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Opinion

Temporary

FIRST PERSON - Alex Magno - The Philippine Star

Gasoline prices in the US are running above $5 a gallon. For the Biden administration, that is intolerable.

Earlier this week, Biden announced the release of 50 million barrels from the US Strategic Petroleum Reserve (SPR). The idea here is to flood the market with supply in order to bring down prices. The high prices are cutting into Biden’s job approval ratings.

The announcement was not met with universal celebration by the market. If the solution to a complex problem appears too simple, it probably would not work.

First, current US oil consumption is running at about 20 million barrels a day. The temporary boost in supply will not last very long.

Second, the release from the SPR will not reflect in pump prices until about mid-December. This means the cost-push to inflation will continue.

Third, the US failed to convince other nations to release from their own reserves for concerted effect. This means there will continue to be high oil prices elsewhere, influencing global inflation.

Fourth, the best of US diplomacy has been insufficient to convince the OPEC cartel to ramp up production. The oil exporting countries are quite comfortable with the prevailing price regime and would rather keep their supply safely under ground. Fossil fuel, after all, is not an infinite resource.

Fifth, a large number of US oil wells are inactive. The US Department of Energy says there are now 250 fewer rigs operating than the same time last year when the pandemic brought down demand. The US government issued 9,500 permits that are not being used.

This means US oil companies are comfortable making enough profits from the current oil price regime without pumping more. Like OPEC, they too understand supply is not infinite. Washington seems helpless forcing American oil companies to ramp up production.

Sixth, at some point the US will have to replenish its strategic reserves. When it does, prices will spike once more.

The only way to nudge up production levels is to remove trade sanctions on Iran, Venezuela and Libya. But this would upset US global strategy.

Biden may try and kneel before Putin to beg for Russia to increase its production. This is unlikely to succeed. Russia, like the OPEC countries and American oil companies, would rather keep their reserves under ground and gain the same volume of profit from selling less but more expensive oil.

What an irony that only weeks before, during COP26, everyone was busy finding ways to reduce greenhouse gas emissions to mitigate global warming. Now everyone is busy finding ways to make oil prices bend to our convenience, retaining a low price regime to encourage prevailing patterns of consumption.

Pricing is the best way to mitigate the burning of fossil fuels. This is why many countries are now considering imposing carbon taxes. The intent is to make prices so penal as to discourage use of fossil fuels. The real price of oil, after all, should include compensating for the damage its use inflicts on people and the environment.

Over the longer run, high oil prices will help push the transition to cleaner technologies. No one said that transition would be painless.

Short-termism

Joe Biden does not have a monopoly of policy-solutions of doubtful efficacy and only short-term sustainability.

In our small corner of the world, politicians seeking to score brownie points with the least informed voters propose suspending excise taxes on petroleum products. Perhaps they should also propose suspending what economists call the “externalities” of oil use, the damage such use imposes on public health and the environment.

Suspending excise taxes on oil will blow a P141-billion hole in our fiscal structure. That should be enough to sink it, forcing a downgrade in our credit rating, a shortage of resources to keep up the fight against the pandemic and the closure of whatever window there is for a strong economic recovery.

A strong fiscal position was one of very few advantages we had when the pandemic struck. At the end of 2019, prudent fiscal management brought us to the highest credit risks the Republic ever had. We had over $100 billion in gross international reserves. We had kept deficits close to the 3 percent of GDP range. We had brought down our debt-to-GDP ratio to a historic low of 39.6 percent.

After the pandemic struck, we had enough headroom to borrow at reasonable rates to support the national budget, fund economic stimulus and grow our public health system. Even while scientists were still working on a vaccine to fight COVID-19, we brokered an unprecedented collaboration between the WB, the ADB and the AIIB to fund vaccine procurement.

Through all the slips and lapses in government’s pandemic response in the early months, we were able to put together a workable strategy to save lives, prevent a collapse of our health system and lay the groundwork for economic recovery. Today, we have enough vaccine supplies to inoculate every Filipino. In the third quarter, our economy posted a 7.1 percent growth rate, exceeding market expectation. We will hit at least the high end of our growth target this year.

Much hay has been made about our ranking in COVID-19 responses. But many of those countries that relaxed restrictions too early are now suffering from a fourth wave of infections. We are, by contrast, experiencing dramatically declining infection rates as we prepare to launch the most massive vaccination program at month’s end.

The ship of fiscal responsibility that brought us here is the same ship populist politicians want to torpedo – all for short-term partisan points.

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