Countries in the Asian region, including the Philippines, stand to benefit from the unprecedented drop in oil prices, which could plummet further in early 2015.
“As a big net fuel importer, emerging Asia is a main beneficiary of the recent plunge in global crude-oil prices. The drop is helpful for the balance of payments and inflation, provides space for macropolicy, and is supportive of economic growth. These gains bolster the region’s readiness to absorb the likely steps toward US monetary-policy normalization in 2015,” the Institute of International Finance (IIF) said in its December 10 report.
In the Philippines oil firms reduced anew on Sunday the prices of diesel by P1.55 per liter, gasoline by P1.75 per liter and kerosene by P1.80 per liter. The latest rollback comes after the December 7 rollback—P2.50 a liter for gasoline and P2.25 a liter for diesel and kerosene—the biggest reduction in pump prices so far. According to the Department of Energy (DOE), the December 14 price adjustment was the 24th rollback in gasoline prices and 31st for diesel and kerosene.
To date, gasoline prices decreased by P12.49 per liter, P13.68 per liter for diesel and P14.22 per liter for kerosene.
The drop in the prices of petroleum products here reflects the global oil prices, which have been falling due to the Organization of Petroleum Exporting Countries’ (Opec) decision to maintain current production levels despite a glut in the market with an estimated oversupply of 1.5 million to 2 million barrels daily. Experts said this is seen as a bid by Opec corner market share at a time when the US and other non-Opec countries are gaining share with the discovery of new oil fields and shale-gas deposits. “It’s mainly due to the oil and gas from shale fields because of the fracking technology developed by the US,” they said, adding that the weak European economies and a slowing Chinese economy are also keeping oil prices low.
Following a period of relative stability above $100 per barrel, oil prices have plunged since mid-2014, falling by more than $40 per barrel to five-year lows.
“The overall net impact on the global outlook is clearly positive. In our assessment the price drop is largely a consequence of surging oil supply, together with a strategic decision by Opec not to cut back its own output. The result is a shift in purchasing power from producers to consumers that should provide a significant boost to global demand at a time of excess capacity.
The price drop also provides more space for supportive monetary policies in a number of economies, as well as the lowering of cost of energy subsidies. “Assuming that the price decline is largely sustained, we estimate the net effect will be to raise global GDP [gross domestic product] by roughly 1/2 percent over a two-year period,” said the global association of financial institutions.
The implications of lower oil prices for corporate earnings are generally net positive. Lower oil prices help increase earnings growth as cheap energy boosts real purchasing power and, therefore, spending, the IIF explained.
Further reduction
The drop in oil prices is seen to continue in the coming weeks.
The IIF expects oil markets to tighten only very gradually during 2015. “All in all, we set our forecast for the Brent benchmark at $74/bbl in 2015 Q1. Beyond the first half of the year, we expect Brent to rise to $78/bbl in Q3 and to $85/bbl in Q4, reflecting the pick-up in global growth on the demand side, and the pullback in US shale production on the supply side. This scenario would result in a $78 average for the year as a whole,” IIF said.
In the Philippines, gasoline prices are pegged on the Dubai crude benchmark and not on Brent crude. However, Dubai crude benchmark closely follows Brent crude prices, with Dubai crude averaging at $76.33 a barrel in November, the lowest since September 2010.
Still, local oil firms expect this downward trend to continue.
“We are projecting that oil price will remain weak. It might even be weaker in 2015 compared to 2014. But those with refineries and on stockpiling inventory suffer most. In our case, we import in Singapore,” PTT Philippines Corp. (PTTPC) General Manager Danilo Alabado said.
The country imports at least 90 percent of its fuel requirements. For PTTPC, Alabado said it is not much affected by the recent steep drop in fuel prices.
But for Petron Corp., the country’s largest oil refiner, its net income for nine months was down by 26 percent to P3.2 billion. The drop was mainly due to the sustained fall in crude prices in the third quarter, resulting in weak margins as higher-priced inventory was sold at lower prices.
The benchmark Dubai crude fell from an average of $108 per barrel in June to an average of $97 per barrel in September, Petron said. This resulted in nine price rollbacks during the period. If the crude price was stable in the third quarter, operating income would have been higher by P1.9 billion. Petron said it was optimistic of its growth prospects amid this temporary weakness in global oil prices.
“We are operating in two of the fastest-rising economies in Asia and we are well-positioned to participate in this growth and further expand our business,” Petron Chairman and CEO Ramon S. Ang said.
Lower inflation
Falling oil prices mostly affect inflation through retail gasoline costs, which means savings at the gas pump can help lift prices for other products.
Finance Undersecretary and Chief Economist Gil Beltran had said lower oil prices will translate into lower inflation. However, the government’s economic team has not yet discussed the effects of the low prices of oil in the world market on the current macroeconomic projections of the government. But the price of gasoline products is one of the factors considered in arriving at the inflation rate, which stood at 4.3 percent at end-October this year.
Nonetheless, the recent price rollback in fuel already prompted the Land Transportation Franchising and Regulatory Board to bring down the minimum jeepney fares to P7.50 from P8.50 effective immediately.
“Hopefully, the trend in fuel prices will bring more benefits to our consumers, not only in jeepney fares but also in other commodities,” Energy Secretary Carlos Jericho L. Petilla said.
Image credits: Kevin Dela Cruz