The best news about the so-called global recession is that prices of major commodities have declined dramatically in recent months.
Rice has dropped to about $735 per ton in price from the record $1,038 per ton for the Thai 100 percent grade B set on May 21, 2008.
This week, oil crashed to below $70 per barrel at $69.85, the lowest in 14 months. In just three weeks, oil has tumbled by $40 a barrel. Demand for energy will decline with the slowdown in economic production because of the so-called global recession. There is no recession actually. Global growth in 2009 will be 3.0 percent.
On July 17, oil hit a high of $147. Yet, the 52 percent drop has not been reflected by the local petroleum companies.
After hitting a high of P60 per liter, Manila gasoline should be priced around P30 per liter today. Assuming the peso has devalued against the dollar by 20 percent, the current price should be no more than P36 per liter. So if gasoline is priced at P48 per liter when it should be selling only at P36 per liter, the oil companies are making excessive profits of about 25 percent. What is the government doing about this obvious price gouging? Nothing.
In America, retailers have reflected the 25 percent price drop. Gasoline is now about $3.08 per gallon (3.8 liters in one gallon), down from $4.11 per gallon from last summer (July and August).
The cut in oil prices should also result in lower electricity bills, not higher. The Malampaya gas pricing is pegged to crude prices, as are coal used by local power plants operated by foreigners.
When oil exceeded $100 per barrel, energy began to cost more as a component cost of production than labor. Energy has eaten up about 15 percent to 20 percent of the cost of producing goods. For households, fuel, light and water (lumped as utilities) were burning up to 20 percent of total household bills, up from the eight percent average.
The sharp price cuts for rice and oil mean a dramatic fall in the inflation rate after hitting a 16-year record-high of 12.5 percent on August 2008. More than half of the consumer basket, measured by the consumer price index, is food (mainly rice) while another seven percent is utilities. The price declines for food and utilities should lop off at least 2.3 percentage points from the inflation rate in the coming months, bringing the rate down to 10 percent, if not lower.
Meanwhile, world prices for steel billets are down 70 percent since May. Major steel producers like ArcelorMittal of India, Severstal of Russia and Boasteel of China are cutting back production by 10 percent to 20 percent beginning in the third quarter. Prices of iron ore, copper, and nickel have nosedived 50 percent and aluminum by 30 percent.
What these price cuts, dictated by the law of supply and demand, mean in the short and long run, are much, much lower prices of goods—of cars, appliances, furniture and construction materials. This Christmas season, then, when shopping for your long dreamt of plasma or LCD TV sets and DVD player, ask for a discount. Very likely, you will get it.
With prices of most goods down in the coming months, expect a robust Christmas shopping season, perhaps the best in many years.
Philamlife President Joey Cuisia called me up the other day to protest what I wrote in my previous column, claiming that Philamlife is, for all practical purposes, bankrupt. He said Philamlife is not bankrupt and that it is an institution in the Philippines. Philamlife is being sold by its mother company, the giant New York-based insurer AIG.
I made the bankruptcy remark based on what has happened to Philamlife’s mother company, AIG which went bankrupt on September 15 just before the Federal Reserve took it over with an $85 billion bailout money, plus another $37.8 billion later. AIG has already used up $82.9 billion of the $122.8 billion bailout money.
In New York, AIG share prices have hit a low of $1.25 a share, 98 percent down from the 52-week high of $66.64. AIG’s market cap based on its Oct. 16 closing price of $2.43 per share, is $6.53 billion. At its low $1.25 a share price, AIG was worth only $3.17 billion. Philamlife, reports say, is claiming it is worth $2 billion. If this is true, you are better off buying the mother company, AIG. You get the mother and you get the subsidiary, Philamlife.
Bloomberg quotes analysts expressing doubt that AIG CEO Edward Liddy can garner enough from selling units to repay the government loan.
