Why is it that when the government stockpiles on a certain item, in this case, oil, it’s called “ensuring future supply,” but when a private entity does this for profit, it’s called “hoarding”? Fundamentally, the acts are no different; by buying now, one is saved from having to buy at higher prices later on.
But at least the private profiteer is not in denial as to the nature of the market. They would try to sell at sky-high prices, indeed, but to many this would be better than otherwise having no oil at all. If the government hoards this fuel and makes it available at a low price in the future, supply will quickly fizzle out anyway. A shortage will occur as long as the supply-demand dynamic is ignored.
Personally, I think this stockpiling business as announced by our hero Noynoy! Noynoy! Noynoy! Aquino reeks of poor foresight. The intention is good, of course; otherwise, how could he flaunt the May delivery of 50 million liters of diesel to the public? But there are some consequences to consider.
GOVERNMENT HOARDING MEANS INCREASE IN PRESENT DEMAND, PRICES
By suddenly increasing orders for fuel, the government helps bid up world crude prices, at the expense of Shell, Caltex (Chevron), Petron and the other oil retailers who don’t merely import fuel but refine their imports of crude.
This jump in demand will wreak havoc on the profit margins of these companies, who will have to deal with higher importing costs for crude, while unable as yet to sell their petroleum products at higher prices, assuming consumer demand does not correspondingly go up; recall yesterday’s lesson about how the value of a product is not derived by costs of production.
If consumer demand does go up, pump prices would have to go up as well. So much for the government’s purported objective. But if the government sells its hoarded fuel at lower prices, oil retailers would be further pressured into selling at a loss.
With these losing companies having less to purchase or having to reduce crude purchases, oil products will become even more scarce, and pricey ― which is precisely what the government is trying to prevent!
WHEN CHEAP OIL IS UNWANTED OIL
There are other risks to consider ― security of the tank farms where the oil will be stored, for one thing. And in the event that the Middle East situation does not escalate into an absolute nightmare, the Philippines will be left with abundant, cheap oil.
You might think, “Oh that’s great! At least oil will be cheap.” You’d be missing the point, which is the opportunity cost as a result of such government hoarding. The reason why the oil would be so cheap is because it would be unwanted; consumers would have found greater satisfaction if they had used the money elsewhere, even if this meant higher pump prices.
In the US, houses now cost about the same or lower than when last decade’s housing bubble began. Do Americans think of this as a boon? No, and the thousands of empty dwellings, many not even foreclosed, are a testament to government-induced malinvestment.
THE PRIVATE SOLUTION
If I headed a private organization that wanted to buffer people’s pain from high oil prices, I would ask willing members to place their money in a fund (just like taxation, except voluntary). I would then have this money invested in the crude oil futures market, or oil exchange-traded funds, with the appropriate measures so as to sell my orders or shares as necessary. This may boost demand and serve to bid up crude prices, but not to the degree that government wholesale purchases for fuel would.
By making such investments, my members would still have to pay high rates of gasoline or diesel in the event of more Middle East chaos, but this would be more than offset by their gains in crude futures/ETFs.
This to me is far better than buying fuel and having it sit around in some compound, waiting for tragedy to strike so as to feel my money was worth it. Hell, the government sucks so much, but it would be far more practical for taxes to be used in the manner I have elaborated rather than this hoarding baloney.
This latest oil stockpiling scheme of Noynoy! Noynoy! Noynoy! Aquino and the PNOC-EDC is just another price manipulation gimmick that won’t solve matters. By focusing on selling “competitively priced” oil, the government stands to lose so much more in taxpayers’ money, and will destroy other worthwhile endeavors, without even eliminating the possible shortage or making things easier for citizens.