Bulatlat

The Independent Philippine Petroleum Companies Association (IPCA) announced that the public will again expect (dread seems to be a more appropriate word) another round of fuel price increases averaging at P0.50 per liter in the coming weeks.  This, IPCA Chairman Glen Yu said, will have to be implemented because of a $4 dollar per barrel increase in the price of oil in the world market, which he finds confusing because of the adequate supply of oil.  Who is then responsible for the spikes in oil prices?  

BY BENJIE OLIVEROS
ANALYSIS
Bulatlat
Vol. VII, No. 26, August 5-11, 2007

The Independent Philippine Petroleum Companies Association (IPCA) announced that the public will again expect (dread seems to be a more appropriate word) another round of fuel price increases averaging at P0.50 per liter in the coming weeks.  He said that they have to recover at least another P1 per liter, aside from the P0.50 per liter increase they implemented this weekend, because Dubai crude has been averaging at $69.49 per barrel in July from $65.79 in June.

With industry calculations of a P0.35 per liter increase in pump prices for every $1 per barrel increase in the price of oil, he said oil companies should have charged P1.40 more this month.  But because of the P0.50 per liter increase this weekend and the strengthening of the peso, another P0.50 per liter increase may suffice.

He added that they are quite confused why oil prices in the world market are increasing despite the adequate supply.

Actually, oil prices began its upward movement ever since the onset of the summer season.  Oil companies and fund managers have been expecting pressures on the supply because summer in the U.S. is supposedly a “driving season,” when people are wont to use their vehicles more for long drives to vacation spots and to visit relatives.  But contrary to projections, U.S. oil inventories remain stable.  Inspite of this, oil prices continue to increase.  

Why? Ask the cartel and speculators, also known as hedge fund managers.  

Oil cartel

There are three big major players plus a few minor players which control both the upstream - exploration, drilling, and production – and downstream – transport, refining, distribution and marketing – processes of oil in the world.  The three big oil companies are ExxonMobil, Royal Dutch Shell, and BP. They are vertically integrated, meaning they control both their upstream and downstream processes all over the world: from the drilling operations to your friendly service station.

ExxonMobil emerged from Standard Oil of the Rockefellers of the U.S. Formed in 1865 by John D. Rockefeller, Standard Oil bought out small refineries, built a pipeline system, and controlled the transport of oil from the oil fields to the consumer.  Standard Oil also formed a marketing and sales company, Esso.  Its operations were integrated into Standard Oil Trust.  Standard Oil’s control over the prices of petroleum products in the U.S caused a public outcry.  Ten years after its formation, a court decision in Ohio ordered that the Standard Oil Trust be dissolved.  But Rockefeller was able to circumvent the decision by reorganizing the Standard Oil Trust into Standard Oil of New Jersey.  Due to persistent public pressure, the U.S. Supreme Court in 1911 ordered that the company break up into several independent companies.  But these were controlled by Rockefeller’s partners.  Eventually, these “independent” companies reintegrated into ExxonMobil, which now operates in 200 countries.

Royal Dutch Shell was formed from Royal Dutch, a company in the Netherlands which was engaged in oil exploration, drilling, and refining in Dutch colonies in Asia, and Shell Transport and Trading Company, which was engaged in the transport, distribution and marketing of petroleum products. Royal Dutch Shell is currently the second largest oil company with operations in more than 145 countries.

 BP resulted from the merger of British Petroleum, formerly Anglo-Iranian Oil Company, Standard Oil of Ohio, BritOil, and Amoco, formerly Standard Oil of Indiana.  Its distribution and marketing activities are under BP Trade Limited.  BP owns 50 percent of TNK, a Russian Oil Company formed in 2003 which combined the petroleum assets of BP, Tyumen Oil Company, and Sidanko in Russia. It also holds 25 percent ownership of Russian oil company Slavneft. BP, which operates in 100 countries, now claims that it has dislodged Royal Dutch Shell as the second biggest oil company.      
 
