Subsidy

It has been reported that an executive order has been signed providing some sort of fuel discount for jeepneys and tricycles. The order appears to have been rushed in the face of protest actions by transport unions.

No one interviewed so far in the media had a clear explanation on how the discounts will be distributed. In a radio interview Thursday afternoon, the Energy Secretary spoke of issuing electronic cards to accredited transport operators enabling them to acquire fuel at a lower rate.

One other official spoke of the “discounts” as being a short-term measure, to help tide transport operators during the summer months when school is out and ridership is thin. No one has told us, so far, how these “discounts” are going to be funded.

All the administration officials who have spoken on the issue appear careful not to use the word “subsidy.” That is such a dreadful word. Since we do not know how long the price pressure on fuel will last or how high the cost of crude is going to kick up, an open-ended subsidy could bankrupt government.

If government is not going to pay for the prospective “discounts”, then who will?

The only other conceivable method for pushing down the cost of fuel for public transport is to indulge in cross-subsidies. This is not anything new. In the past, government tried to subsidize diesel for public transport by charging gasoline more. People whose vehicles used gasoline paid for the fuel of those who used diesel.

The same method could be employed in another thinly disguised form this time around. At any rate, it will be an imprecise tool. People who own small sedans powered by gasoline will end up subsidizing the consumption of people who drove SUVs fueled by diesel.

There is a sense that a populist policy has been set without a clear method for its implementation. In the rush to appease an angry public reeling from high fuel costs, the administration might have (once more) rushed into something it has not fully thought through yet. This will produce a fiscal disaster (if it turns out to be an open-ended subsidy) or a political fiasco (if it turns out to be unenforceable).

Unclear as the method for a fuel discount might be, it has already been rejected by the leftist groups trying to reap political capital by fostering rage.

The leftist groups forward a truly stupid demand. They want government to control the price of fuel. They want government to act like the apocryphal King Canute who, irritated by the sound of the waves, ordered the sea to be still. They want government to repeal the law of supply and demand — as in the apocryphal story attributed to one of our former presidents.

We are, if anyone needs to be reminded, an economy almost entirely dependent on imported fossil fuels. The price of these imported fuels are set by a dynamic global market affected by stray calamities and profound political crises. It is a market where the headroom between total supply and total demand thins by the day.

Anyone who knows what the price of oil will be tomorrow will be a rich man when he wakes up. The fact is, no one knows where the price of oil will go in the near term. There are a thousand factors influencing the pricing of hydrocarbons — not the least being the revolutionary turmoil sweeping major oil producers.

Oil prices could begin sliding down next week if world affairs calm down. By the same likelihood, oil price could shoot up to their historic highs of about $140 per barrel in a very short time.

I listened the other day to some leftwing rabble-rouser saying that government should nationalize the oil industry. By doing that, this idiot claims, government could buy oil from other governments at a friendlier price. That is a highly seductive idea except for one small detail: governments do not sell oil. Companies that invest in drilling, transport and refining capacities sell the oil. They do so at prevailing market prices.

Even if we assume that, say, the government of Saudi Arabia has a few barrels set aside for our benefit, the discount it will give us for this negligible quantity of oil will in no way offset the costs we incur by nationalizing our oil industry. It will have to be only a few barrels of course, because any large amount of oil traded in official channels will distort the global market for a freely traded commodity.

And this is the clincher: Why will anyone want to sell us oil at a discount? What painful concession will they extract form us for such a gracious act? Is it worth screwing up the comprehensive system of market price-setting that works well with a minimum of fiscal bleeding?

Should we return to the old system featuring an Oil Price Stabilization Fund (OPSF), that will imply across-the-board subsidies for the product. Guaranteeing such a fund requires, as we saw from experience, government to basically write a blank check for oil subsidies.

If we return to that system, confidence in our fiscal management will crash. Government indebtedness will rise. Resources will be pulled out of economic investments to underwrite fuel consumption. When the price of oil is wrong, the product will be used imprudently, adding to imports and weakening our currency.

In a word, if we subsidize the price of oil, this will create an inflationary push that will likely be worse than allowing market forces to work by themselves.

No one, to be sure, is happy with the price of oil today. It will be costlier to try and meddle with market forces.