MANILA - With countries recovering from the global economic crisis, the National Economic and Development Authority (Neda) on Thursday said oil prices could hit $80 per barrel in early 2010, but warned against the imposition of oil subsidies.

This, as the country’s largest business groups appeared divided on the government’s issuance of Executive Order 839 freezing oil prices to October 15 levels in Luzon, where back-to-back typhoons wrought more than P24 billion in economic damage and left thousands homeless. More of them, however, inclined toward warning the government that allowing the price-freeze order to stay in force for a long time would lead to supply shortages, as the market instinct is not to sell at a loss.

Neda Acting Director General Augusto Santos said the futures market for oil now shows that with the expected recovery in many rich and even developing countries, oil prices will start climbing again and possibly hit $80 per barrel in early 2010.

But if the government falls into the temptation of allowing oil subsidies, as some sectors are now clamoring in light of the raging debate between the state and oil companies on the fairness of oil pricing, this may only erode the government’s budget to help the poor, Santos said. Oil subsidies, he stressed, only benefit the rich and the middle class.

“The oil price relevant to us is that of Dubai crude. The futures markets for oil show that Dubai oil prices are expected to hit $80/barrel once more in early 2010. This increase in Dubai crude prices is expected consistent with the global economic rebound. As the US Energy Information Administration reported, ‘World oil prices are assumed to rebound and rise in real terms through 2030’,” Santos said.

“In case oil spikes again, do not turn to fuel subsidies —or public funds for the poor will just benefit the rich and middle class. [Government must] ensure that food supply remains secure,” he added.

Mixed views on EO 839

Business groups are divided on the issue of retaining EO 839—which sets a cap on the price of petroleum products—but they are one in reminding the government to be on guard in implementing it, as no private firm will continue selling at a loss.

The Management Association of the Philippines (MAP), in a statement, called for the recall of EO 839, saying it could cause a massive supply disruption without assuring tangible benefits for the consumers.

Also, the MAP said the order delivers a double black-eye to investors, which the government invited with the assurance of stability and protection under the law. It added, “Not only are they not getting protection from rampant smuggling, they are also being forced to bleed by selling products below their cost.”

The statement issued through MAP executive director Arnold Salvador said: “When the order backfires, as we know it will, there won’t be any winners, only bewildered consumers and disaffected investors wondering if they were had.”

The Federation of Philippine Industries (FPI) said it is proper to retain the EO as long as the government will be open to constant review of the price cap to consider changes in the prices of the finished product and/or the raw materials.

“In a state of calamity, the government has the right to put a price ceiling. However, the price that the government should set should be realistic based on the weighted average cost of the oil firms. Otherwise, unrealistic price ceilings may result in shortages because you cannot force a company to sell at a loss. No law will force a company to sell at a loss,” FPI president Jesus Arranza told the BusinessMirror.

As in the early ’70s, Arranza said the success of the price ceiling depends on how fast the government will revise the price cap through constant review of the import prices of oils, “so they can balance the interest of the public as well as the interest of the industry.”

John Forbes, director of the American Chamber of Commerce of the Philippines, deferred comment as the Joint Foreign Chambers will soon be issuing a statement for all the foreign business groups in the country. He, however, hinted that the statement would be critical of the EO, noting, that the “price cap distorts the free market.”

The Philippine Chamber of Commerce and Industry said EO 839 is an issue of national importance so it urged the government and the oil industry to sit down and agree to work together, “in the spirit of true partnership, to respond to the crisis of the twin disasters of Ondoy and Pepeng while ensuring to protect and preserve the principles of free enterprise.”

The largest group of Filipino SMEs said while the EO may be an exercise of its police powers in an emergency situation, the government is expected to employ it judiciously, sparingly and in a well-calibrated manner, and not a day longer.

“Oil is a basic commodity which is mostly imported, cost-driven by volatile world market prices and a cartelized group of oil-producing countries, and additionally influenced by a fluctuating peso-dollar exchange rate. Indisputably, oil is a strategic product that has great impact on our economic well-being and national security. The general welfare of our country and our people must not be put at risk by any miscalculation of the impact of EO 839 on the stability of our oil supply,” the group said.