These are the three major oil companies control every aspect of the oil business. After a series of mergers, they replaced the seven sisters – Exxon, Mobil, Chevron, Texaco, Gulf, British Petroleum, and Royal Dutch/Shell – which dominated the industry up to the 80s, as the major players. These three oil companies also cooperate with minor oil companies, which operate like the major players, albeit on a slightly smaller scale. The biggest minor players are TotalFinaElf, the fourth biggest oil company, Chevron Texaco, the fifth, ConocoPhilips, the sixth largest and ENI, the seventh.

TotalFinaElf is a merger of Compagnie Francaise des Petroles (CFP), which developed the first oil field in Iraq in 1927, CFP’s marketing subsidiary Total, the Belgian company PetroFina, and another French oil company Elf Aquitaine S.A. It operates in more than 130 countries.  

Chevron Texaco is conglomeration of Chevron, Texaco, and Caltex. Chevron was formerly the Standard Oil of California.  Texaco, formerly the Texas Fuel Company, formed service stations throughout the U.S..Caltex resulted from the joint operations of the Standard Oil of California and Texaco to exploit the markets in the Middle East, Africa, Europe, Australia, and New Zealand.  Chevron and Texaco merged and decided to dissolve Caltex.  It operates in 180 countries.      

ConocoPhillips resulted form the merger of Conoco, formerly Continental Oil, a refining and petroleum retail company, and Phillips Petroleum Company which engaged in the production of oil and natural gas. ConocoPhillips operates in over 40 countries.  

 ENI or the Ente Nazionale Idrocaburi of Italy included the Azinenda Generale Italiana Petroli (AGIP) as well as refining companies and a natural gas company. ENI is engaged in the production, trading, and marketing of oil and natural gas and operates in over 60 countries.  

These big oil companies also control the exploration, production, distribution, and marketing of oil from oil producing countries, except those which eventually nationalized their oil industry such as Mexico and Venezuela.  

By themselves, the three big oil companies, which are all vertically integrated, can control every aspect of their oil business. Together, they can push the price of oil up or down.  And with the cooperation of the minor players, these oil companies can regulate the supply and distribution of petroleum products and dictate the price regardless of supply and demand.  So when they claim that the supply is low or that world oil prices are increasing to justify the increase in pump prices, they have only themselves to blame because they actually create these conditions.  Almost all oil companies in the country, except a few small players which buys petroleum products to sell here, are subsidiaries of big oil companies.    

Even without any formal agreements, these companies set the price of petroleum products. Have you noticed how they increase their pump prices one after another?  Usually, the big oil companies announce an increase in pump prices to be followed by the small players the next day.   And do you know that these oil companies also dictate the retail price of petroleum products to be sold in service stations?  Service station owners and managers are told to set the same price as, and not to undercut nearby service stations which are supplied by other oil companies.  

The insidious speculators  

More insidious and parasitic are speculators, called hedge fund managers, who push prices of petroleum products up at the New York Mercantile Exchange (NYMEX) and ICE Futures of London, formerly InterContinental Exchange which acquired the International Petroleum Exchange.   

The New York Mercantile Exchange describes itself as the largest commodity futures treading market dealing with energy and precious metals.  It began trading energy futures in 1982.  

ICE Futures started trading the whole range of energy products, including Brent Sea Oil, natural gas, electricity and carbon.  Both these futures market greatly influence the prices of oil in the world market.  

The purpose of commodity futures is to enable companies to plan their operations and finances, and protect it against probable losses caused by price fluctuations of the commodities it needs for its operations. In the trading floor, in the case of NYMEX, and also in the internet, in the case of ICE Futures, buyers and sellers enter into contracts for the purchase and delivery of petroleum products and other commodities months ahead.  Stipulated in the contract are the agreed price and the quantity for future delivery. For example, as of this July, contracts for the purchase of petroleum products for delivery in September are entered into, with the corresponding price agreed upon. The negotiated price is based on estimates by both buyer and seller taking into consideration the current price and projected fluctuation.  

