The prices of oil products seem to be the most fickle of all commodities.
Last week, oil prices dropped. Today, we are likely to see oil prices substantially increase.
Over the past few weeks, pump prices rose or fell reflecting the movement of international prices for crude. Today’s prices increase is due to an entirely different factor. While crude prices rose only slightly, the price of ethanol additives increased significantly.
By law, our oil companies are required to add ethanol to their fuel products. The scientific basis for doing so remains a matter of debate. But the addition of biofuels did seem a politically correct thing to do – even if it added to the cost of the final product.
Initially, we thought we could produce all the biofuels we need as additive. Millions were invested, and lost, in plantations to produce the biofuels. As it turned out, our cost of production was much higher than merely importing the additive. Now we import nearly our total requirement.
Since they are derived from plants, biofuels may technically qualify as “renewable.” But they required committing large tracts for land for cultivation, diverting them away from food production.
Demand eventually overtook supply of biofuels. This caused a sharp rise in the price of additives. That eventually translates into a sharp increase in the prices of final oil products.
Oil prices will be significantly lower if we did not require biofuel additives. But we have a law. It may be harsh for consumers, but it is the law.
Those asking for the withdrawal of excise taxes on oil products to bring down prices are silent on asking for the repeal of the law requiring biofuel additives. It is simply not politically correct to do so.
There is more bad news down the road.
Industry analysts are predicting oil prices will reach, and even exceed, $100 per barrel. There is nothing the OPEC cartel can do about it.
It turns out that when oil prices were unreasonably low, there was underinvestment in new production capacity. No one wanted to make investments in oil production when the risk of losing money was high.
Meanwhile, rapid economic growth in densely populated economies such as India and China, translates into spiraling demand for oil. Rising demand will outstrip supply very soon. It is too late for capacity to catch up – even if all the oil producers deliver at full capacity.
The outlook on oil is for prices to creep upwards for a long period. Here it is the unalterable law of supply and demand in effect.
Sayang, when we enjoyed a period of low interest rates and low oil prices, when inflationary pressures were not as strong as they are now, we had a do-nothing administration in place. The opportunities lost are immeasurable.
Economy first
Former president Noynoy Aquino has this unsettling habit of making statements in the form of a question. In one of his rare public appearances the other day, he asked what Gloria Macapagal Arroyo might accomplish with only year left in her term.
The answer should have been self-evident. GMA’s legendary work ethic enabled her to do more things than usual. Too, as an economist, she has a keen insight into what things ought to be done ahead of others. President Duterte saw that as an asset.
Through her nine years as president, our average GDP growth climbed to over five percent, significantly higher than the 3.5 percent average for the preceding decade. Our economy was able to escape the 2008 global financial crisis because of adept counter-cyclical policies. The fiscal consolidation during those nine years set the foundations for future economic expansion.
Businessmen are quick to express relief that an economist is now in charge of the House. She represents a sharp departure from the odd priorities and blunt tactics of her predecessor. In one week as Speaker, GMA prioritized the organization a Department of Disaster Resilience to address the fact that the country has become among the most vulnerable to severe climate events. She asked her allies to work on the next packages of the tax reform program even as some hyper-political senators balk at taking up that challenge.
While Pantaleon Alvarez bamboozled businessmen to get his way, GMA is likely to be more consultative. With her as Speaker, we might be able to avert an energy crisis looming on the horizon.
Last year, Alvarez filed House Bill 5020 seeking to abolish the Energy Regulatory Commission (ERC). At the same time, another congressman, Carlos Zarate has been preoccupied mounting protests and filing cases to prevent the ERC from approving construction of new power plants. Four commissioners have been twice suspended as a result of these cases, effectively paralyzing the commission now chaired by a close GMA ally.
GMA knows the energy situation well. It was during her presidential term that the Electric Power Industry Act was passed. This law promotes competition and efficiency in the power sector to deliver reliable power at least cost to support our economic growth. Because of this law, and the interconnection of our island grids, we achieved electrification of 91 percent of households.
The power sector is now optimistic that, without the uncertainties brought about by Alvarez, new generating capacity could proceed apace with rising electricity demand. That will spare our consumers the high cost of power due to limited generating capacity.
For a while, as with the looming global supply shortage in oil, our consumers were in danger of paying higher energy costs because of delayed investments in new generation capacity.