Carrying the Burden of Oil Price Hikes

Because of the inaction of the Arroyo government, the burden being caused by the oil price increases is being borne by the driver who has already lost almost half of his/her income, and the consuming public who had to cope with the corresponding increases in the prices of basic commodities, services, and utilities. While on the other hand, giant oil companies and financial speculators gain superprofits from these increases.

Vol. VII, No. 45, December 16-22, 2007

The public had its taste of a transport strike last December 13 after almost two years. PISTON (Pinagkaisang Samahan ng mga Tsuper at Operator Nationwide or Unity of Associations of Drivers and Operators Nationwide) said the strike was successful: paralyzing almost 90-95 percent of public transport nationwide and around 70 percent in the National Capital Region. The government and the Philippine National Police claimed that the strike was hardly felt, affecting a mere 20 percent of public transport. A major daily’s headline declared that the transport strike fizzled out. But what was seemingly lost in these claims and counter-claims is the core of the issue – the spike in oil prices – and the justness of the demands of PISTON.

Undeniably, the prices of oil products has increased so many times this year and the public should expect more rounds of oil price hikes during the early part of next year. What was only assured by the government is that the prices of oil products would no longer increase for the remainder of the year, a mere two weeks.

In the meantime, drivers of public utility vehicles and of course, the public, are made to bear the increases in oil prices. Every centavo increase in fuel translates into a decrease in the income of drivers. Owners of jeepneys and taxis and buses will have their boundary (tariffs paid by the driver) intact. Bus companies have a percentage sharing in collected fares with the driver and conductor thus, the burden in the increase of fuel costs is shared by both drivers, conductors, and owners.

For example, because of the P6.50 ($0.157 at an exchange rate of $1=P41.14) per liter total increase in diesel – which was priced at P31.45 ($0.76) at the start of 2007 and has reached P37.95 ($0.92) per liter – a jeepney driver, who regularly consumes 30 liters per day, has lost P195 ($4.739) in his/her daily income. The average income of a jeepney driver now has decreased to P211.50 ($5.14) per day from P406.50 ($9.88) at the start of 2007. (Please refer to the related article for the details of the computation.)

Likewise, oil price spikes pushes the prices of basic commodities up as corporations pass on the burden of increases in transport costs and operating expenses on consumers. So the poor driver carries the burden twice over in the form of decreased income and increased cost of living.

Most transport groups, with the exception of PISTON, have been calling for an increase in transport fare to help them cover the increase in fuel costs. But that would only translate into passing on the burden of oil price spikes from the driver to the commuting public. The problem is that the salaries and wages of the commuting public do not increase correspondingly and prices of basic commodities, services, and utilities have likewise been increasing.

Who then should carry the burden of oil price spikes?

PISTON articulated three interesting demands: the Oil Deregulation Law be scrapped; that the government should control the increases in oil prices; the 12 percent expanded value added tax on oil products be removed.
The scrapping of the Oil Deregulation Law would allow the government to control the prices of oil. With the Oil Deregulation law in effect, all the government could do is to either beg the giant oil companies to temper their increases or issue empty threats of filing cases against the latter for price fixing.

As I have discussed in two previous articles, two giants are to blame for the oil price spikes. First are the giant oil companies dominated by the big three: ExxonMobil, Royal Dutch Shell, and BP. They are closely followed by TotalFinaElf, the fourth biggest oil company, Chevron Texaco, the fifth, ConocoPhilips, the sixth largest and ENI, the seventh. These giant oil companies are vertically integrated, meaning they control both their upstream and downstream processes all over the world: from the exploration to the drilling and refining operations up to your friendly service station. Thus, they are in a position to fix the price of oil and oil products regardless of supply and demand. And only a fool would think that they are not conniving and operating as a cartel.

Gone are the days when the Organization of Petroleum Exporting Countries (OPEC) are able to control the price of oil such as what happened in the early 1970s when it was primarily responsible for the increase of the price from $7 to $11 per barrel. Petroleum exporting countries, with the exception of Venezuela and Saudi Arabia which have nationalized their oil industries, are now hostage to these giant oil companies. Have you noticed that while OPEC decided not to increase its output, the price of oil still fluctuated independently? In fact, it even went down, when the law of supply and demand dictates that it should have gone up, right after OPEC made the announcement. And OPEC has repeatedly declared that there is no need to increase their output as the increases in oil prices is not due to supply and demand but because of speculation.

As of today, the price per barrel of light, sweet crude at the New York Mercantile Exchange (NYMEX) is at $92.35 per barrel. North Sea Brent crude at the ICE Futures is at $92.50 per barrel. The price per barrel has reached a high of $99 during the last few months. This brings us to the next point.

The NYMEX and the ICE Futures are not actually oil distribution channels. It is the giant oil companies themselves who market and distribute the oil. These are commodity futures markets.

Ideally, the purpose of commodity futures market 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.

What is being traded at the NYMEX and the ICE Futures are commodities, in this case oil, which are for delivery months ahead. And it is the financial ‘investors’ also called hedge fund managers, speculators, or financial oligarchs, who dominate trade in commodity futures markets as well as stock and money markets.

Whenever trading pushes the price of oil for future delivery higher, the tendency is to push up the price of oil now as speculators scramble to purchase current stocks in anticipation of earning profits from it in the coming months. Economists call this ‘investing’. But this is not investing in the real sense of the word as there is no actual value added resulting from the ‘investment’, just plain and simple profiteering.

Another reason for increases in the price of oil traded in these commodity futures markets is the anticipation of shortages in supply because of an anticipated higher demand or probable disruptions in production. This has been one of the reasons being cited often for the increases such as when they announce the effects of tensions arising in Iran or Nigeria or a hurricane in Texas. The reasons they cite are numerous and they can continue doing so for as long as they, the financial ‘investors’ ,want to profit from the futures market. While in actuality, none of the reasons being cited has ever caused a real shortage in supply. They are making mountains out of molehills so they can profit from it.

Oil prices also increase whenever the value of the dollar plunges or stock markets falter. Because every time that happens, speculators transfer their money to ‘invest’ in oil, which is considered a safe investment as it is always in demand.

The greed for profits of these two giants – the giant oil companies and the financial ‘investors’ – are insatiable and they would keep pushing the prices of oil up to earn superprofits. The only thing they fear is what is called by economists as “overheating’, meaning the price of oil has gone too high that actual demand for it falls as people cut down on consumption because they can no longer afford it. When the market “overheats,” the speculator who last bought oil at a high price before prices went down loses money. This is the reason why the price of oil has not yet breached the $100 per barrel level.

Thus, in order to protect the public from the profiteering tendencies of these two giants, there is a need for the government to carefully scrutinize the justification for the increases and to set price ceilings. In a deregulated environment, giant oil companies and financial speculators profit at will while consumers and drivers carry the burden of the increases. With a regulated environment, the profiteering tendencies of these giants can be tempered. A few pesos lost by the lowly driver, wage earner, and salaried employee whenever oil prices increase is a matter of life and death while a few pesos of profits taken away from giant oil companies and speculators is a mere pittance for them.

Furthermore, the Arroyo government should stop adding to the burden of drivers and consumers by scrapping the 12 percent expanded value added tax imposed on oil products.

There are long-term solutions to protect the Filipino people from the profiteering tendencies of these two giants such as the nationalization of the oil industry and searching for alternative sources of energy. But there is an urgent need for the Arroyo government to act now to mitigate the sufferings caused by the oil price spikes on the Filipino people. Otherwise it would be clear that the Arroyo government favors these giant oil companies and financial speculators to the detriment and burden of the Filipino people. Bulatlat

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