Oil Prices: A Rollercoaster Ride in 2008

The year 2008 saw a roller coaster ride in prices of crude oil and petroleum products. Studies point to speculation, not the law of supply and demand, as the culprit.



The year 2008 saw a roller coaster ride in prices of crude oil and petroleum products. In the first week of January, global crude oil price breached what analysts called the “psychological barrier” of $100 per barrel mark for the first time. At one point in July, crude oil traded at an all-time peak of more than $147 per barrel in the world market. Then a month later, the steep decline in oil prices began and by December, crude oil was trading at under $33 per barrel. From an earlier forecast of global crude oil prices reaching as high as $250 per barrel “very soon” , one estimate now predicts prices to fall to as low as $30 per barrel in first quarter of 2009. Thus, said one analyst, “2008 will go down as one of the most volatile and difficult years ever for oil. It was a year that started with runaway prices and all the makings of the worst inflation in nearly three decades. It is ending with imploding deflation and worst recession in seven decades”.

Speculation behind the rise and fall in oil prices

Some analysts have identified the “combination of the slowdown in the global economy, which dampened oil demand, and higher production from the Organization of Petroleum Exporting Countries (OPEC)” as the major reason for the reduction in world oil prices since July 2008. The OPEC, for its part, listed “lower demand especially in the developed countries, increased oil supply, the strengthening of the US dollar and easing of geopolitical tensions” as the factors behind the decline in global prices.

But a June 2006 US Senate Permanent Subcommittee report The Role of Speculation in Rising Oil and Gas Prices pointed to speculation as the cause behind the rapid rise in oil prices. The report said that from January to May, index traders poured $60 billion into commodity markets causing a big spike in oil prices. But when the US Congress held hearings in May to July to curb speculation, traders pulled $39 billion from the market. One of the authors of the report summed up their findings, to wit: “The bottom line here is with regard to commodities, money going in pushes prices up, money going out pushes prices down”.

Wild spikes in the global price of crude oil experienced last year underscore the depth of speculation in the oil market. The prices quoted above actually refer to “crude oil futures” traded in the New York Mercantile Exchange (NYMEX) and the London ICE Futures. Futures market does not involve the physical trading of crude oil but are engaged in by giant investment banks and other financial companies and the oil majors to earn huge profits from speculating on the future price of oil. When oil prices were posting record high numbers in the first half of the year, speculation was estimated to account for as much as 60 percent of global oil prices.

Indeed, the extreme price swings of oil in 2008 further strengthened the claim that speculation, not actual supply and demand, is behind the world oil price movement. Between January and July, the monthly average prices of crude oil increased by 41 percent (WTI crude) to 50 percent (Dubai crude). But between July and December, prices declined by 68 percent (Dubai and Brent crude) to 69 percent (WTI crude). Meanwhile, global oil demand in the fourth quarter 2008 was pegged at 85.6 million barrels per day (mb/d), down by only less than 1.4 percent from its first quarter level. Supply, on the other hand, was recorded at 86.5 mb/d in December, down by only less than 1 percent from its January average. The figures indicate that there has been no significant change in the supply-demand balance of crude oil last year that could fully explain the very sharp rise and fall in prices.

Overpricing and profiteering

Local pump prices jumped by almost 41 percent between January and July 2008, with diesel and kerosene posting the sharpest increases at 46 percent. Meanwhile, between July and December 2008, monthly average prices declined by less than 38 percent, with diesel and kerosene posting slower reductions at 36 percent and 31 percent, respectively.

There is a general perception that the rollbacks in local pump prices have not been proportionate to the rapid decline in world oil prices with the Big Three taking the brunt of public criticism. The latest estimates of the Bagong Alyansang Makabayan (Bayan), released in the first week of December, showed that a big time rollback of around P7.82 ($0.16 at the December 2008 exchange rate of $1=P48.09) per liter for diesel is still necessary as oil firms continued to implement lower price cuts than the rapid decline in global prices. Similarly, the pump price of kerosene should still be reduced by P11.45 ($0.238) per liter while that of unleaded gasoline by P2.42 ($0.05) per liter.

