Shell departure to trigger hefty oil imports stoking inflation â Fitch unit
With the permanent shutdown of Pilipinas Shell's Batangas refinery, the Philippines now has one remaining refinery facility — Petron Corp.'s bigger 180,000-bpd Bataan plant which has remained temporarily closed since May 5 as the pandemic bites.
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Shell departure to trigger hefty oil imports stoking inflation — Fitch unit

Ian Nicolas Cigaral (Philstar.com) - October 22, 2020 - 12:52pm

MANILA, Philippines — Larger oil imports to compensate for supplies from the shuttered Shell Philippines’ Tabangao plant would leave the country vulnerable to global oil price swings and stoke inflation, a Fitch unit warned.

“As domestic fuel demand is expected to grow over the coming years, the Philippines will have little choice but to raise import volumes in response, barring an unlikely significant upsurge in refining output,” Fitch Solutions said in a commentary sent to reporters on Thursday.

“As past trend suggests, the inability to offset rising fuel import needs with its own production is likely to result in further added import costs down the line,” it added.

In 2019, energy data showed 65.5% of oil demand was met with shipments of finished petroleum products abroad, while the balance is produced out of the remaining two refineries from Shell and Petron Corp. that import crude abroad to mix them up here. 

With Petron left as sole refiner, Fitch said Philippines’ oil imports will inevitably rise as 32% of fuel production capacity had been lost. This, in turn, would increase the annual bill for oil shipments between $600,000 and $900,000 every year compared when Shell was producing.

As oil acts as raw material on anything from transport to food, Fitch pointed out that bigger reliance on oil imports means global oil cost increases would tend to influence consumer prices more. The problem worsens if one considers that domestic fuel demand is up for a sustained uptick as economic growth returns. 

“Risks related to import inflation or disinflation will become more elevated,” it said.

For now however, the Bangko Sentral ng Pilipinas (BSP) sees little risks of inflation moving beyond the 2-4% target for this year until 2022, owing partly to consumer demand battered by lockdowns and the pandemic. On its last policy meeting on Oct. 1, BSP even cited low oil prices as reason to keep interest rates low.

Consumer costs are also currently kept at bay by a strong peso, which has appreciated 4% against the dollar as of Wednesday from end last year. As of Thursday noon, the local unit is trading 48.591 to a dollar, slightly weaker than previous day’s close of 48.585.

That said, Fitch believes trouble looms ahead once the distraction from the health crisis fades. Apart from danger that inflation hovering at 2.5% as of September would accelerate, hefty dollar sources built mainly from rising remittances may get depleted once oil import rebounds.

“This creates several risks, including putting an extra burden on the Philippines’ foreign exchange reserves or the ability to attract investors inflows— a highly negative prospect as the country is still deficient in many key infrastructures in and outside oil and gas,” Fitch's research unit said.

With larger imports come also a weakened peso, which in turn would likely force the BSP to roll back some of its easy-money policy launched this year.

“The Philippines does have reserves buffer…and an inflow of remittances to offset higher import costs in the near term,” it said.

“Although as import volumes grow, the risks policymakers need to manage will inevitably grow, potentially resulting in tighter monetary policy over the longer term,” it added.

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