FIRST PERSON - Alex Magno (The Philippine Star) - September 17, 2019 - 12:00am

Until last Friday, oil prices were pleasantly wafting downwards, seemingly destined to remain below the $60 per barrel level. The OPEC was planning a meeting to enforce further supply cuts to nudge the price a little higher.

Today, oil prices spiked about 18% in early trading. Some analysts are telling us that, in the event Saudi Arabia is unable to promptly fix its damaged oil facilities, oil prices could rise to as much as $100 per barrel.

Last Saturday, armed drones or guided missiles struck two of Saudi Arabia’s most important oil facilities, setting them ablaze. The Algaic facility supplies 7% of world supply. The Khurais oil field accounts for 1%.

Taken together, the two damaged facilities knocked off half of Saudi Arabia’s oil production. A total of 5.7 million barrels per day cannot be produced until the two facilities are restored to normal operations.

It is not clear where the attacks came from. The Houthi rebel group in Yemen, that had mounted smaller scale attacks before, claims responsibility. The group claims the attacks were mounted using 10 armed drones.

Saudi and US officials, however, say no incoming drones were monitored coming from Yemen. It is possible the stacks were launched either in Southern Iraq or Iran.

Southern Iraq is populated by Shiite Muslims and heavily under the influence of Iran. Iran supports the Houthi rebels in Yemen with funds and military material. Saudi Arabia and Iran had had a deeply antagonistic relationship, each side aspiring to dominance in the most explosive region in the world.

At this point, responsibility for the attacks is a secondary matter. The more important concern is how to restore global oil supply and prevent shortages compounded by price speculation. Oil shortages will almost certainly push the global economy over the brink and into the chasm of recession.

Even before the attacks, about 2 million barrels per day were taken out of global supply because of economic sanctions enforced on Venezuela and Iran. The rapid escalation of the civil war in Libya could add to that supply loss.

What the attacks tell us is that the world’s oil supply is as vulnerable as it is vital. The entire supply network – from the massive oil facilities, the bulky stockpiles that countries maintain, the shipping routes such as those going through the Strait of Hormuz – is vulnerable to attacks similar to what we saw last Saturday.

What happened last Saturday was more than attack on Saudi Arabia’s oil exporting capacity. It is an attack on the world’s oil supply as well.

We have always taken oil, at whatever price, to be a certain resource. The industry’s vulnerability to the vagaries of geopolitics, however, now makes that an uncertain resource.


Economies such as the Philippines that are almost entirely dependent on oil imports bear the brunt of the repercussions of Saturday’s attacks.

All the economies of East and Southeast Asia, the most important driver of the global economy today, rely on imported oil. Of all the countries in this arc of growth, only China maintains strategic reserve stockpiles. It is too costly for other countries to maintain the same. The only other country in the world with substantial strategic reserves is the US.

An oil price shock of the scale we are now warned of could push the Eurozone into recession sooner than anyone expected. The immediate market reaction to the attacks is a collapse in stock prices and a revision of growth forecasts.

The Philippines has just brought down its inflation rate to under 2%. Our economic managers are maintaining a 6% GDP growth for the year as a “fighting target.” Our stock market was just on the verge of returning to the 8,000-point level.

Now an oil price shock happens. We are not sure if oil prices will indeed hit the $100 per barrel mark. But certainly, they are bound to be substantially higher the next few months.

With the oil price shock, we will have to recalculate everything.

With the low inflation rate until last Friday, our monetary authorities had ample headroom to cut policy rates and reserve requirements further to boost economic activity. Now we have to recalculate how much headroom we actually have. Higher oil prices could push us back to the regime of elevated inflation we endured last year.

Our stock market may not break beyond the 8,000-point level in the foreseeable future. Hot money is leaving the market, spurred by a flight-to-quality in uncertain times. This will cut into the volume of investments made. In turn, this will blunt efforts to bring down unemployment to historic lows.

Horror of horrors, we might not make 6% in GDP growth by yearend – although we might perform better than either China or Vietnam. We are swimming against the tide of a global downturn.

We do not yet know how high oil prices will spike or how long a regime of elevated oil prices will stay. But we must prepare to dig some economic trenches.

Fortunately, we have passed such landmark legislation as the Rice Tarrification Act that brings down consumer rice prices. That should soften any inflationary surge caused by a spike in oil prices.

Fortunately, we passed some of the tax reform packages that provide government a robust and recurrent revenue flow. That will help maintain fiscal stability in these uncertain times.

Fortunately, we have a fulsome spending plan, centered on infrastructure modernization, to keep domestic demand going amidst a global slowdown. That will help us avoid a global recession should that happen.

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