Petroleum Prices Philippines

BUS506M Research Colloquium

Petroleum prices in the Philippines and its response to the movement of foreign exchange rates

Joanne Jean L. Abainza

Abstract

Studies on causal relationships between petroleum prices, crude oil prices, taxation policies, poverty, and other commodity prices have already been explored to establish relationships between aforementioned variables. Motivated by various transport groups’ argument that fuel prices in the Philippines should be forex-sensitive, this study will test if changes in fuel prices in the Philippines is Granger-caused by the strength of Peso versus dollar. Qualified data to be used includes prevailing daily retail pump prices and Peso-Dollar conversion rates from 2009-2013.

1. Introduction

Following the deregulation of fuel prices in 1996 (RA No. 8180, Downstream Oil Industry Deregulation Act of 1996), firms in the downstream oil industry have been allowed to set fuel prices on their own. Some of the factors considered in fuel pricing include (a) availability of raw material; (b) importation/freight cost; (c) production/refining cost; (d) operating and capital expenditures; (e) return on investment; (f) competition, and; (g) taxation and other government policies implementing related fees.

1. Background of the Study

A 16% growth in car sales in the Philippines in 2013 (www.philstar.com, 2014) proves to point that the increased demand for automobiles drives a surge in increased domestic fuel prices. The Department of Energy (DOE) has monitored at least P5.00/li increase in gasoline and P4.00/li increase in automotive diesel prices since 2010. (www.doe.gov.ph, n.d.).

Gasoline price asymmetry has been widely explored but in relation to crude oil prices. Most recent dissertations explores, prove, and/or explain the existence of asymmetrical behavior. In 1990, Bacon labelled this asymmetry the “rockets and feathers” phenomenon where an increase in crude oil prices drives a surge in increased petroleum prices (rockets), and a decrease in crude oil prices reflects a slow decrease in petroleum prices (feathers).

Through a vector autoregressive model, this study will identify if the change in fuel prices is Granger-caused by the change in the performance of Peso over dollar. If Granger-causality is established, this study will also explore if the “rockets and feathers” relationship phenomena is also present in fuel prices in the Philippines – but relating it to foreign exchange (forex) rates’ movement instead of crude oil prices.

1. Problem Statement

•  Is the change in fuel prices Granger-caused by the strength (weakness) of Peso vs. Dollar?
• Do petroleum prices respond asymmetrically to forex rates’ movement in the Philippines?
• Is the “rockets and feathers” phenomenon present between fuel prices and forex rates’ movement in the Philippines?

• Is the downstream oil industry monopolized by its major players (e.g. Caltex, Petron, and Shell)?
• Does the change in fuel price made by the ‘Big Three^[1]’ players in the industry Granger-cause the change of fuel prices implemented by other players?

1. Objectives of the Study

• To test the causal relationship between forex rates and fuel prices in the Philippines.
• To determine how fast fuel prices react to forex movement.
• To determine which oil firm is (are) most likely forex dependent.

1. Relevance of the Study

The motivation behind the study is to prove to point that fuel prices in the Philippines is not forex dependent. It will provide answer to several claims that an improvement in Peso performance over dollar should be followed by the decrease in commodity prices – especially of gasoline and/or diesel. More than just bridging the gap, this study intends to educate its readers that forex is not the sole variable affecting fuel prices – hence, further exploration can be done in order to pin-point to which variable fuel prices in the Philippines’ is mostly dependent on.