Weekly oil price hikes: Profit-making or genuine market dynamics?

by Manila Bulletin

As consumers complain of dizzying hikes in oil prices, or at times, unsatisfied at the amount of rollbacks in recent weeks, the oil companies are consequentially suspect of profit-taking.

The deregulation of the downstream oil industry is already traversing roughly 23 years — yet the fires of controversies are still very much focused on the same concern — pricing.

Battle lines though may have been shifting a bit as industry competition gets tougher and the players’ trump card now hinges more on aggressive strategies to corner patrons and gobble up rivals’ market shares.

And in a legitimate sense of price competition, that would be a very acceptable proposition. However, recent swagger of big-time price hikes undoubtedly snitched thunders, and tugged all the other industry players into the ‘defensive’ side. Subsequently, politicians as well as advocacy groups are back in vilifying them – some want freeze in price hikes; while lawmakers and the Department of Energy (DOE) have been batting for more transparent pricing; hence, they’re urging the oil companies to itemize the cost components of their products retailed at the pumps.

With prospects of economic recovery post-COVID, the main question in consumers’ mind is: how are prices headed in the coming days? No one has a crystal ball; but there are pricing benchmarks and intervening factors that the industry has been analyzing weekly relative to their price adjustments.

The industry previously reached a consensus on weekly price movements referencing on the Mean of Platts Singapore (MOPS) or the moving average of prices of oil commodities traded in Singapore. Even refiner Petron Corporation adheres to MOPS-based pricing because that assures it of competitive pricing versus finished product importers.

Another factor influencing price movements is the fluctuation in peso-dollar exchange rates. Beyond these, competitive forces could be held as the strongest element affecting price movements. For example, if an oil company estimates price hike to be at P1.00/liter but its competitor station nearby is selling even lower, that player will be forced to match the price of the other firm so it will not lose customers – in the context of market competition, that is typically called “destroyer pricing.”

And since the Philippines is heavily dependent on importation for its oil supply, it is inextricably hostage to developments that have been affecting supply-demand balance and international price swings that are either triggered by geopolitical factors (i.e. weather conditions, terrorist assaults in oil-producing countries) or market speculation (including economic recovery forecasts). Other pricing pressures are traced to fluctuations in the consumption or the rise-and-fall in oil inventories of major economies, like the United States and China, which are closely monitored as these affect market fundamentals especially if there are depressing news, such as the lingering impact of the pandemic and slower economic growths.

So why would an oil company choose to stay in the market amid the rough patches? Beyond business, perhaps, it is because of the challenge of providing Filipinos such a basic commodity and in becoming part of an industry that supports the economic growth of the country.