THE price of crude oil has dominated the global financial news for the last six months. Price movements have been analyzed from every conceivable viewpoint in light of economic and geopolitical considerations.
Here in the Philippines, hundreds of millions of pesos have been saved—and probably spent on other things—with the large drop in gasoline prices. Between July 2014 and January 2015, the average price of crude oil had fallen by 50 percent.
On December 7, 2014, the newspaper headline was “Oil firms roll back fuel prices by as much as P2.50.”
On February 8, 2015, the headline read “P2.00 hike in fuel prices expected this week.”
When people hear about the price of oil going down, the complaint is that the local oil companies are not dropping the price of gasoline as much or as fast as the price of oil is going down. When gasoline prices are raised, the opposite complaint is voiced.
The problem is, most of us do not understand about crude prices or about gasoline prices.
The price of oil that we usually read about is not the “real” price. What is quoted is the price of crude-oil futures on the US and European commodity markets. This is the price set by the buying and selling of the financial instrument or contract, not the price of the physical oil. In fact, 90 percent of these contracts involve a cash settlement not the actual transfer of barrels of crude oil. These transactions take place between speculators, who are “betting” on the future price of physical oil and can be “pushed” in a particular direction regardless of actual physical supply and demand.
The pump price of gasoline is based about 50 percent on the price of crude oil; the rest on the refining costs. Therefore, crude can be going down, but other costs may be stable or even increasing. Further, the Philippines imports about 50 percent of our petroleum needs not in crude but in finished products, like certain types of fuel and liquefied petroleum gas (LPG).
The price of the finished products is based on the Mean of Platts Singapore, which is the average of a set of Singapore-based oil-product price assessments. So if the LPG price does not fall as much as crude oil, blame the refiners in Singapore.
But pricing has many other inputs. Cushing, Oklahoma, USA, is home to 2,000 residents and is the site of the world’s largest oil-storage facility, and the supply of oil in Cushing helps determine prices on this side of the world. Global gasoline prices are also moved by the New York Harbor Conventional Gasoline Regular Spot Price. As a major importer, price watchers follow how many oil supertankers or Very Large Crude Carriers are heading to China indicating their demand, which might move prices.
Finding someone to point a finger at for the way gasoline prices move is about the same as finding someone to blame for bad weather.
Image credits: jimbo Albano