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OIL PRICES HAVE SOARED TO $135 per barrel - twice that of the Philippine government's projection of #62 to $70 per barrel for Dubai oil. With surging oil prices, the pump price of gasoline is projected to go as high as P65 per liter.
Who will bear the burden of higher oil prices? The burden always falls on real people- in this case, the consumers, car owners and commuters. But the burden will vary widely, depending on one's income, preferences and capacity to change one's pattern of consumption.
A rich individual who drives a gas-guzzling SUV would have to spend an additional P2,000 to fill up his 80-liter car - assuming a pump price of P65 per liter for a total bill of P5,200 compared with the old gas bill of P3,200 (80 x P40 per liter).
But he may choose to reduce his burden by using his smaller, relatively more fuel-efficient car or he may even choose to use the MRT system.
A young, middle-income urban dweller who uses the MRT system will not be heavily affected as long as the transport fares do not change much. But this requires the continuation of or even an increase in government subsidy to the transit corporation.
Urban commuters
For a great majority of urban commuters, they would have to bear a heavier burden if the jeepneys and bus fares are raised. Considering the doubling of the price of diesel, it would be wrong not to adjust the transport fares. The urban commuters may choose the MRT system more than jeepneys and buses.
For a farmer in a remote village in the Cordilleras or the Autonomous Region in Muslim Mindanao, the impact of higher petroleum prices will be relatively light. he most likely uses firewood rather than LPG (liquefied petroleum gas) for cooking and has no access to rural electrification.
No doubt, higher oil prices will hurt all. But it will likely hurt the rich more than the poor.
Second-round effect
A second-round effect is that as oil prices surge, the production costs of some goods, including food, will also rise. The effect varies-the price of goods, which use oil and oil-based products more intensively, will go up faster than those goods that use oil and oil-based products less intensively.
Higher price means less of the goods will be bought and sold. This will lead to layoffs and lower return on investment.
In sum, workers and shareholders of the highly affected firms will bear the burden of higher oil prices. The economy-wide effect will depend on the resource-labor or capital-used intensively in the affected industry.
What should then be the form of government intervention in the face of rising fuel prices? Here's a discussion of what the government shouldn't do.
Legislation not answer
Legislation is not the answer. Policy-makers should recognize that prices are market determined, through the interplay of supply and demand. For the intellectually challenged policy-makers the law of supply and demand is irrepealable. In the short-and medium-term, no amount of legislation can increased oil supply.
The focus of policy intervention should be on the demand side-conservation and more efficient use of energy.
But he best way to encourage efficient use of resources is through the price mechanism. when the price of a critical resource-in this case, oil-is rising, it is wrong to artificially lower its price by reducing taxes or by imposing some form of price control.
Tariffs on oil
By artificially lowering the price of oil products, consumers and firms will behave as if the resource is not expensive and thus use the resource inefficiently. it is in this spirit that policy-makers should not cut tariffs on oil and oil products in order to artificially make their prices lower.
Authorities should not, through moral suasion, ask oil companies to delay the adjustment of the higher costs of petroleum products at the pumps, hoping that fuel prices will decline in the future. Well, oil prices continue to rise and now the oil firms are in a deeper pool of under-recoveries (amounts that they need to recoup).
Don't delay fare increase
It will also be a mistake to freeze the fares for public transport even as oil product prices increase. Delaying the fare adjustment through various means (bureaucratic red tape and other nonprice measures like running after illegal concessionaires) will result in inefficient use of petroleum products since it will not change the behavior of commuters even in the face of surging petroleum prices.
Finally, rationing in any form is a poor option, especially in an environment where the government is inept and perceived to be corrupt. |
