FIRST PERSON - Alex Magno (The Philippine Star) - June 18, 2019 - 12:00am

Pump prices are due to marginally increase today. This does indicate the start of a trend, however.

The uptick in oil prices reflects the brief crude price rally late last week because of an apparent attack on two tankers at the Gulf of Oman. No one has claimed responsibility for the attacks.

Notwithstanding the rising tensions at the Strait of Hormuz and the Gulf of Oman, analysts are forecasting international prices for crude oil will remain soft into the foreseeable future. This despite the threats to supplies posed by the worsening civil war in Libya and the effects of US-led economic sanctions on Iran and Venezuela.

The softening of prices is due mainly to the projected slowdown in the growth of the global economy exacerbated by the tariff war between the US and China. The Chinese economy, the main driver of global growth, is expected to decelerate this year and the next.

The slowdown in China’s pace of growth will likely reflect in the weaker growth of the mature economies of East Asia and the emerging economies of East Asia. Together, these economies account for a major share of global growth.

In the US, growth is expected to moderate in the next few quarters after the initial exuberance brought about by Trump’s cut on corporate taxes. The effects of Trump’s wild tariff threats on Mexico and Canada will likely discourage business expansion. China’s retaliatory tariffs on US agricultural exports will hurt American farmers even as the Trump administration has prepared billions of dollars in subsidies to offset their losses.

The UK will likely leave the European Union without a deal. This could translate into a recession shortly. The messy Brexit debate brought British politics to the point of crisis. More important, it has made the future of the British economy truly uncertain.

The Eurozone will probably remain stable. But with its mature economies and aging populations, this important economic zone cannot become the engine of growth for the rest of the world.  

Prolonged stagnation probably best describes prospects for the economies of South America. The major economies in this region are all uniformly facing financial stresses. No major infrastructure is being undertaken.

Better growth performance is expected of the economies of Africa. But these economies are beginning from a low base.

China is most invested in Africa’s economic future. It will reap the most benefits of any growth in this continent. But the gestation period will be long.

Meanwhile, US strategic oil reserves are ample. US oil producers have begun exporting to the rest of the world, undercutting supply constraints enforced by the OPEC countries to support crude oil prices.

Only two events could reverse the larger trend toward softer crude oil prices. First, the OPEC must schedule an emergency meeting and agree to deeper supply cuts. Second, open hostilities between the US and Iran at the Persian Gulf.

No OPEC emergency meeting has been scheduled. Major oil exporters, all wanting more revenues at this time, are unlikely to agree to dramatic production cutbacks. Also, a major increase in crude oil prices at this time will probably push many parts of the global economy toward recession.

Despite the attacks on commercial shipping in the Persian Gulf, through which passes a third of seaborne oil supplies, it is unlikely that the US and Iran will end up in war. Both nations can only lose in such an outcome.

Both Saudi Arabia and Israel would prefer to see Iran’s military capacity degraded by major hostilities. Both are most threatened by Iran’s missile build-up. But Russia and China back Tehran. An outbreak of hostilities in the Gulf will have complex global consequences that no single power might fully control.

Donald Trump, although he might be strangely enamored by the leaders of Saudi Arabia, is deathly afraid of war with Iran. This runs against the grain of his isolationist instincts.

Beyond that, it is unlikely that the US could assemble a coalition to war against Iran.  America’s European allies disagreed sharply with Trump’s unilateral decision to withdraw from the international agreement governing Iran’s use of nuclear resources. They disagreed with the stiffer sanctions Trump imposed on the Islamic country. They are not likely to turn abruptly around and march with the US.

Some analysts in fact theorize that the more radical elements in Iran’s leadership are emboldened by the thought that, in the end, Trump is so afraid of war that he will yield concessions to the Islamic Republic when things appear to be moving closer to the brink.

The larger trend toward softer oil prices will immensely benefit the economies of East and Southeast Asia. These dynamic economies are almost entirely dependent on oil imported to the region through the Straits of Hormuz.

Softer oil prices will enhance this region’s capacity for growth. By providing the growth engines so necessary for global economic expansion, high growth in East and Southeast Asia will ultimately benefit the rest of the world.

Being nearly totally dependent on imported oil, the Philippine economy is both most vulnerable to the escalation of tensions at the Gulf and best advantaged by the softening of oil prices. Imported oil is a major factor in our inflation picture. Lower oil prices will help greatly in pushing down the inflation rate. In turn, this will create more headroom for pro-growth policy measures.

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