Close watch underway on ME war and oil prices

The government is now closely watching market prices in the country. The Philippine Statistics Authority disclosed last Tuesday that the inflation rose from 1.3 percent in November, 2019, to 2.5 percent in December. Malacañang, however, said the increase is well within the target range of 2 to 4 percent and should not be cause for alarm.

We recall that the great rise in prices in 2018 began in January, continued in succeeding months , and reached a high point of 6.7 percent in September, before it started falling in the face of emergency measures taken by the government, including the Rice Tariffication Law.

The price increases – or inflation – of 2018 were blamed by the government on three principal factors — (1) elevated world oil prices that raised transport and power prices; (2) a fall in peso value due to world market uncertainties and a strong US dollar; and (3) a strong domestic demand that producers and traders used to pass on high costs to consumers.

The government did not include one other factor, but it surely played a big role in the rise of prices in 2018 – the imposition of a ₱2.50 tariff on imported diesel where there was none before, by the newly enacted Tax Reform and Acceleration and Inclusion (TRAIN) law.

There was no price problem last year, 2019. But now, at the start of 2020, there are fears brought about by the United States drone attack that killed an Iranian top general visiting

Baghdad, Iraq. The incident threatens to explode beyond the borders of the Middle East, as Malaysian Prime Minister Mahathir Mohamad saw the Bagdad killing as more than a US-Iran affair but one which concerns all Muslims. “The time is right for Muslim countries to come together,” he said, a call which could spur the Philippines’ Muslim militants in Mindanao to renewed activity.

But the more likely effect of the new US-Iran conflict is violence in the Middle East region, which is the biggest source of the world’s oil supply. Should this violence escalate, we may see world crude prices rise even higher than they did in 2018.

There is also the factor of the local tariff on diesel. The TRAIN law imposed a new tariff of ₱2.50 per liter in 2018. A second tranche of ₱2 was imposed in 2019 but it did not have any effect on market prices. This year, 2020, the third and last tranche of ₱1.50 has just been imposed. We must now watch closely lest this third tariff unduly cause diesel prices to rise.

But it is the world crude oil prices that are the biggest factor in any local price increases. We hope the US-Iran problem will not explode into a wider war in the Middle East. But if it does and world crude prices do shoot up, the government must be ready with measures to limit any local price increases. And it must be ready with emergency aid programs for the poorest of the poor in our country.