$100

The road to a post-COVID-19 global economy is not going to be easy.

This week, oil prices climbed up to over $83 per barrel. Some analysts are saying the price for the key commodity could touch $100, a level it reached once before.

Over the past weeks, oil prices climbed steadily, largely as an effect of the production caps put in by OPEC, the powerful cartel of petroleum exporting countries. Down the road, prices could be driven by sheer scarcity as demand for the product grows rapidly.

One side effect of the prolonged period when oil exporters were capping production is that very little investment has been put into new production capacity. It made little business sense to invest in new capacity if existing capacity is capped anyway.

Today, we have reached that dangerous point that no one bothered to think seriously about the past few years: global demand, notwithstanding concerns about carbon footprints and greenhouse gas emissions, has outstripped production capacity.

Even if all the caps were removed, global oil supply will still be short of demand. This will push prices higher – only this time no one is really in control of price movements.

It is not only oil that is spiking. Europe is facing a serious spiral in the price of natural gas just as the cold months are beginning. Much of the continent’s natural gas supply is piped in from Russia and Vladimir Putin recently reminded his European clients of their strategic dependence on his country. Should the whim strike this autocrat, he could choke the flow of gas to the West and profit from sky-high prices.

The US, for strategic purposes, long opposed the construction of a new gas pipeline from Russia to Western Europe. The Europeans desperately need that new pipeline capacity, especially as gas prices have now become unaffordable. The disagreement could drive a deep wedge in trans-Atlantic relations.

Analysts observed that the price of a basket of oil, coal and gas has increased by 95 percent since May this year. The price spikes show no signs of abating.

The UK has led the way in the global quest for green energy. But recently, the country found it necessary of turn their coal-fired power plants back on to meet domestic power demand.

Other large economies such as China and India are beginning to ration power through rotating brownouts. The power situation in many emerging economies is even direr.

When the pandemic struck last year, the entire global economy slowed down. Demand for oil plummeted, forcing prices to only half of what they are now.

As the pandemic shows signs of fading and countries are trying hard to restart their economies, demand for fossil fuels kicks up. Now spiking fuels costs are threatening to push up inflation rates even as economies are struggling to post marginal growth rates.

The fuel price outlook compounds other factors such as broken supply chains, labor shortages and congested ports in making economic growth more complicated.

Subsidies

Filipino consumers are beginning to feel the pinch. Pump prices for oil products rose continuously for seven weeks – in leaps and not just in small steps.

A few weeks ago, anticipating turbulence in global energy markets, our Department of Energy asked the local oil companies to build a buffer stock of the precious commodity. That is not easy to do, however.

For one, we have limited storage capacity. We do not have anything like the giant storage facilities the US has to keep its strategic oil reserves.

Much of our refining capacity has been shut down. It is cheaper to refine oil products in Singapore.

Many of our smaller oil companies do not have the operating capital to hoard oil in any significant quantity. They make their profits buying refined products and retailing them quickly.

In a word, there is little we can do to insulate ourselves from rising oil prices. Spiking oil prices will push up costs and drive up inflation. Disposable incomes will be redirected from food and other commodities to fuel. A higher oil bill will worsen our trade imbalance.

Already, jeepney drivers are demanding a 3-peso increase in the minimum fare. Either that, or they are demanding government pay outright subsidies for the fuel they consume as well as the suspension of excise taxes on oil products. Either way, this will entail revenue losses that government could ill-afford at this time.

We know from experience that a spike in oil prices has a nearly immediate domino effect on the prices of other commodities. Higher transport costs, for instance, will raise the price of food products. Eventually, this will translate into growing demand for higher wages. Higher wages, in turn, could force many of our small enterprises out of business.

Our economy is nearly entirely dependent on imported oil. This is our major vulnerability. In the present case, the spike in crude oil prices is magnified by the depreciation of the peso.

Our road to recovery just got a little bumpier. But our economic managers are confident we will meet our growth target this year even as some of the international banks have cut their predictions for our economy.

Our growth performance was downgraded because public health restrictions inhibited economic activity in the third quarter. To meet our growth targets, our economy needs to over-perform in the fourth quarter.

Economic recovery is not as easy as switching the light on in a room. The global effects of this pandemic mean we will probably be on recovery mode for years.