Volatility at the Pump

Oil prices were adjusted more than a dozen times in 2004

The adverse effects of high oil prices in 2004 were felt by all sectors of society as they were manifested in transport fare hikes, higher basic commodity prices, and higher inflation rates.

Oil prices increased monthly in 2004. Prices of unleaded gasoline and diesel products increased 14 times for a total increase of P7.22 per liter (for gasoline products) and P7 per liter (for diesel products) since the start of the year. Unleaded gasoline increased by about 35% from its rate a year ago while diesel prices increased by 43%. On the other hand, kerosene prices increased 17 times for a total increment of P7.05 per liter or a 41% increase since January 2004.

Prices of Liquefied Petroleum Gas used for cooking increased 12 times in 2004 for a total increase of P8.08 per kilogram of LPG or a total P88.88 for an 11-kg LPG tank. LPG prices in 2004 were up 29% over year-ago levels.

The volatile local oil prices were, of course, a product of volatile world prices. International contract prices of Dubai crude, the oil benchmark for the region, averaged US$34.20 per barrel for the whole year, up by more than US$6 per barrel or 22% from a year ago. Dubai crude reached a 13-year high in August amidst concern over oil supply. It averaged US$38.55 per barrel, an increase of more than US$10 per barrel since the start of the year.

For the Philippines, however, crude oil prices may no longer be the relevant benchmark because more and more fuel is bought as a finished product in global markets. The refining business is in decline.

Unleaded gasoline prices based on the Mean of Platts Singapore (MOPS), the region’s benchmark for finished petroleum products, averaged US$44.81 per barrel – up by more than US$9 per barrel or 25% from a year ago. International contract prices of diesel products based on MOPS averaged US$51.33 per barrel in December, up by US$11.80 per barrel or 30% from a year ago. Prices of unleaded gasoline and diesel products in the international market peaked in October with unleaded gasoline prices averaging US$54.82 per barrel and diesel prices at US$58.47 per barrel. Thankfully, prices of unleaded gasoline and diesel products softened by December.

Various civil society groups and legislators have tried to seek the review of the Oil Deregulation Law in order to subvert the continuous increase of oil prices. But this is equivalent to barking at the wrong tree. The Oil Deregulation Law cannot be blamed for the extraordinary oil price increases of 2004. The pricing of local petroleum products is largely dependent on external factors affecting the international oil market and the global oil supply and demand scenario. The Organization of Petroleum Exporting Countries (OPEC) member-countries were producing oil at a record 25-year high of almost 30 million barrels of oil per day in 2004, yet prices remained at an unusually high levels throughout the year.

The sharp increases in world oil prices were mainly caused by the dramatic increase in global oil demand spurred mainly by the growing industrial economies of China and India. Political tension in major oil producing countries have also taken their toll on world prices. Insurgent attacks on Iraq’s major oil installation, the stand-off between Russian oil giant Yukos and the Russian government, and political instability in Venezuela and Nigeria were some of the major developments in oil producing countries which have spooked the oil market and helped pump up prices.

Unusual as it may seem, the upward movement of oil prices in 2004 should not be considered an oil shock. It was just a result of the law of demand and supply in the oil industry. The trend of oil prices in 2004 reiterated a very important lesson – that the country needs to aggressively develop and promote the use of alternative fuels so that it is not overly dependent on a product whose prices will always be subject to volatility.