Peaked

We can heave a sigh of relief. The worst scenarios are not playing out.

Today, the pump prices for gasoline will spike by P2.35 per liter. This reflects the spike in the global market for oil caused by the drone attacks on two major Saudi oil facilities.  The attacks took out half of Saudi Arabia’s oil output and 5.7% of world supply.

Oil prices did spike the day after the attacks as industry experts forecasted, prices climbing to as high a $100 per barrel. A few days after, oil prices began to soften, settling at around $65 per barrel for the benchmark Brent crude.

A few things explain the softening. The US ordered a drawdown from its strategic oil reserves. Saudi Arabia announced it could repair the damage and return to normal oil production in as little as two weeks. American air defense systems were rushed to protect Saudi oil facilities.

Those initiatives helped calm the international market. As the week progressed, there was less and less appetite to speculate on oil futures.

It could be that oil prices have peaked – until the next crisis.

Should Saudi Arabia deliver on its promise to return to normal production in two weeks, we might see a return of oil prices to $60 per barrel. That seems to be the price level comfortable for everybody.

When oil prices drop too deep below that level, OPEC will probably call for another round of supply cuts. If it rises to high above that level, the dynamics of a weak global economy will probably force a decline in demand.

Had oil prices rose to the levels industry experts feared in their earlier forecasts, this would have pushed the industrial economies closer to recession. A deep recession will hurt the oil producers as much as it will hurt those in the recession-prone economies. Lower demand is a symptom of slowing economic activity that translates into higher unemployment and wider poverty.

What we are seeing is the happiest possible outcome. This does not mean, however, the crisis will not recur.

Regional tensions

Oil supply and pricing remain tenuous. Supplies from Venezuela, Iran and Libya are trapped either by economic sanctions imposed by the western powers or by internal conflict.

When Donald Trump assumed the presidency, he pursued a policy toward Iran that can only be described as narcissistic, unilateralist, unwise and dangerous. He unilaterally withdrew from a nuclear arms agreement concluded with other global powers. America’s European allies are disgusted with Trump for doing this. They are not about to support America’s efforts to assert its power over an unstable region.

Trump thought that if he bamboozled Iran, the regional power would simply kneel and submit. Instead, Iran increased its support for Houthi rebels creating trouble for Saudi Arabia and tried several times to constrict the Strait of Hormuz through which a fifth of the world’s oil supply passes.

The more the US increased pressure on her, the more Iran pushed back. Tehran clearly intends to make tensions in the Gulf as painful for everybody else.

Long subjected to American trade sanctions, there’s now little more the Iranians could lose. But if escalating tensions cause everybody else more pain, there will be greater likelihood the situation could move away from the present policy configuration.

The Saudis now know how painful the situation could get. They spent billions intervening in the civil war in Yemen and appear to be losing the fight. They spent billions more building an air defense system and then watched helplessly as armed drones slipped through those defenses and bombed their most prized oil refineries.

The US spent hundreds of billions intervening in Iraq only to see the Shiite majority in that Arab nation tilt the country toward Iran. The Sunni minority in Iraq, for their part, was drawn to the ISIS that wreaked havoc in both Iraq and Syria that will take generations to repair. Having spent a fortune fighting the ISIS in Syria, Washington needs to reconcile with the fact that the Assad regime, representing the minority Shiite population in the country, has become well entrenched with the support of Moscow.

The day after the attacks on Saudi oil facilities, Donald Trump sophomorically declared the US was “locked and loaded” to get to the perpetrators. He then realized the US had no winning hand in the region and no military intervention against Iran will be winnable. Eventually, the US, despite strong evidence Tehran was behind the attacks, settled on merely sending air defense batteries to Saudi Arabia.

The US was unmasked as a paper tiger – which was probably the goal of the bold bombing run mounted against major Saudi refineries.

Reserves

Tense as the situation in the world’s main oil producing region might be, there is little a small, oil-importing country like the Philippines could do.

In the excited hours after the attack on the Saudi oil refineries, realizing how vulnerable we are to oil supply disruptions, our own DOE announced plans to build an oil stockpile.

A lot of rethinking apparently happened after that announcement was made. Building a strategic oil stockpile will take years and involve public investments in the tens of billions. We will have to construct large oil storages and fill them with crude purchased while oil prices are high. It will take billions more to secure these storage facilities that are natural magnets for terrorists.

The best we can do at the moment is to sit back, accept the volatility, minimize disruptions and avoid sketchy pronouncements.