Such abuse is made possible by the Downstream Oil Industry Deregulation Law (ODL), first passed in 1996 and amended in 1998, which allowed oil firms to automatically adjust pump prices. The law aggravated the overpricing and price manipulation in the world market by the global oil cartel composed of giant transnational corporations (TNCs), some of which have local units and partners in the Philippines such as Petron, Shell, Chevron and Total.

Malacañang’s double-talk on rollbacks

Even several Cabinet officials of the Arroyo administration have taken turns “lambasting” the oil firms for not implementing a “substantial” rollback in pump prices of petroleum products. National Economic and Development Authority (NEDA) director general Ralph Recto even came out with a computation showing that a substantial rollback in the pump prices of diesel and gasoline should be implemented by the oil firms. Press Secretary Jesus Dureza, on the other hand, warned oil companies not to wait for the government to use its “iron fist” before they implement a substantial rollback. Earlier, Justice Secretary Raul Gonzales called for an “independent” audit of oil firms to determine whether current pump prices are justified given the downward trend in global oil prices.

But despite asking the oil firms to explain their pricing schemes and to implement a more substantial rollback as well as threatening to audit them, Malacañang has vehemently opposed calls from various sectors, including several Catholic bishops, to scrap the 12 percent value added tax (VAT) on oil and the Oil Deregulation Law. In her July 2008 state of the nation address (SONA), Arroyo called the VAT and the Oil Deregulation Law as “much criticized but irreplaceable policies”. In many occasions, Arroyo had also boasted that the country is in a better position to confront the global economic crunch because the economy is “stronger than it has been in generations” and due to the “tough choices” that her administration has made, particularly the VAT reforms.

Recent price trends

Because the downstream oil industry in the Philippines is deregulated, consumers did not benefit from rapidly declining global oil prices. The abusive pricing scheme of oil companies has been going on for many years but has become more obvious and severe under the deregulated regime. Despite warnings from Malacañang itself, the government could not force oil firms to implement bigger price cuts for as long as the law is in effect. Besides, it’s not in the interest of the Arroyo administration to force oil firms to substantially bring down their prices because Malacañang also benefits from speculation-driven, artificially high oil prices because of the 12 percent VAT on oil: the higher the pump prices of oil, the more tax collections the government gets. Since January 2006 to June 2008, RVAT collections from oil have already reached P122.48 billion ($2,754,216,325 at the 2008 average exchange rate of $1=P44.47) or almost 56 percent of the total RVAT revenues.

The US recession and the global economic crunch are expected to deteriorate in the coming months. The Philippines is already starting to feel the direct impact of the global crisis as trade and investments is slowing down. More overseas Filipino workers (OFWs) are facing the imminent threat of retrenchments while the domestic labor market is further contracting. The impact of these on the Filipino people is mitigated only by easing inflation, mainly due to lower oil prices. But even this “mitigating” factor is offset by unabated oil price manipulation under the deregulation law.

In addition, the global oil market remains vulnerable to speculation and as such local pump prices could again steeply climb in the coming months primarily due to renewed speculative attacks. The volatile financial market, which in one week saw the demise of two of the US’s mightiest investment banks triggered fresh rounds of speculation. Trading in crude oil futures contracts for October delivery at the NYMEX jumped at one point by $25 per barrel last September 22, 2008 – its biggest single-day surge ever – one week after the upheaval at Wall Street. The unusual price hike compelled the Commodity Futures Trading Commission (CFTC) to subpoena trading records from some NYMEX traders to look into possible “illegal manipulation” of prices. Israel’s intensified military attacks against Gaza in December 2008 has triggered fresh rounds of massive speculation that drove oil prices up by 23 percent in the week connecting 2008 and 2009, the most since August 1986. Prices of oil futures have been on a steady uptrend since Israel started bombing Gaza and further escalated since the start of the ground assault on January 4.

