DESPITE a constant barrage of criticism for “not doing enough” to alleviate the burden of skyrocketing fuel prices, I will give the government credit for acknowledging the threat immediately, as soon as the bombs started falling in the Middle East, and not downplaying the implications of the war and its effects on fuel prices. Whether or not the measures it has already taken or is proposing to take will have a sufficiently mitigating effect remains to be seen, of course, but the reaction to the current crisis has been a refreshing change from the “this problem won’t affect the Philippines” gaslighting we are usually subjected to.
Even so, I do not think the government truly appreciates how badly the war in the Middle East and its effects on costs here has rattled the public. As I was out and about on Sunday, there was a palpable atmosphere of worry, the same familiar sense of dread we all felt in the days leading up to onslaught of Covid-19 here five years ago. It is noticeable in the large number of people who are watching, or listening to, or talking about the news even while they’re engaging in leisurely activities or doing other mundane things. A casual comment, just a word or two to almost anyone can instantly start a conversation about the crisis. And almost anyone you have the conversation with will express the same fear in one way or another: “Something very bad is about to happen.”
I do not believe that feeling is out of place, or a mere emotional artefact from the experience of the pandemic days. There are indications that the conflict in the Middle East could and probably will spiral out of control very quickly, and I believe people are sensing that, whether they are closely following developments and putting two-and-two together from the sequence of events, or just throwing their hands up in the air to catch the vibrations. But speculating on what that means is not going to do any good for anyone’s peace of mind, or ability to cope with the one problem we already know we are all facing, which is the sharp increase in fuel prices.
Just as a note of clarification, at the time I am writing this, exactly 9:21 a.m. on Monday morning, March 9, the local fuel suppliers have not yet announced what their prices will be this week. Early estimates from last Friday through the weekend suggested a jump of perhaps P20 per liter for diesel fuel, and P10 to P11 per liter for gasoline. I think that is probably a bit pessimistic, maybe overestimated by half, based on the increase of oil prices (between 16 and 20 percent, depending on which market) since the war was started by the US and Israel on Feb. 28. Even so, a P5 to P10 per liter jump in prices is going to be a heavy hit.
Regardless of what the new prices will be by the time this hits the newsstands on Tuesday, the basic formula for fuel prices remains the same, and having a bit of an understanding of it might help people to figure out how to cope. In simple terms, fuel prices are made up of three components. First, is the cost of the oil itself, the raw material from which gasoline, diesel, kerosene and jet fuel are derived. That accounts for roughly 50 percent of the price per liter than one pays at the pump. Despite what some people think, the oil companies have virtually no control over this, as the oil price is a function of the commodities markets.
The second component, accounting for about 30 percent of the pump price, is the cost of processing and distributing the fuel. The suppliers’ and retailers’ profit margins are also included in this, and while that is something they can control to some extent, the space they have to do so is more limited than most would suppose; at most perhaps plus-or-minus 10 to 15 percent, or put another way, about five to seven percent of the bundled pump price per liter.
The third component is taxes, which accounts for roughly 20 percent of the pump price. This factor is in the hands of the government, and the likely suspension of the fuel excise tax that is now being discussed is a reflection of that. Fuel prices here are subject to two taxes, first the excise tax — P10 per liter for gasoline, P6 per liter for diesel, and P5 per liter for kerosene — and then the 12-percent value added tax (VAT). What most people do not realize is that there is actually a compound taxation on fuel, because VAT is applied to the price plus the excise tax; in effect, there is a tax on a tax.
The impact of a suspension of the fuel excise tax will help, but as oil prices and as a consequence fuel prices continue to rise — which they will, for the foreseeable future — it will have less of a positive impact, because it is a fixed rate. To illustrate, here’s a simple calculation based on what seemed to be the average price of diesel in my area this week, P60 per liter. If a P10 per liter increase is announced, with no excise tax suspension the new price will of course be P70 per liter. However, if the excise tax is suspended, removing P6 per liter from the pump price, the actual reduction is about P6.72 per liter, due to the corresponding reduction in the VAT component. So, instead of paying P70 per liter, diesel customers are going to be paying about P63.38 per liter, which is much better.
Much better, but P3.38 per liter is still a massive price shock, double or more the biggest increase we’ve seen in the past four years, and maybe longer. That price shock is going to ripple through the entire economy, not only in direct costs for every form of transport, but in the costs of goods, and electricity prices, although the latter may not be as bad as expected; it will be something to keep an eye on.
The most worrying aspect of this, however, is that this is just the beginning, and that is what really gives us the sense of dread. The sardonic old toast “May you live in interesting times” at this point feels like a curse.
ben.kritz@manilatimes.net
Bluesky: @benkritz.bsky.social
Website: www.badmannersgunclub.com
