Oil shock

As if the pandemic were not enough, now comes higher crude oil prices. It’s bad news that deserves some really serious thinking because the situation is unlike previous years when oil prices would seesaw on discord among major oil producing countries, mainly members of the Organization of Petroleum Exporting Countries and its allies, known as OPEC+ – led by Saudi Arabia and Russia.

Currently, crude prices have breached the $80 per barrel mark and will not likely dip lower, as OPEC+ seems bent on keeping their taps opened at 400,000 barrels per day, even as economists are saying that the faster-than-expected world economy’s recovery will need 450,000 barrels per day through the rest of the year.

The talk is that crude will likely reach $100 per barrel if OPEC+ sticks to 400,000 bpd, even as the US and India plead for increased outputs, especially with winter in the northern hemisphere coming up. Whether OPEC+ will allow oil to breach the $100 per barrel mark will only be determined by considering that an oil shock too severe for the world could backfire on its long-term plans.

The world economy is undergoing a maelstrom, coping with a series of events that started with the huge stimulus packages unleashed by governments during the pandemic, and derailed global commodity supply chains.

Inflation watch

If OPEC+ keeps to its plan to unleash only moderate increases in crude oil despite a higher world demand, the world’s leaders and their central banks, including ours, need to come up with counter plans.

The Philippines has some worrying indicators to reckon with. For months now, inflation has been above the forecasts of between two to four percent, mainly because of food supply issues. We’re now importing pork, more chicken, and fish to balance out demand that local supply is unable to meet.

However, official statistical data on inflation for housing, water, electricity, gas, and other fuels is on the uptrend too, now at its highest since February 2019, affecting all income households.

The recent higher cost of electricity, liquefied petroleum gas, and kerosene have been decisive factors in keeping inflation elevated, and while overall inflation data as of end September was slightly lower at 4.8 percent compared to August’s 32-month high of 4.9 percent, the recent uptick in crude prices will add immense upward pressure.

Using tariffs and MAVs

For now, the government is leveraging on calibrated tariffs and minimum access volumes (MAVs) to keep food prices at manageable levels. In answer to the African swine fever (ASF), for example, an executive order allowed a combination of lower tariffs and increased MAV to fill the gap in local pork supply.

Similarly, with fish supply expected to tighten as the fishing season closes, a Certificate of Necessity to Import with a maximum import volume of 60,000 metric tons for small pelagic fish such as galunggong, mackerel, and bonito, has been approved.

Together with previous tariff and MAV changes in rice and chicken imports, the government has been able to manage inflation levels. These interventions, however, are not expected to hold when the impact of higher crude prices is felt.

Bear in mind that the government-mandated minimum inventory stock levels are at a low 15 days for petroleum products – except for LPG, which is even at a lower seven days. Besides, the country is now even more dependent on petroleum products, as only one refinery, Petron Corp.’s, is in operation.

Shifting energy landscape

The current oil shock that the world is confronting brings back memories of the 1970s when OPEC, led by Saudi Arabia, imposed an oil embargo on countries that supported Israel in the Yom Kippur War. While the price of oil rose to $12 per barrel, it was a 300 percent change from the original $3 that the world had become used to, causing a global economic upheaval.

These days, the avowed shift by more countries in the developed world, the latest from China, to move to cleaner fuels away from oil and coal, will likely keep the resolve of OPEC+ to maintain tighter control of its crude output.

Seeing the end of an era of fossil fuel dependence is enough to convince oil producers to take a more prudent stock of their position, and to extract the most money from the oil that they have at their disposal while they can.

The energy landscape is shifting, and while it may still take decades before non-renewable energy sources take a backseat in fueling the world’s economy, the disasters attributed to climate change and carbon emissions is forcing countries to support change.

We’re seeing the withdrawal symptoms from a dependence on fossil fuels that has been with the world since the mid-1800s, and the transitional birth pains of an era that is shifting to renewable energy sources that will provide tomorrow’s fuel for transportation and other needs.

Today, even without a full return yet to pre-pandemic economic activity levels, harsher winters are depleting heating oil inventories faster for many European countries, and causing major disruptions in fossil fuel supplies. For many, a deliberate reduction of coal use is compounded by lower energy availability from wind and solar farms.

What we are now seeing in Europe is a preview of how volatile the energy sector will be as the world tries to balance its aspired environmental objectives with economic growth. No one will be spared as the world enters a rocky few decades. Even our economic planners may likely be helpless in cushioning the nation from these harsh realities.

Who could have imagined the 21st century to be so disruptive?

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