Furthermore, as the global crisis worsens, oil prices become even more vulnerable to intensified speculative attacks. With the bursting of the housing bubble, more speculators are expected to shift from “investing” in real estate to speculation in the commodity futures market, which includes oil. The expected slowdown in real demand as a result of the worsening US recession may not deter traders from speculating on oil since the backdrop for continuing speculation such as the political instability in the Middle East remains. Emerging oil price trends in the light of Israel’s military offensives in Gaza clearly illustrate this.

Oil price control to mitigate crisis

While Malacañang pretends to run after oil companies for not implementing substantial price rollbacks, the Arroyo administration’s continued adherence to deregulation and the continued imposition of the VAT on oil betray its lack of genuine intention to lower pump prices. Thus, consumers must rely on their own strength to compel Congress to implement the necessary corrections in oil policies that will truly promote and protect the public and the national interest.

2008 was indeed a rollercoaster ride in oil prices – but whether international prices shot up astronomically or steeply declined – Filipino consumers in the end still paid for exorbitantly priced oil. 2009 would certainly be more tumultuous as the recession in the US and other major industrial economies deepens and further aggravates the permanent crisis of the pre-industrial Philippine economy. The country’s already chronic job scarcity is expected to worsen as overseas Filipino workers (OFWs) and those employed in affected local sectors such as exporter manufacturing firms start to feel the pinch of the global economic crunch. The situation could easily deteriorate once prices of basic consumer goods and services again unjustly escalate, which is to be expected for as long as the government insists on the already discredited principles of free market economics namely, deregulation, liberalization and privatization.

Policy makers must now seriously rethink the deregulation policy and put in place a mechanism for effective oil price control to ensure reasonable oil prices and help cushion the impact of the raging global crisis. (Bulatlat.com)

Forecast by Russian energy giant Gazprom as quoted in “Oil flies to record high beyond 146 dollars”, Agence France-Presse, ABS-CBN News Online, July 4, 2008
Forecast by Goldman Sachs as reported in “Oil predicted to fall to $30 by 1st quarter”, Agence France-Presse and Bloomberg, December 13, 2008
Peter Beutel, analyst at energy consultancy Cameron Hanover, as quoted in “Oil prices may drop even more in 2009, say analysts”, Agence France-Presse, Philippine Daily Inquirer, December 29, 2008
See article “Surprise OPEC cut pushes oil above $100”, Financial Times, September 10, 2008
See article “Big oil price swings caused by speculators, says report”, Reuters, Inquirer Money, September 11, 2008
Estimate by F. William Engdahl, see his article “Perhaps 60% of today’s oil price is pure speculation”, FSO editorials, May 2, 2008
Prices from Platt’s as regularly published in the Philippine Star; December prices cover Dec 1-22 average only
Figures taken from the Oil Market Report, regularly published by the International Energy Agency (IEA)
Prevailing prices from the Department of Energy and as compiled by IBON Foundation; December prices cover Dec 1-12 average only
See “Notes on oil prices”, Bagong Alyansang Makabayan (Bayan), December 6, 2008
According to Recto, the pump price of diesel should be lowered to P35.32 per liter while that of gasoline, to P40.95, see “NEDA estimates: P35/L for diesel, P41/L for gasoline,” GMANEWS.TV, October 22, 2008; the October average price of diesel was pegged at P47.07 per liter and that of gasoline products at P45.58 (unleaded) to P49.98 (premium plus), based on DOE data as compiled by IBON Foundation
“Palace official to oil firms: don’t wait for iron fist,” GMANEWS.TV, October 18, 2008
See “Gonzales pushes independent firm to audit oil firms,” INQUIRER.net, September 9, 2008
See “Arroyo: ‘firewall’ built vs recession”, INQUIRER.net, 12 Nov 2008; see also text of Mrs. Arroyo’s speech in her July 2008 State of the Nation Address (SONA)
Data from the Department of Finance (DOF) as cited in “Notes on oil prices”, Bagong Alyansang Makabayan (Bayan), September 2008
See “Investigation widens into unusual oil price rise”, The New York Times, September 24, 2008
See “Oil caps biggest weekly gain since 1986 on geopolitical concern”, Bloomberg.com, January 2, 2009; see also “Oil above $47 on Gaza, Russia gas row”, Reuters, January 5, 2009

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