Oil price hysteresis and volatility in the Philippines

High oil prices: looking for solutionsA people's-legislators forum

Minority Conference RoomHouse of Representatives

Aimee RarugalRanzivelle Roxas-Villanueva, PhDGiovanni Tapang, PhD

Outline

● Motivation● Tools● Results

– Profiteering

– More frequent increases

● Alternatives

Motivation

● Effect of oil price volatility to the general public● Analyze monthly time series data of oil prices

– Relationship between benchmark prices and pump prices

– “Which data leads what”

● Investigate effects of deregulation despite lack of transparency in data

Time series data

4

• Forex data from the Bangko Sentral ng Pilipinas monthly averages• Dubai crude prices from the International Monetary Fund (IMF) commodity prices • Gasoline and diesel prices from the IBON Foundation monitoring data (www.ibon.org)

Mutual Information

Dubai price has greater effect on gasoline price than on diesel price.

Diesel is a politically controlled commodity (transport prices as well as electricity prices are very sensitive to the price of diesel)

Dubai

Dubai

Diesel Gas Forex

Diesel

Gas

Forex

Shows dependence between data sets

,,

( , )( , ) ( , ) log

( ) ( )X Y i i

X Y i iX i Y i

p x yI X Y p x y

p x p y

= Σ ÷

Transfer Entropy

Foreign exchange rates has great effect on Dubai and gas prices

This is due to large import component of oil in the country

Dubai

Dubai

Diesel Gas Forex

Diesel

Gas

Forex

Shows which data sets directly affects others

11 2

1

( , )( , , ) log

( )k k k

Y X k k kk k k

p x x yT p x x y

p x x+

→ ++

= ∑

Correlation plots

Common response of crude/diesel/gasoline prices implies that the foreign exchange affects the three other time series similarly. Plots of Dubai vs. Diesel and Dubai vs. Gasoline show linear trend up until the latter third of the data set. In the last third part of the time series, the path that the prices take is reminiscent of hysteresis (different rates of increase and decrease of pump prices relative to Dubai crude).

Dubai-Gasoline

Diesel vs. Dubai prices ('95 to present)Pre-deregulation Deregulation (1999-present)

1995-present

Price decreases (if any) did not follow path of price increases. Hysteretic behavior points to profiteering.

Gasoline vs. Dubai prices ('95 to present)

Pre-deregulationDeregulation (1999-present)

1995-present

Price decreases (if any) did not follow path of price increases. Hysteretic behavior points to profiteering.

Price changes per month

Change per monthDubai

Change per monthDiesel

Change per monthGasoline

Jan 99- Feb06 0.2 0.28 0.29

Mar 06 – Jan 08 0.16 0.26 0.28

Feb 08 – Jun 08 2.44 2.92 2.6

Jul 08 – Jul 09 -1.22 -1.22 -1.07

Average unit increase in the price of pump prices per unit increase in Dubai in the forward part of the time series is more than the average unit decrease ratio in the reverse part

0 0.02 0.04 0.06 0.08 0.1 0.12 0.140

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08

dubai post

diesel post

gasoline post

dubai pre

diesel pre

gasoline pre

deregulated

pre-deregulation

Fourier analysis: More frequent increases after deregulation (more than 2x)

● Shows how often fluctuations occur

Conclusions

● Noticeable price hysteresis in the prices of Dubai crude and diesel and gasoline as shown in the correlation plots: investigate profiteering and prevent reoccurence (regulate prices)

● Dubai prices have a greater effect on gasoline prices than on diesel: (control importation and pricing, find alternatives/local sources)

● Foreign exchange rates affect the three price rates as shown by its large transfer entropy: (importation)

Oil production and consumption (2006) in bbl/dayconsumption: 349,000 bbl/d, Production: 25,000 bbl/d, Imports: 324,000 bbl/d

Natgas production and consumption (2004)

2.8-3.9 trillion cubic feet (Tcf) potential reserves

Consumption: 102 billion cubic feet (8% total energy production)

The Malampaya ProjectShell as operator (45%), Chevron (45%), PNOC (10%), October 2001

3.9 trillion cu. ft. (Tcf) of proven reserves

– Consumption: 310,000 bbl/day (2010)

– 1 bbl oil equivalent = 5658.5 cu. ft. natural gas

● Can sustain up to 5-10 years at current usage without imports

Oil price hysteresis and volatility in the Philippines

High oil prices: looking for solutionsA people's-legislators forum

Minority Conference RoomHouse of Representatives

Aimee RarugalRanzivelle Roxas-Villanueva, PhDGiovanni Tapang, PhD

Tools: Mutual information

● measures nonlinear correlations between data streams● measure of the amount of information about X given a

measurement of Y and vice versa

● pXY(x,y) - joint probability distribution of X and Y● pX(x) and pY(y) - respective marginal probabilities

Shows dependence between data sets

,,

( , )( , ) ( , ) log

( ) ( )X Y i i

X Y i iX i Y i

p x yI X Y p x y

p x p y

= Σ ÷

Tools: Transfer entropy

● measures the amount of information transferred between them

● measure of the influence of the sequence Y on the evolution of X.

● p(x|y) are conditional probabilities

11 2

1

( , )( , , ) log

( )k k k

Y X k k kk k k

p x x yT p x x y

p x x+

→ ++

= ∑

Shows which data sets directly affects others