Benjie Oliveros | Pity the Oil Companies?


MANILA — When President Gloria Macapagal-Arroyo issued Executive Order No. 839 on October 23 ordering oil companies to roll back pump prices in areas affected by typhoons Ondoy and Pepeng to October 15 levels, the Big Three — Petron, Caltex, and Shell — warned of supply shortages and negative effects in planned investments. They did comply, albeit grudgingly, by lowering prices in Luzon but increasing pump prices in Visayas and Mindanao.

First to comply by October 26 were independent oil players Unioil and Flying V. The next day, Seaoil followed suit. By October 28 all the Big Three have finally complied with the order. On the same day, Petron announced that it would incur P1.5 billion in losses if the price ceiling on pump prices is maintained throughout the last quarter of 2009. Petron said that it would incur losses when it starts paying for higher crude inventories in November and December.

The probability of losses being incurred by oil companies and shortfalls in supply are all bull. First the price cap set by the Arroyo government is based on October 15 prices. After October 15, the price per barrel of oil increased by around only $3 and started to decline by October 21. The more significant increases were from the beginning of October up to October 15. Thus, by October 15 pump prices were already high. By October 29, the price per barrel of oil was already slightly lower than its price last October 15.

Second, the spike in the price of oil was not brought about by increases in the costs of exploration, extraction or refining oil. Neither was it brought about by actual increases in demand for oil.

It was brought about by rising stock prices and the weakening of the dollar. Why does the price of oil increase with rising stock prices in the US? Because investors feel that rising stock prices is a sign that the US economy is on the road to recovery. Economic recovery is supposed to translate into greater demand for oil. When data regarding inventories of gasoline and crude oil in the US showed increases, the prices of oil declined because it meant that the projected increase in demand did not materialize.

Increases in the price of oil with the weakening of the dollar is much more revealing. The price per barrel of oil is pegged using the dollar. Thus, a decline in the value of the dollar should have caused a decrease in the price of oil when compared to or bought with other currencies. However, every time the US dollar weakens, ‘investors’ buy oil futures to hedge against possible losses resulting from the decline in the value of the dollar, thus, causing a spike in oil prices.

It is clear, therefore, that the recent increases in oil prices were mainly brought about by speculation. Dan Gilligan, president of the Petroleum Marketers Association in the US, said in a 2008 interview with 60 Minutes – which was posted by CBS news on January 11, 2009- that 60 to 70 percent of oil contracts in futures markets are held by “speculative entities” and “not by companies that need oil”. Gilligan said “All they do is buy the paper, and hope that they can sell it for more than they paid for it. Before they have to take delivery.” These transactions cause the volatility in oil prices.

While speculators rake in profits from oil futures contracts, so do oil companies because they sell the oil that speculators supposedly buy. Actually, oil companies profit more as they sell oil at prices way above the cost of production.

The supposed losses of Caltex and Shell are merely on paper as these are subsidiaries of Chevron Texaco and Royal Dutch Shell respectively. The local subsidiaries source their oil from their mother companies and not from commodity markets such as the New York Mercantile Exchange or the ICE. Petron, on the other hand, is 90 percent owned by Ashmore Group, a financial investment house, after it bought the shares of the government and of Saudi Aramco. The Ashmore Group is much like the “speculative entities” that Gilligan was referring to.

Third, as mentioned above, the price of oil in the world market is already on the decline so the claim of Petron that it would pay for “higher crude inventories” in November and December is not true.

Local oil companies are complaining about the price cap not because they would incur losses but because their profits from the spike in oil prices in October would be reduced. It is not out of necessity but out of greed. And they are being aided by no less than Energy Sec. Angelo Reyes who has acquired the annoying habit of echoing the position of and lawyering for the Big Three oil companies. The actions of the oil companies and Secretary Reyes show why the repeal of the Downstream Oil Industry Deregulation Act of 1998 is all the more urgent and justified. (

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