``Nine-tenths of the economic fallacies that are working such dreadful harm in the world today are the result of ignoring this lesson. Those fallacies all stem from one of two central fallacies, or both: that of looking only at the immediate consequences of an act or proposal, and that of looking at the consequences only for a particular group to the neglect of other groups.” Henry Hazlitt (1894-1993), libertarian philosopher and economist, Economics in One Lesson
Some economists propound that global demand for petroleum products will perhaps moderate enough to lower oil and petrol prices, as governments around the world work to reduce subsidies.
Subsidies mean that government absorbs the difference between the costs from market prices relative to significantly lowered prices sold to the public. If the government doesn’t have enough wherewithals to sustain the losses or subsidies then it would have to print or borrow money which eventually would rack up deficits and mean higher taxes and lower standards of living.
But, the raging acceleration of oil prices (WTIC crude benchmark skyrocketed to $139 per barrel last Friday) has been fast inflicting damage to government fiscal conditions. For instance according to the Financial Times (highlight mine),
``Government officials said Malaysia was in danger of spending M$50bn ($15bn, €10bn, £7.9bn) on fuel subsidies this year if government-set prices for petrol and diesel were not raised to reflect the surge in global crude oil prices to about $130 a barrel.
``Before today’s increase, Malaysia’s fuel subsidy accounted for nearly a third of total government spending and was equivalent to about 7 per cent of gross domestic product, one of the highest proportions in the world.”
So in weighing on the tradeoffs between the costs to political stability against restoring some sense of fiscal uprightness, some governments will and have opted for the latter. Indeed, Malaysia recently raised petrol prices by 40%! And this has been followed by price increases in India and Taiwan.
After all the distinction between subsidies and a pass through from market prices is all in the timeframe- subsidies are basically SHORT TERM pacification in exchange for LONGER TERM pain.
For as long as energy prices keep climbing, where governments have no revenue source to fund subsidy programs, consumers will ultimately be facing the reality of higher energy bills. In short, governments have a choice of having its consumers accept reality NOW or at a greater pain, TOMORROW.
Figure 1 Morgan Stanley: Global Oil prices as of Early 2008
For politically stable countries, the most likely path will be to lift subsidies. But this does not seem to apply to the Philippines even if petrol prices seem to be lower than the rest of the world, as shown in Figure 1 courtesy of Morgan Stanley.
While petrol prices haven’t been subsidized, which has been a plus factor for now, the trend towards subsidies or even the risks of “nationalization” appears to be gaining momentum as the incumbent government has increasingly trained its guns on the private sector.
For instance in the case of Meralco, government has used a flanking attack (this time using Energy Regulatory Commission, after the GSIS and SEC) towards squeezing the Meralco management to increase payout for a whole lot of myriad reasons (e.g. deposits). Perhaps the idea is if Meralco gets effectively hemorrhaged, stockholders will be swayed to allow government allies to assume control of the firm.
While it is true, that the Philippine government has not directed a frontal takeover of the said energy distribution monopoly by EDICT (Presidential Decree or via Franchise in Congress-yet) and has done so by corporate maneuvering, the fact that it is bleeding dry Meralco gives the public the wrong impression that the private sector has been responsible for rising electric bills! The government has even prohibited the energy (LPG) companies from making public announcements for price increases! Incredible.
At worst, the administration representatives in the Senate has even disparaged at the members of the joint foreign chambers of commerce on the latter’s appeal to reconsider changes to EPIRA. 
Figure 2: IMF: Philippine Debt to Foreigners Is Half of Outstanding Liabilities
The overweening self righteous attitude of our officials assumes of the profuseness of capital in the Philippines (if we have so much capital why then are we poor?). We do not imply that they should fawn over to foreign capitalists, but rather negotiate diplomatically or cordially and not out of highhandness.
Should the Philippines undergo another financial or capital crisis; do we not supplicate on foreigners for capital as we have done in the past? The fact is Philippine foreign liabilities comprise HALF of the countries total or outstanding debt, see figure 2 from IMF, meaning much of our local spending programs in the past have been financed by foreigners. Yes, it also infers that a lot of the “corruption” by government officials has been indirectly due to foreign funding. Thus, we find intellectual dishonesty (if not a travesty) in invoking a nationalistic hysteria when dealing with energy issues.
The fact is that energy prices have been RISING around the world ENSURES of higher energy bills to Philippine consumers. Period. In addition, since we are NOT self reliant or produce enough energy to standalone- we are reportedly importing 99% of our gasoline and diesel requirements (manilastandardtoday.com)- thus are subjected to global market forces. This reality means pain at the pump and at our electric bills. No amount of political grandstanding will lower prices, even if the government or its factotums does succeed to takeover Meralco or other public utility firms -again if the aim is to subsidize, subsidies temporarily lowers bills but will be more costly to the consumers in the future. Moreover, we must be reminded that our fiscal position is still in a precarious state.
Further yet, “evil” profits which are meant to be stanched and public subsidies (the fleecing of the country’s productive sector to the unproductive) are both delusions that it is being peddled to the public as a panacea, from which the latter will want more and more of it. Anyway, the government keeps feeding on them, e.g. fertilizer (P 1,500 per farmer), energy (P 500 per family) and student loans programs. We should even doubt the efficacy of these programs if they are indeed meeting their desired targets which we suspect could end up more in the hands of the disbursers of such legal bequest, i.e. the politicos, the affiliates and their followers.
Hence, instead of a thrust towards fiscal balancing which is seen in many parts of the world, the Philippines seem on the path towards fiscal remission if not an outright regression. Yes, Philippine financial markets have borne the onus of such politicization, as seen in the state of the “depreciating” Peso, the “falling” Phisix and the “soaring” bond yields.
The next Presidential elections (if there would be any) will probably be marked by demagoguery of even more intense socialist tendencies. Don’t forget many of the world’s tyrants/despots emerged during the heydays of oil and commodity prices in the late 60s-80s. This has probably been due to the increasing clamor for social safety nets under pressures of higher cost of living and or to revenues derived from surpluses of commodity exports as a docile form of redistributive channel for more social spending programs. Today since forex surpluses have been flowing to non-democratic regimes, there has been a tendency to adopt on such paradigm e.g. Bolivia, and Venezuela.
We suspect that all these collective actions have mainly been efforts to deflect on political pressures on the administration (ZTE scandal), which has decided to turn the table against its opponents and use the present economic environment as staging point for a Public Relations (PR) Offensive.
Yes, we can also say that the administration through its subsidy programs has been attempting to buy its way to popularity or to win back favorable sentiment from the populace for allegedly “social” intents but apparently cloaked with undisclosed political reasons.
Nonetheless, the potential emerging risks arising from the actions of our public officials could also be construed as seemingly a prologue for a transitory government, from one of a political “democracy” to a prospective “statist autarky” from 2010 and beyond. I just hope the latter is just a figment of my imagination.
Post script:
A possible unintended consequence arising from the nationalistic hysteria will of course be investors withdrawing from financing of our new energy projects. This means that LIGHTS GO OUT IN THE FUTURE. (Environmentalist should love this!)
And possibly when brownouts worsen like in the Ramos Regime, we will be forced anew to embrace foreign capitalists at disadvantageous terms for us. (But advantageous for the dealmakers though! Could this be the reason behind the sudden reappearance of the virtues of patriotism?) Thus vicious cycle repeats all over again. Haven’t we learned from the past?
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