High Oil Price Inflation

News about the high oil prices in the Philippines has been surfacing around the radios, televisions, internet and newspapers. There are clearly a lot of complaints about such increase in prices and there are even rallies held at the streets protesting and showing their disbelief and disapproval of that fact. I read an article stating that the high oil prices pose the biggest risk to the Philippines' inflation outlook this year. 

According to the Governor of Bangko Sentral ng Pilipinas Armando Tetangco, their inflation's target of 3% to 5% could be reached   if Dubai crude reaches $150 to $160 per barrel. He stated that they had conducted scenario analysis as to how much an increase of price will threaten the inflation target. Their estimation per barrel oil price is $150 and $160 that may possibly lead to a breach of the inflation target. 

The Philippines' imports nearly all of its crude oil needs and escalating geopolitical tension in the Middle East could push up power and transport costs. Dubai crude, the benchmark in setting local oil prices, has reached over $120 a barrel in recent days. But Tetangco said that at the moment, the inflation outlook remains manageable and the BSP's policy stance, appropriate.

"Over the policy horizon, we expect inflation to be below the mid-point of our target range. We will continue to monitor developments, particularly in the MENA ((Middle East and North Africa) and their impact on volatility in international prices, to see if there is any need to adjust our policy stance," he said.

While much attention is being directed at the impeachment trial of Chief Justice Renato Corona, oil prices are threatening to go through the roof. 

The surge in prices of imported oil has been attributed to increased political risks mainly in the oil-producing Middle East and North Africa and the growing demand of large economies like China and India. The oil price benchmark used by the Philippines, the Dubai crude, cost $123.65 a barrel as of March 9.

For an import-dependent country like ours, there is no question that crude oil is the life blood of the economy. Oil is the source of gasoline to run cars, of diesel for public transport, of aviation fuel for air transport, of bunker fuel to generate electricity, and of LPG for households, among others. Oil is so important a commodity that runaway prices can trigger a vicious cycle: the transport sector seeking fare increases, power utilities demanding higher electricity rates, producers raising prices, and battered consumers clamoring for higher wages to keep up with the rising cost of living.

Reforming the petroleum industry is on many experts’ minds. Some legislators have sought to amend the Oil Deregulation Law or Republic Act 8479. Pending at the House of Representatives are at least seven bills proposing to repeal or amend the law, five resolutions to investigate oil pricing, and a resolution to provide the President emergency powers to address the oil crisis. Three bills seeking to amend RA 8479 are pending in the Senate.

There are other long-term measures that can help oil-importing countries like the Philippines mitigate the impact of surging crude prices. On top of these are policies to restrain oil demand and to make use of solar, wind and hydro energy.

Among the current proposals, the one that stands out is the scrapping or suspension of the 12-percent value-added tax (VAT) on oil, and bills to that effect have been filed in Congress. Considered an easy fix to the grave problem, the removal of the VAT on petroleum products is estimated to lower pump prices by P6-P7 a liter; its suspension is seen to at least soften the impact of the price increases.

The problem, however, is that President Aquino has rejected calls not only for the scrapping but even for the suspension of the VAT on oil. His administration’s main argument is that the revenues are needed for various social projects.