How do world oil price movements affect the local oil price?

Crude oil price movements are normally cyclical, depending on supply / demand parameters. Recently, price movements have been quite abnormal, dropping to a very low $10/bbl during the late 1998 through the first quarter of 1999 prompting OPEC to agree on production cuts starting April 1999.

The production cuts imposed by both OPEC and cooperating non-OPEC producers such as Mexico, Russia and Norway, caused crude and petroleum product prices in the world to increase substantially. These price hikes have affected even stronger economies like the US and inventories have sunk to very low levels after the winter demand.

How has our country fared during this crisis fueled by rising prices of crude oil worldwide?

The phenomenon of increasing petroleum prices is not unique to the Philippines. It must be recognized that all countries in the world have felt the impact of the production cuts agreed upon by oil producers, even the US.

Government has been successful to date in moderating the impact of the continued increase in world oil prices. This is borne out by the fact that while crude cost has more than doubled from $10 per barrel in January 1999 to a high of $27 per barrel in June 2000, domestic prices have increased at much lower and slower rates.

Prices remain lower than what it would have been had the Automatic Pricing Mechanism (APM) of the Energy Regulatory Board (ERB) been in effect today. Had the APM been followed, we should have had monthly price hikes and retail prices would now be higher.

Domestic prices are the lowest in the region, except for oil-producing countries like Malaysia.

What is the government doing to protect consumers from unwarranted price increases?

Government has been exerting all possible efforts to temper or soften the impact of the continued rise in world crude oil prices on consumers and our economy by:

• Ensuring that prices of petroleum products in the country remain fair and reasonable;
• Reducing the oil component in the power mix; and
• Encouraging the development of non-oil energy sources.

Will reducing the taxes of imported petroleum products help?

Government has considered the option of reducing tariff and specific taxes, weighing revenue losses vs. the possible reduction in oil prices. However, it may do more harm than good to the economy. Aside from the fact that we already have a budget deficit, we would be taking funds away from government's basic services, like health, education and public works.

What is the impact of oil price hikes on the national economy?

Fuel price hikes no longer have the same impact on prices of basic commodities and the economy as before. In 1973, the country was 92% dependent on oil for its energy needs. Over the years, our dependence has been reduced to less than half in view of our programs of energy diversification, demand management and energy conservation.

To temper the impact of the oil price hikes on power cost, the National Power Corporation (NPC) veered away from oil-fired plants towards the latter part of last year. Consequently, oil in the power mix dropped from 41% in 1998 to only 23% last year. This year, the NPC's objective is to bring this down to 11%.

What is MOPS-Based Pricing?

MOPS or Mean of Platts Singapore is the daily average of all trading transactions between buyer and seller of petroleum products as assessed and summarized by Standard and Poor's Platts, a Singapore-based market wire service.

Oil companies, particularly the new players, who import finished products directly rather than crude, point to MOPS as a better indicator/benchmark of world prices than the traditional Dubai crude. Since information on individual product postings are readily available, it would be easier to monitor prices compared to the current method of using crude as reference since this will still have to be refined into the various products. The one-to-two month lag time between the increase/decrease in crude cost and the adjustments in domestic prices have also caused some confusion. Hence, the proposal to adopt more current price moves consistent with movements in MOPS.