‘Turn-off to investors’

The Makati Business Club said price control is not a cure for high prices, and it is a turn-off to investors.

“Price controls do not work. They result is the opposite effect of shortages since suppliers will stop supplying at price below their cost. In the black market that is created, the consumer ends up paying more than the normal price. Worst of all, businessmen will stop investing in a price-controlled industry, thereby killing the jobs that could otherwise have been created,” MBC executive director Alberto Lim said.

Michael Wootton of the British Business Council said restraining increases in fuel prices is understandable because of the damage caused by the typhoons. “This is a socially responsible thing to do.”

But MAP’s Salvador said while the EO is widely popular for a consuming public reeling from the effects of the global crisis and the recent typhoons, it is also based on an oversimplified but misleading view of the problem.

“It holds out the promise of lower prices, but it does not properly inform the public of the dire consequences of arbitrary and sweeping price control. Additionally, from a legal point of view, the constitutionality of the order is at best debatable,” he said.

He said a company forced to sell below cost will be forced to cut its business volume to minimize losses, and as the entire chain scales down, supply gradually disappears.

The buyers will then turn to informal sources and a black market emerges, defeating the objective of keeping prices low.

For instance, the government needs to target just the people affected by the calamity.

“It could, through DSWD, issue discount cards to those genuinely in need, with funding from the P12-billion fund identified for calamity rehabilitation. Or, if this is too difficult, it could suspend taxes on oil products for a limited time. Even better would be to catch the smugglers, force them to pay their taxes and use those payments to help the people hurt by the calamity. What it should not do is retain EO 839,” he said.

Global demand rising

Neda chief Santos said that based on the October report of the Organization of Petroleum-Exporting Countries (Opec), global demand for oil will start growing in 2010. He said Opec expects demand to come from non-Organization for Economic Cooperation and Development countries like China, the Middle East, India and Latin America.

With this, Santos said oil prices are seen to continue rising in the medium term. He suggested several ways to make the country more resilient to these oil-price shocks like developing more renewable-energy sources.

Expanding the conditional cash transfer, and not oil subsidies, would better benefit more Filipinos, Santos added.

The acting Neda chief said expanding the coverage of the Pantawid Pamilyang Pilipino Program should be done as soon as the Department of Social Welfare and Development (DSWD) completes the identification of an additional 300,000 households.

Santos said that increasing the cash assistance to families benefitting under the 4Ps would help these families cope with increasing food prices, which are now seen as higher than in the 1990s due to the food and global economic crises.

DOJ task force alert

Justice Secretary Agnes Devanadera yesterday urged the media and the public to help the government ensure that oil companies fully comply with EO 839 and do not resort to other means in order to recover their supposed losses from complying.

Although no violations have been reported yet to the Department of Justice-Department of Energy (DOJ-DOE) Joint Task Force on Oil Deregulation, Devanadera said the media and the consuming public could very well validate the oil companies’ compliance with EO 839.

“The monitoring team is just checking the prices displayed at gasoline stations while the media and the consuming public are the ones who fill up their vehicles at gasoline stations. So we really need some feedback from the consumers,” the DOJ chief explained.

She added that the DOJ-DOE task force might also consider putting up a hotline where the public can report complaints against oil firms.

Devanadera reiterated that the government would not withdraw the imposition of fuel price controls amid threats from oil companies of supply shortage.

The DOJ secretary said the government is confident that oil companies have enough buffer funds to cope with the adverse impact on their pocketbooks of EO 839.

“You have to look at the entire business, the entire year, and the financial statements of the oil companies will show that they can do something during the lull,” Devanadera said.

Devanadera added that the government may undertake several measures under Republic Act 8479, or the Downstream Oil Industry Deregulation Act of 1998, in case the oil companies would declare shortage of supply.

These include conducting “an inquiry, investigation or opening of books and taking cognizance of the oil prices in the world market.”