Global economic risk

The price of crude oil has been one of the biggest risk factors to the Philippine economy that the government has no control of. But while it cannot do anything to influence its price, it can take measures to at least mitigate the adverse effects of rising prices of imported oil, especially on consumers. This risk was highlighted again when refining facilities in Saudi Arabia were recently hit by a drone-and-missile attack—labeled by the United States as a terrorist act initiated by Iran—that sent international crude prices rising. The United States blaming Iran for the attack heightened tensions further in the oil-rich but volatile Middle East. Immediately, crude oil prices jumped as an initial reaction to a possible worsening of the situation, as war in any part of the region would send oil prices skyrocketing as they did in the past. The Philippines imports two-thirds of its crude oil needs from the Middle East.

The 1970 and 1979 oil crises were sparked by political conflict and wars in the Middle East. Iran’s foreign minister was reported to have warned that any attack on his country as retaliation for the drone-and-missile strike on Saudi Arabia’s oil facilities would result in all-out war, sparking fears of another war-induced oil supply crunch.

The Philippines, which has been enjoying unprecedented economic growth, should brace for any eventuality arising from this situation. Energy Secretary Alfonso G. Cusi announced after the Saudi attack that the agency was meeting with local oil companies “to ensure that the energy family will be sufficiently prepared to face the potential impact of this unfortunate incident, if any, on the country.”

Warning oil companies not to exploit the attack on Saudi oil facilities by unduly raising pump prices of old inventories bought at much lower prices is another proper response to avoid any panic, reminded Albay Rep. Joey Salceda. The government must henceforth exercise extra vigilance in ensuring that oil companies are able to raise the prices only of petroleum products that they had bought at higher prices caused by the Saudi attack, if there are any. The DOE noted that any impact of the incident on local petroleum prices will be felt by tomorrow, when local players announce their pricing schedule.

There is currently in place one safeguard against runaway crude prices to help cushion the impact on consumers. If the price of Dubai crude reaches $80 a barrel and stays there for three months, the fuel excise tax will automatically be suspended as provided in the TRAIN (Tax Reform for Acceleration and Inclusion) law.

Still, the government needs to ensure that the effects of high oil prices on the economy in general, and on consumers in particular, will be minimized. Sen. Sherwin Gatchalian, chair of the Senate committee on energy, has called on the DOE to draw up mechanisms that will minimize the impact on the Philippines of any oil price hikes. The immediate effect will be on transport fares and electricity prices, two basic needs of the ordinary consumer and, therefore, top priorities for the government, which should see to it that the local transportation and power sectors are adequately supplied.

Gatchalian also noted that the surge of global oil prices as a result of the attack in Saudi Arabia underscored the need for the DOE to put energy security at the forefront of its energy direction, by working to diversify the country’s oil supplier portfolio and, in the process, insulate consumers from price volatility that may be caused by supply disruptions. The DOE, in cooperation with the local oil industry suppliers, needs to have a contingency plan that will temporarily replace any supply shortfall from a major supplier to ensure the steady delivery of petroleum products to the Philippines.

While the government has allayed the public’s fears of surging pump prices of petroleum products due to the attacks on Saudi Arabia’s oil production facilities, ensuring adequate supply despite temporary disruptions in the global oil market is necessary to shield consumers from another wave of price shocks once crude prices head north.