World oil prices rising again

SAN FRANCISCO — World oil prices have been on the rise the past few months, a major reason for higher gasoline prices back home. Of course, it didn’t help that TRAIN 1 imposed higher taxes on petroleum products, giving Filipino consumers a double whammy.

 Make that a triple whammy. The peso foreign exchange rate has also been on a downward trend which means more pesos are needed for every barrel of crude we import and pay for in dollars.

Here in the United States, there is some ambivalence about rising world oil prices. It is surely hurting the ordinary motorist who now pays close to $3 for a gallon of gasoline (one US gallon equals approximately 3.78 liters).

But the United States is now a major producer of shale oil that suffered during a recent era of declining world oil prices. Now, they are back in business.

US shale oil production caused America’s importation of crude oil to drop. OPEC had to impose production cuts to mop up excess supply. After several tries, OPEC was able to successfully implement reduced production quotas for its members and started the trend of rising oil prices.

There are many reasons why oil prices are rising other than OPEC’s production cuts. Geopolitical events, like the increasing tension in the Middle East, helped influence the upward movement of oil prices.

Domestic political problems in some major oil producers (Venezuela, Nigeria, Libya) have also constrained oil production from these countries. Then there is increasing global demand, specially from China, Japan and India. Increasing income in developing countries is also causing oil demand to remain at least steady despite an uptick in prices.

What analysts are watching carefully is at what point will higher prices for oil cause a significant decline of demand.

A Reuters analyst noted that “the price of benchmark Brent crude has surged by $47 per barrel (170 percent) from their low point in early 2016 and are now trading close to $75 per barrel. Over the same period, weighted-average US gasoline pump prices have risen by almost $1.13 per gallon (61 percent) and now stand just a few cents below $3 per gallon.

“Crude and gasoline prices are still well below the levels of $115 per barrel and $3.80 per gallon where they stood just before oil prices started slumping at the end of June 2014.”

Saudi Arabia’s oil minister told reporters in Jeddah he has “not seen any impact on demand with current prices. We have seen prices significantly higher in the past — twice as much as where we are today.” The Saudi official thinks there is capacity to absorb higher prices because of reduced energy intensity and higher productivity of energy input levels.

Some analysts, according to Reuters, suggested demand destruction would begin if and when prices rise above $80 per barrel, while others put the threshold as high as $100. There is the feeling that “$3 per gallon or even $4 is the psychologically important limit for US motorists.”

OPEC is more confident they can hold the line on prices due to rising consumption in middle-income countries. Fast economic growth, rising household incomes and increasing vehicle ownership in none OECD countries help keep the higher price trend. Just look at the unchanged intensity of our traffic jams.

But economists believe there will come a point at which consumption growth starts to slow more noticeably as oil prices continue to increase. It could, for example, force the Duterte administration to significantly scale down their ambitions in Build Build Build.

The oil price risk factor is not yet front and center in public discussions back home. I think it should be. It poses significant risks to our economic growth aspirations. NEDA Sec. Ernesto Pernia admitted they underestimated the rate of oil price increase in their economic and budgetary assumptions.

I asked Finance Usec. Karl Kendrick Chua what happens to TRAIN oil taxes if world oil prices zoom up beyond $80 a barrel. Here is his reply:

“The TRAIN law has a mitigating measure in case crude oil price reaches or exceeds $80 per barrel. When this happens, the next scheduled increase on Jan. 1, 2019 is put on hold and resumes when it falls below $80.

“There is also no such provision in the TRAIN to revert to the original excise tax rates before TRAIN. The BIR, in consultation with other agencies, is preparing the IRR for this provision.

“The wording of the law is (with bold phrases as stress):

“For the period covering 2018 to 2020, the scheduled increase in the excise tax on fuel as imposed in this section shall be suspended when the average Dubai crude oil price based on Mean of Platts Singapore (MOPS) for three (3) months prior to the scheduled increase of the month reaches or exceeds $80 per barrel.”

The law also provides for an annual review of the implementation of the excise tax on fuel by the DOF and shall, based on projections provided and recommendations of the Development Budget Coordination Committee… recommend the implementation or suspension of the excise tax on fuel.

Usec. Chua emphasized the law provides “That any suspension of the increase in excise tax shall not result in any reduction of the excise tax being imposed at the time of the suspension.”

I guess this means if oil prices reach $100 a barrel next month, we will get no relief from TRAIN 1’s oil taxes until the review next year and only on the next scheduled excise tax increase.

Oil taxes have never been popular, but it is the easiest tax for government to collect. But these could also generate more political instability that can scare investors. If the prospect of rising oil prices isn’t yet giving our economic managers sleepless nights, it should.

Boo Chanco’s e-mail address is [email protected]. Follow him on Twitter @boochanco