It's Opec, Stupid

I was watching Pulso Action Balita the other night and it is obvious from the man-on-the-street interviews they gathered, that people think government regulation of oil prices could have prevented the prices of gasoline, diesel and other oil products from going up. Nothing could be farther from reality. It is OPEC, not Petron, not Shell, not Caltex, not Total or any of the new players who has us over a barrel.

The misconception is partly the fault of local politicians who either do not understand what is going on or if they do, choose to be intellectually dishonest just so they can grandstand. Let us not even talk about the left because they are only after propaganda value regardless of the truth.

Ironically, though not surprising, even President Estrada is partly to blame. I heard him say in an interview that he can't do anything about rising oil prices because "deregulated na yan." It is as if he could have done something if the industry was still regulated.

In fact, it is possible that oil product prices would have been higher today if we were still in the regulated environment. Based on the criteria used in the past by the Energy Regulatory Board -- import price and peso/dollar exchange rate -- there would have been no alternative for the ERB but to authorize a price increase. As it happened now, the President was able to prevail upon the oil companies to withhold an increase for three months.

I checked the figures and they prove my point. Prior to this week's 50-centavo per liter increase, the local price was based on a $21.47 a barrel crude. The price now is based on $22 a barrel crude. But the import price of crude today, as you read this column is $24 a barrel.

My sources at the Department of Energy estimate that pump prices should increase by another P1 a liter under ERB regulated conditions. In other words, all those people who told their ABS-CBN interviewer that oil should be regulated again don't know what they are wishing for. They would be very surprised that they must pay a peso more on top of the 50 centavos if they somehow, suddenly got their wish.

As I explained in a previous column, the domestic price of oil products is a function of those two main elements. If we were an oil producing nation, government can choose to forego royalties to lower the domestic price. But since we import all of our requirements (the Palawan oilfields have practically run dry), we do not have the luxury of an alternative.

The Oil Exchange proposal is not likely to decrease the price of oil products, at least not commensurate to the billions of government funds needed to capitalize it and the misguided hopes it is generating. In fact, some simulations indicate prices could be higher if an Oil Exchange were operational today. And I hate to imagine the resulting graft once government officials are entrusted with such powers and such money.

The Oil Exchange will also make us vulnerable to the volatility of price and supply in the international market since it will be totally dependent on the spot market for products. This is the case today. The new players who are buying from the spot market are losing more per liter of products sold because international product prices are higher than locally refined.

Let us also not forget that oil is a natural resource that depletes over time. Unless we start using alternative energy sources in a large way soon, using up the earth's known reserves of oil is just a matter of time. In other words, oil is a precious commodity that is becoming even more precious as we use it up. The countries hosting these oil reserves are expected to exact as much economic value as they can from this diminishing resource.

The last time oil prices were at an all time high was during the Iraq-Kuwait war. The record price of $40.42 a barrel was posted on Oct. 11, 1990. Up until about a year ago, we had it easy until the oil producing and exporting countries managed to impose the discipline necessary to cut production and bring prices up.

As late as March last year, crude oil was $13 a barrel. And it seemed the world's key oil-producing nations no longer had the power to keep prices high. But, as it turns out, we thought to soon. Oil prices are now approaching $27 a barrel, with consumption actually outpacing production. It is back to the oil crisis years with the OPEC nations managing to keep the world in its grip.

Blame it on the law of demand and supply. As an article on Slate by James Surowiecki explains it, oil prices have doubled because the global economy has made a powerful recovery in the past months. The growth of the US economy has been phenomenal, Europe is doing quite well, Japan is getting out of recession (at least for the moment), and much of Asia is moving again.

Surowiecki points out that since oil prices are prospective, and the markets do not anticipate a global slowdown any time soon, oil prices can only go up. And the more oil consumers want, the more expensive it will become. Thus far, both OPEC and non-member countries, such as Mexico and Norway, have shown restraint in violating production quotas in the face of rising prices.

In the past, OPEC had a history of massive cheating on the part of its members, who routinely violated their production quotas. That, of course, sent prices tumbling. Surowiecki recalls that OPEC also "had an impossible time dealing with its non-member competitors, who were prone to flood the market at any time."

When will prices go down, if ever? Until, such time as more oil becomes available, either through expanded production by the leading oil-producing nations or expanded exploitation of existing reserves by the giant oil multinationals. It does not help that the oil giants are not investing as much on oil exploration such that the world is pretty much stuck with current known reserves in the face of rising demand depleting them.

One beneficial effect of this round of world oil price increase is a renewed effort to look for oil alternatives. Cheap oil has made us complacent but today's economics may make it more attractive for energy companies to invest in alternative energy sources. That should be good for future generations that may no longer have the luxury of depending on oil as a primary energy source.

Ernie Espiritu sends this one to remind us of the inevitable.

A man, called to testify at the BIR, asked his accountant for advice on what to wear. "Wear your shabbiest clothing. Let him think you are a pauper."

Then he asked his lawyer the same question, but got the opposite advice. "Do not let them intimidate you. Wear your most elegant suit and tie."

Confused, the man went to his rabbi, told him of the conflicting advice, and requested some resolution of the dilemma.

"Let me tell you a story," replied the rabbi." A woman, about to be married, asked her mother what to wear on her wedding night."

"Wear a heavy, long, flannel nightgown that goes right up to your neck," the mother advised.

But when she asked her best friend, she got conflicting advice. "Wear your most sexy negligee, with a V neck right down to your navel."

The man protested: "What does all this have to do with my problem with the BIR?"

"No matter what you wear, you're going to get screwed"

(Boo Chanco's e-mail address is [email protected])