Suspended

After nine weeks of sustained oil price increases, consumers were treated to a refreshing rollback yesterday. This might not signal a shift in the trend, however.

The rollback reflects the small retreat in global crude oil prices brought about by a report that strategic oil reserves held by countries, principally by the US, are filled up. That means a slight diminution in probable demand in the near term. That is the good news.

The bad news is that there will continue to be demand pressure on total oil production maintained by the exporting countries. Some analysts are predicting a continued rise to about $100 per barrel.

US economic sanctions on Iran further limit supply in the market. This is compounded by the unreliability of deliveries from Libya, a country beset by violent rivalries between heavily armed militia factions. Deliveries from Venezuela, which hold one of the largest oil deposits in the world, could not be increased because of the obsolescence of her drilling technology.

Donald Trump, in his usual unorthodox fashion, has been pressuring Saudi Arabia to increase its oil deliveries. Even if the Saudis succumb to the political pressure from Washington, it appears they do not have enough facilities to export much more oil.

At the moment, Saudi Arabia’s government is in the midst of a controversy surrounding the disappearance of high-profile dissident journalist Jamal Khashoggi. The journalist entered the Saudi consulate in Istanbul to arrange his divorce papers. He never reemerged. The Turkish government claims it has audio and video evidence the dissident was murdered at the consulate.

This outrageous incident is stirring up global opinion against the Saudi government. Several major investment negotiations have been put on hold. A high-level international meeting in Riyadh will likely be boycotted. The UN will likely look at the evidence Turkey has and could call for sanctions against Saudi Arabia.

Trump, in his usual amoral way, tried hedging on condemning the Saudi leadership. He had, after all, negotiated billions of dollars in weapons sales to Riyadh. But a strong, and angry, bipartisan consensus has formed in Washington. Over the last few days, Trump himself began speaking of “punishing” the Saudis for the grisly murder in Istanbul.

For many years, the rest of the world tolerated Saudi Arabia’s repressive state apparatus because of the kingdom’s clout over oil supplies and prices. But the murder of Khashoggi right at the Saudi consulate in Istanbul crosses a red line. This could be the last straw. Moral outrage is building. More countries could decide to damn oil supplies and penalize the barbaric Saudi regime.

Iran is most pleased with the predicament Riyadh finds itself in. The country is Saudi Arabia’s bitter rival for dominance in the region. If sanctions are imposed on Saudi Arabia for its murderous behavior, the economic blockade on Iran demanded by the Americans might be eased.

No one could have predicted this explosive situation before October 2, the day Khashoggi entered the Saudi consulate and then vanished. No one wants this new layer of uncertainty thrown over the fate of oil supplies.

In the worst case, Saudi Arabia could be diplomatically isolated and she could withhold oil supplies to fight off political pressure from the rest of the world. That could send oil prices through the ceiling and precipitate the global recession that many economists say is due just about now.

This is how history unfolds, often erratically and many times due to the folly of powerful men.

Last Sunday, October 14, Finance Secretary Carlos Dominguez III announced the two-peso additional increase in excise taxes imposed on fuel products will be suspended. The additional excise taxes were scheduled for implementation on January 1, 2019. It would have brought up the excise taxes on fuel products from P7 to P9 as provided for in the TRAIN law.

The TRAIN law contains a provision that additional excise taxes will be suspended if world crude prices exceed $80 per barrel for over three months. We have reached that threshold. Oil futures indicate prices will remain above $80 per barrel for the remainder of the year.

In a word, the suspension of the additional excise taxes due on the first day of the next year simply follows the letter of the law. It is not a concession to the opportunist politicians who politicized the tax reform measures for use as a platform for their grandstanding in aid of reelection.

True, oil prices drive the inflation rate. But the more important cause of inflation this year has been the mismanagement of the rice supply and the shortages of fish, meat and vegetables brought about by our weak logistics system. If we do not improve on our infrastructure to strengthen our logistics capability, the whole economy will be thrown into a permanent inflationary state. We need tax reform to underwrite the infra buildup.

The suspension of the excise taxes could relieve some of the inflationary pain. But considering the possible chaos that threatens to break out in the global oil supply system, the relief will probably be negligible.

When President Duterte arrived from the Bali summit meeting last week, he asked the people to brace against the hardship oil-driven inflation would bring. He had no idea how prophetic his utterance would be. The Khashoggi affair was just beginning to simmer at that time.

This week, the full consequence of Saudi Arabia’s murderous enterprise will blow up to the magnitude of stray events that alter the historical course.