• Falling oil prices and the PH

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    MIKE WOOTTON

    MIKE WOOTTON

    THE oil price in April 2009 was about the same as it was in 2004 and as it is again now, hovering around $52 per barrel. The 2009 price followed an exceptional peak in 2008 of $140 barrel. Following the 2009 “low,” it started its inexorable rise back to an average of around $120 barrel between 2011 and 2014.

    Many factors affect retail fuel price comparisons, not least the Philippines’ heavy dependency on international markets and the consequent exchange rate effects. The pump price of regular unleaded gasoline in 2009 was P36.25/liter and it is now P39.40/liter—an 8.7 percent differential. But the peso has strengthened from 47.136 to the US dollar in April 2009 to 44.604 now—a 5-percent increase. You now need fewer pesos to buy a barrel of oil. So rather than the comparative price increase, shouldn’t gasoline now be less expensive than it was in 2009, at about P34/liter, plus the inflation on the Philippines’ refining and marketing element (which should be fairly minimal)?

    The cost of oil and gasoline affects very many things due to the essential nature of its use in transportation. So when the oil price rises to the $120-140/barrel levels, then the cost of almost everything goes up. Conversely, if the oil price drops to about $50/barrel then it would be reasonable to expect to see a reduction in costs. The pump price of gasoline is an obvious one— it is, after all, in everybody’s face all the time, but there is not always a realization of the extent of the consequential effects on other consumer prices of these oil price shifts.

    It is in this area that effective consumer watchdogs should be concentrating in order to ensure proper recognition of the reductions in consumer items brought about by rises and falls in the prices of oil. Falling oil prices should be good news, reducing inflation significantly if the trickle-down effect is properly captured by whoever regulates these things; but it seems that it rarely is.

    I was working in the Philippines in 1992 when oil was $30/barrel (P750 at the exchange rate at the time) and it was around then that they first started seriously arriving at the decision to develop Malampaya. In Southeast Asia at the time, there was a very active oil and gas exploration and development sector. I was involved in Indonesia, China, Vietnam and Malaysia. There was a thriving drilling rig business doing exploration and appraisal wells, all on the basis of oil at $30/barrel. Now the price has “plummeted” to $50 (P2,200) and the oil companies are laying off people and cutting back investment plans all over the world in panic attempts to cut costs.

    It seems that conventional oil and gas resources are getting more difficult and expensive to find. The fashion has recently been, in a “greater than $100/barrel world” to do tar sands, shale oil and LNG (liquefied natural gas), all of which have high capital and production costs and which would consequently tend to maintain the oil price at the $100/barrel level. Many of the unconventional oil projects are now being abandoned as a result of the higher OPEC production levels and a slowdown in the rate of expected worldwide demand increases. These abandonments should be good news for the consumer if the effects of the relatively lower oil prices are sufficiently regulated by the time they reach them, but remember that even now, the oil price is not really low, it’s just reached the end of an oil price bonanza period.

    I can remember one senior management request to look at a “$10/barrel oil price world” for, at that time, it was considered a real possibility, and it was a challenge that could have been handled. It is unfortunate that the oil price bonanza steered the oil companies toward expensive capital investments rather than putting greater effort into exploration to find more conventional hydrocarbon resources. At the current $50/barrel level (equivalent to about $30 in 1992), there is still plenty of money in the business to get back on track and find and develop conventional resources.

    The cost of services, drilling rigs and oilfield equipment also grew over the last five or six years in line with the increase in the cost of oil and this just added to an inflationary spiral. Even allowing for this, the oil companies made lots of money which now, with the abandoning of shale oil and other heavy capital-intensive unconventional projects (which they had also abandoned in the late 1980s), they are tempted to use in buying each other out. Perhaps they may just better use these windfall piles of cash to stimulate a bit more old-fashioned exploration for conventional resources and readjust to life in a $50/barrel oil price world. It may be bad news for the traders but good news for everybody else.

    In other words, the oil industry should not be in a panic mode because of the recent fall in the price of oil. They should be modifying their strategies forward in identifying those now harder-to-find natural resources which could just reignite interest in, for example, the very challenging area of Philippine exploration.

    Mike can be contacted at mawootton@gmail.com.

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