Petroleum High

Domestic oil prices will remain high this year with the continued surge in petroleum demand worldwide, led by China and the United States, and amid concerns of tight supply

By Delma L. Peyra

Pushing oil demand from a frisky world economy led by China, Asia, and the United States has led analysts to scale up further forecasts of high oil prices this year. Already, the Organization of Petroleum Exporting Countries (OPEC) raised its demand forecast for 2004 to 26.17 million barrels per day (bpd), up by some 230,000 bpd on expectation of growth in demand for the last quarter of the year. This came less than a month after proceeding with its planned cut on oil production by four percent, or 2.5 million barrels a day last 31 March.

China, with already seven percent of the share of the world’s oil consumption, stays on its red-hot growth momentum, with its GDP expected to grow at a sizzling nine percent this year. And while China produces oil domestically, its oil reserves are dwindling. The country used to export oil in the ‘90s, but is now competing with the West in its appetite for crude oil. It is presently the biggest consumer of oil after the US, and last year, its oil consumption averaged 5.4 million barrels of oil a day, compared with the US’s 20.2 million barrels a day. Moreover, according to estimates, China will suck in nine to ten percent of world oil consumption by 2010.

Industries and motorists in Southeast Asian countries, all with resurgent growth forecasts this year, are expected to contribute in revving up the demand for oil. Pump prices in the United States, with its gas-guzzling vehicles, continue to climb up due to high consumer demand and low oil inventories.

Dubai crude, for which oil companies in the Philippines base their import costs, has reached more than US$31 per barrel as of April, from an average of US$30.87 in March - exactly US$2 more than its average in January. OPEC’s previously announced crude oil price commitment in the US$22 to US$28 range for the year would likely be raised to a higher band. Another factor being considered aside from the strong worldwide demand for oil is the impact of the falling dollar versus other currencies (versus the euro, it has lost value by at least 50 percent in the past two years), prompting oil suppliers to charge more for their petroleum. The continuing tension in the Middle East, with the Israeli-Palestinian conflict unlikely to die down this year, the terrorist attacks in Saudi Arabia and Turkey, and the uneasy presence of the United States in post-war Iraq drive jitters on the security of oil supplies.

After the May polls

At the end of March, there have been no less than five rounds of oil price adjustments locally, adding more than two pesos to gasoline prices and a peso to the socially sensitive diesel product. Already, except for fuel oil and LPG whose wholesale posted prices are now cheaper by more than fifty centavos per liter, pump prices of gasoline, kerosene, and diesel are all up by ten percent year-on-year in March. The price of diesel now retails to as much as P18 per liter. This has driven the transport sector to petition for increase in fares, which are currently based on diesel price below P15.

Oil companies, acting on persuasion by the government to soften the impact of oil price hikes before the 10 May polls, have offered discounts on the price of diesel by as much as one peso per liter. Partly state-owned Petron, still the biggest oil company in the country (33 percent of the market), initiated the discounted diesel scheme through its 53 retail stations nationwide. Soon after, other major oil firms Shell and Caltex followed suit to offer their own discounts for diesel. Most likely, the discounts for diesel will be lifted immediately after the national elections. Luckily, regional market prices of diesel are currently stable and will likely remain so. Diesel prices based on the Mean of Platts Singapore (MOPS), the benchmark used for pricing finished products in the Southeast Asian region, barely moved from US$38.80 per barrel in February to US$38.42 per barrel in March. In January, regional prices for diesel stood at US$41.41.

However, regional prices for gasoline are on an up-trend. Unleaded gasoline averaged US$44.23 per barrel in March from US$39.87 per barrel in February - a big jump of more than four dollars. Oil firms - both refiners and the small oil players which mostly import finished products - have said that price adjustments in the past four months have not even been enough to cover their cost of buying crude and finished products, and are likely to increase pump prices again by 60 to 70 centavos per liter immediately before or after elections.

Depending on the outcome of the national elections, the foreign exchange rate of the peso versus the dollar can also affect domestic pump prices. About 20 centavos is added to the pump price for every one peso depreciation to the greenback, and conversely, the same amount is shaved off from the price of oil for every one peso appreciation.

Related to this, analysts are saying that the peso is weighed down by uncertainties on the outcome of the May polls. Last November, when movie actor Fernando Poe, Jr. announced his candidacy for the presidency, the peso plunged to all-time lows breaching the P55 to the US dollar level. The peso averaged P56.07 to the dollar in February, and shed more value by plunging to P56.30 to the dollar in its monthly average by March. However, an outcome that will spell victory for President Gloria Macapagal-Arroyo may lead to the recovery of the peso. Analysts predict that an Arroyo win could boost the peso back to the P54 to the dollar level. This could somehow cushion the rampage of high world crude prices, and consequently, their effect on domestic pump prices could shave of at least 40 centavos from pending increases in the domestic pump price of oil.

Winds of Change

Recent and current developments in the local oil industry such as the passage of the Clean Air Act and the decision of oil majors such as Caltex and Shell to shift into a 100 percent import strategy will also likely impact on domestic pump prices, both in the short-term and, most especially, in the long term. Industry players have also taken into consideration the supply and demand realities in the region so as to be able to maintain their competitive edge. It helps that there is an excess capacity of refineries in the region, making importation an easy alternative for oil firms.

According to industry players, low-sulfur diesel as mandated by the Clean Air Act costs 30 to 50 centavos more per liter. The law took effect officially in 1 January 2004, but as early as November of last year, oil firms led by independent players started selling low-sulfur diesel.

Last year, oil major Caltex Philippines announced they were switching to a 100 percent import strategy instead of reinvesting in its refinery to comply with environmental laws. Early this year, Pilipinas Shell also announced it may shutdown its refinery operations this year, and may resort to importing. Partly state-owned Petron, though, is on stream with reinvesting on its refinery to comply with environmental laws. In 2002, its refinery started supplying unleaded gasoline. While it currently imports its diesel, Petron will invest in machinery to desulfurize automotive diesel down to 0.05 percent sulfur level this year.