Oil retail price reduction: Enough?
This year, the world is deluged with a lot of newsworthy developments. Issues run from the very serious health concerns (Ebola) to the possible repercussions of the looming economic crisis in Russia. Needless to say, the ongoing onslaught and beheading spree perpetrated by the ISIS in some areas in Syria and Iraq remain the biggest scare of all.
Lately, however, the economic implication of the global oil price slump has likewise taken center stage as it was viewed as one that could make Russia’s economic crisis worst (the west-initiated economic embargo is largely the culprit) as its economy is largely dependent on oil exports.
Likewise, this year, the country had its own share of equally newsworthy developments too. First and foremost, the PDAF and DAP issues and their consequential developments like the incarceration of some lawmakers have continued to hug the headlines. Also, on equal footing, is Vice President Binay’s alleged overpricing, among others, of Makati’s parking building and science high school. It isn’t at all bad though. While Russia pains for the global oil price slump, the country, as an oil importer, gains from it. The question is, amongst us, who really gained from it.
To put the global oil price slump and the country’s gains in proper perspective, let us track down the prices globally. As mentioned earlier, we are an oil importing country. Therefore, as we don’t have a say on it, we are in the receiving end of the swings in fuel prices. Oil prices can be tracked down through Brent, Dubai, MOPS (Mean of Platts Singapore) or West Texas Intermediate. Noticeably, and they should, all of them are pointing to the same direction. As of today, the prices are below $60 per barrel. For illustration purposes, we shall take West Texas Intermediate or WTI. WTI crude this year opened at $95.44 per barrel. Its highest was on June 20, 2014 at $107.26, but just for a day. Since then, after a brief rollercoaster ride, it went below $100 per barrel ($98.17) in July 31, 2014. Then, it went below $90 per barrel ($88.85) since October 7, 2014. Then, it went below $80 per barrel ($78.78) since November 3, 2014. In November 28, 2014, it went below $70 per barrel ($66.15). Two weeks ago, December 11, 2014, it went below $60 per barrel ($59.95). Then, just last week, December 18, 2014, it went down further to $54.11 per barrel.
As shown above, in the first seven months of the year, oil prices were hovering around $100 per barrel. Then, for almost two weeks now, the prices went below $60 per barrel. Apparently, global prices have been slashed down by more or less, 40 percent. Consequently, therefore, as global prices are spirally going down, local prices should, likewise, be in the same direction. Yes, it did, but price-wise, are the retailers reasonably cutting the prices down. Or, have we reasonably enjoyed the benefits of such a slump? By saying, reasonably, we may ask, did we enjoy the same 40 percent cut in retail prices? The question may be correct, if all other factors in determining landed cost, like foreign exchange movements and freight costs, are constant.
To recall, peso-dollar exchange rates this year did not have wild swings. If we have to relate its movements to oil price changes, nothing much is significant. For instance, we opened the year with the peso-dollar exchange rate at P44.2914 (when oil price was at $95.44 per barrel). In June 20, 2014, when oil price was at this year’s highest at $107.26, the exchange rate was at P43.8032. Then just last week, December 18, 2014, when oil price was at this year’s lowest at $54.11 per barrel, the exchange rate was at P44.6552.
Notably, the Department of Energy has suggested an oil pricing formula. This formula factored in several cost components like the cost of the oil per MOPS, freight cost and foreign exchange rates movements. Duties are not included since, currently, these are not imposed on oil imports. Palpably, therefore, it is purely mathematical and is therefore an exact science. So that, arguments on prices are issues that are not supposed to surface.
Unfortunately, however, this formula stops at landed cost. Beyond the landed cost, subsequent activities’ assigning of costs depend entirely on the consciences of the oil importers/refiners/distributors/retailers and are not publicly available. Moreover, there are no significant movements in the freight costs from international carriers as well as ocean losses.
Therefore, today, it is safe to assume that the landed cost’s reduction shall be directly proportional with the global oil price decreases. So that, what remains to be an issue are the costs incurred beyond our international port. These could include refining and transport/distribution costs, among others, which are all oil-consumption driven, and, therefore, low. Of course, we should factor in the industry players’ profits, which, sadly, could be greed-driven.
Thus, possibly greed-driven, the current retail prices reduction may not be enough.
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