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Business

Jittery oil

BIZLINKS - Rey Gamboa - The Philippine Star

A barrel of oil at $200 by the end of the year? Before you say, “Manahimik ka, Marites,” let me clarify that this was a projection by oil traders last March based on a reading that Europe will permanently shun Russian oil and gas whatever the consequences.

As things are shaping up now, many countries in the European Union (EU) have seriously put on the table an exit plan on its use of Russian oil and gas, the latter by at least two-thirds by the end this year. Earlier, the US had already announced a total ban on importation, while the United Kingdom opted for a phase out.

Russia’s military actions in Ukraine in early February had exposed the ugly consequences of the EU being 45 percent dependent on Russian fossil fuels. Just recently, Russia lashed back at the EU for its sanctions by cutting off gas supplies to Poland and Bulgaria when both refused to pay in rubles.

Europe is also about 25 percent dependent on Russian oil, which would realistically be easier to replace with crudes from other parts of the world, although at a higher cost. Still, it jives with the overall plan to do away with any Russian fuel exports, including coal.

World economists are looking at an optimistic 18-month structural reorientation period for the West and the rest of the world to adjust to new sources of fuels as the ban on Russian fuels take full effect. It will be a painful time, especially for Europe, and will need a fair amount of intervention, including possibly rationing. The toll on economies will be significant.

Russia will have to find a market for the fuel that Europe and the US will not buy. If there are limited takers, crude oil prices will certainly shoot up the roof this year before getting back to a more normal keeling.

At present, Russian oil is reportedly selling at a $35 discount per barrel, but many countries are wary of being caught in the sanctions crossfire. If – and that’s a big if – Russia is able to dispose all of the boycotted fuels at its bargain prices, then world crude oil prices could take a big drop, some say to even $65 a barrel.

Inflation creeping up

This big reshaping of the global oil and gas supply and demand structure, of course, has not spared developing countries like the Philippines, which is largely dependent on imported fuels. We are in for a bumpy ride in the next six months managing higher food prices and runaway petroleum prices.

Already, diesel at the service station pumps is almost double what it was in 2021, affecting industries and sectors that are heavy users. It has been a seesaw movement in prices for a few weeks now, after having risen for a record 12 straight weeks.

While those affected are on a wait-and-see mode, a further prolonged high fuel price situation may soon become an untenable situation, and prices of basic commodities will have to drastically go up. This would include rice, meats, fish, and vegetables.

Already, inflation in April is expected to be higher than the four percent reported in March, although still within the revised 4.2 to five percent goal of the central bank for the rest of the year. The earlier estimate was within the two to four percent target range.

The government is doing all it can to keep inflation from breaching the five percent mark. Proposed measures include ways to bring down the cost of imported coal, as well as subsidies for selected users of diesel for transportation.

The extension of lower tariffs on imported pork and chicken are also being readied, including the lowering of tariffs on imported corn. The latter is expected to help bring down the cost of local livestock and poultry production, corn being a major component of feeds.

Still, with crude oil prices flirting the $120 mark for a barrel, the possibility of inflation rising to over five percent in the second quarter is becoming more apparent.

Knock-on effects

The World Bank last week issued its commodities outlook, noting that the hike in energy prices over the last two years has been the largest since the 1973 oil crisis. Food prices and fertilizers have also increased at levels last seen in 2008.

As a result, non-energy prices, including agricultural produce and metals, will rise by as much as 20 percent this year. This price shock will create a domino effect on pretty much everything, and will cause “a significant human and economic toll,” according to the World Bank.

Knock-on effects resulting from the escalation of commodity prices include diminished food production, mainly because of high fertilizer prices. We will likely see more people living in poverty, with reduced incomes because of lower yields.

Recovery will also take longer. Almost all commodities have not escaped price increases, and each feed on each other to create bigger rippling effects. The World Bank noted that policy responses such as tax cuts and subsidies provide only temporary relief that exacerbate supply shortfalls and price pressures.

Inflation will likely remain elevated for a longer period as the disrupted supply chains try to find the best way to return to normal operations.

Another immediate effect of this commodity upheaval is the delay in the transition to green energies, mainly because of higher metal prices like aluminum and battery-grade nickel.

The World Bank urges policymakers to study targeted safety-net programs such as cash transfers, school feeding programs, and public work programs.

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Should you wish to share any insights, write me at Link Edge, 25th Floor, 139 Corporate Center, Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at [email protected]. For a compilation of previous articles, visit www.BizlinksPhilippines.net.

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