What to do with $80/bbl crude oil

Aside from the unpalatable effects of higher oil prices for the Philippine economy, the increasing complaints from a growing number of sectors make the hiked petroleum product prices worrisome for the government, especially one that puts a lot of weight on people’s sentiments.

Crude prices are now at an all-time high since the start of 2016, from a low of $27.10 per barrel then, and now dangerously courting the $80 per barrel level.

Alarm bells are being rung as prices of basic commodities have reportedly been on the rise, while the transport sector is asking for an increase in fares after the price of diesel, the preferred automotive fuel of public utility vehicles, is now higher by about P10 a liter since the start of 2018.

To be fair, it wasn’t just rising crude prices alone that caused an increase in petroleum product prices. New excise taxes, resulting from the Tax Reform for Acceleration and Inclusion (TRAIN) Law signed by the President late last year and made effective beginning this year, are also to blame.

Diesel was assessed a tax of P2.50 tax per liter for 2018, when previously it had none. The same is true of liquefied petroleum gas (LPG), the housewives’ fuel for cooking, which was slapped a P1 per liter excise tax.

(Note that the excise taxes for majority of petroleum products will again be increased in 2019 and 2020.)

Aggravating this era of high crude prices is the depreciation of the peso against the dollar, which reached a 12-year low last seen in July 2006, now at P52.63.

Price monitoring and enforcement

Over the weekend, President Duterte issued three directives to help mitigate the effect of higher pump prices and calm public sentiment on rising prices of basic commodities.

The first was an order for the surveillance teams of the Department of Trade and Industry to monitor and arrest unscrupulous traders who would raise prices of goods beyond the government’s recommended retail prices.

This is a welcome move that gives fair warning to any attempt by rogue traders who want to take advantage of the situation. And depending on the level of competence of the DTI’s surveillance teams, this would be good for the government’s image.

Raising the minimum wage

The second directive asks the Department of Labor and Employment (DOLE) to study the possibility of raising the current minimum wage levels to help workers cope with higher prices of basic commodities, as well as the impending rise of transport fares.

Raising minimum wages has never been an option even when crude prices had risen to over $130 per barrels in 2008, for the simple reason that crude oil prices could correct to “normal” levels within a few months, or even drop to abnormally low levels like in 1998 when it went below $23 per barrel.

We all know that crude oil prices can go up and down depending on many factors that affect supply and demand. More importantly, we know, too, that minimum wages, once raised, can never be decreased.

What was done during previous times of rising crude prices was for employers to extend a package of additional benefits to help workers cope with the temporary emergencies, but one that could be discontinued when pump prices reverted back to “normal” levels.

Non-OPEC oil

The third directive was given to the Department of Energy (DOE) to explore getting cheaper crude oil from countries that are not member of the Organization of Petroleum Exporting Countries (OPEC). Specifically, the directive mentioned Russia.

The directive is a good image-building initiative by the government to show to the public that it is trying its best to bring down the country’s oil import bill. But that’s about all it is.

Getting cheaper crude oil from non-OPEC countries like Russia requires some high level of government-to-government negotiations, and the positive results may be minimal given the present industry structure where we have only one refinery.

The idea is also dated, having been introduced during the oil crisis of the 1970s.

Petron Corp. is now privately owned. If its refinery in Bataan could be able to take in cheap Russian oil, it would only be a fraction of the crude oil traditionally imported from OPEC sources. Lastly, Petron supplies only 40 percent of the market from its refinery, with the other oil companies importing finished products.

Suspending TRAIN’s excise taxes on fuels

Last week, the Palace declared that it was willing to look into the possibility of suspending the new excise taxes imposed by the TRAIN Law on petroleum products, especially now that crude prices continue to rise.

This would be an ideal solution only if the President could just convince his economic team. Finance Secretary Carlos Dominguez III has continued to gloss over the inflationary effects of higher fuel taxes caused by the TRAIN Law, and this statement has been echoed by other Department of Finance members.

Oil importing economies are always vulnerable during times when crude prices are unstable, and whatever gains they may have made during an era of stable oil prices could be wiped out in an instant. All efforts, thus, must be expended to get past this threat, and come out in one piece.

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