Much like the stock market, trading in commodity futures is being dominated by speculators.  Those “investing” in the stock market are not there to invest in companies to earn dividends in the future.  They buy shares in the hope that its value increases.  If the value of the shares does increase, the “investor” will be able to sell the shares he bought at a higher price thereby earning some profit.  But if the “investor” was not able to sell when the price was high and the value of the stocks nosedives then he loses.  This is the game of speculators.

In the commodity futures market, speculators enter into contracts for the purchase and delivery of commodities not because they are interested in acquiring the said commodities.  They enter into futures contracts in the hope that by the time of the supposed delivery, the price of the commodity has risen more than the agreed price. The seller would then settle by paying the difference between the spot price at the time of the supposed delivery and the price stipulated in the contract.  The buyer thus earns a profit.  If the spot price of the commodity at the time of the supposedly delivery is lower than the price in the contract, the buyer loses and pays the seller the difference.  The settlement can take place even without the delivery of the commodity.  

In the stock market, big buyers can push the prices of a stock of a company up by purchasing a lot of shares and creating a bandwagon effect.  They can then unload, meaning sell to cash in, or hold on to the shares while the prices keep going up.  The prices of a stock can keep going up for as long as there are buyers willing to buy at a progressively increasing price until the “bubble bursts” because the true value of the stocks of the company is revealed when it issues its financial statement or that the prices are too high that nobody wants to buy the shares anymore for fear that the price will already go down.    

In the commodity futures market, big buyers/speculators can also push the prices of commodities up by purchasing in bulk, triggering a bandwagon effect.  The prices can even go higher if there are fears that the commodity, in this case oil, may experience a shortage in supply or if there is an expected increase in demand.  Thus, speculations of possible shortages because of a possible war between the U.S, and Iran coupled with massive buying by speculators purportedly to prepare for the probable shortage triggered an increase in the prices of petroleum products.  Likewise, the onset of the “driving season” in the U.S, and the corresponding projected increase in demand for petroleum products also coupled with massive buying by speculators also triggered an increase in prices of oil.  To make the problem worse, even as the expected shortage did not materialize, the price of oil in the commodity futures market remains high and is continuously being pushed upwards by speculators who keep on spreading grim scenarios of possible shortages while reaping profits.  This can take place until the market “overheats,” meaning nobody wants to purchase oil futures anymore because the price has gone too high.  

Thus, speculators are able to manipulate to push the prices of oil upwards to earn profits.  Aren’t they insidious and parasitic?  They profit from the misery of the billions of consumers who are reeling from increases in the prices of basic commodities and the rates of basic utilities and services caused by spikes in the prices of oil and petroleum products.

Deregulation makes it worse

The deregulation of the oil industry has made the Filipino people more vulnerable to the manipulations of the oil cartel and of speculators.  With the deregulation, oil companies are able to increase pump prices at will.  The government only “monitors” and does not regulate the prices of petroleum products, which is basic in everything from the operations of factories and utilities, transport of commodities and commuters, to the electrification of offices and households.  In fact, the deregulation of the oil industry not only makes us vulnerable to the manipulations of the cartel and speculators, it practically feeds us to them to satisfy their hunger for profits.

During the late 1960s, a ten centavo per liter increase in the pump prices of gasoline and diesel triggered a series of protest actions which led to the Diliman commune, when UP students barricaded themselves inside the Diliman campus of the University of the Philippines.  

Now we have been experiencing a series of increases in the pump prices of petroleum products pushing the prices of basic commodities and the rates of basic utilities and services upwards.  The Macapagal-Arroyo administration is not doing anything. It continuously ignores the calls for different solutions such as the scrapping of the oil deregulation law, the nationalization of the oil industry, the bulk purchasing by government to be sold to companies at an exchange market, price controls, etc.  At most, it sometimes asks oil companies to delay the increase in prices for a few days or weeks when it feels that it is in a critical situation and the increase may trigger protest actions.

How long will we be able to absorb the increases in prices caused by oil price spikes? How much do we have to bear before taking action? Bulatlat