buy when oil prices are low. The cost of crude and the carrying cost must be provided by the government.

The years of relative quiet in the Middle East oil market despite sporadic violence has lulled us to complacency. Prayers alone will not be enough to cover the impact of wars or even rumors of wars. We must be ready.

Boo Chanco’s email address is [email protected]. Follow him on X @boochanco