“Such a state of economic emergency would also enable local governments to use their calamity funds to provide relief to tricycle drivers, farmers, and fisherfolk.”
The impact of the Russian-Ukraine war has finally come closer to home—in terms of higher fuel prices. And higher food prices. Indeed, higher prices of nearly everything.
Of the 100 points of the consumer price index (CPI), which is used to measure inflation or the rate of movement in prices, 38.98 is eaten up by food, 22.47 by utilities (housing, water, electricity, gas and other fuels), 7.81 by transportation, and 2.26 by communication. That’s 71.52 out of 100, or P71.52 out of P100.
Russia produces 12 percent of the world’s oil supply. It is the second largest oil producer. Russia is also the world’s second largest producer of natural gas, with 16.6 percent share of global natural gas supply, according to J.P. Morgan. In 2020, Russia exported 37 percent of its natural gas production and supplied 45 percent of Europe’s NG imports. According to J.P. Morgan, about 70 percent of Russia’s gas exports to Europe pass through Ukraine using three major pipelines.
At the same time, Russia accounts for 17 percent of global exports of wheat. Ukraine accounts for another 12 percent of global wheat exports. Ukraine is also the fourth largest exporter of corn.
Russia’s invasion of Ukraine has disrupted supplies of oil, gas, corn, and wheat.
The West does not want to buy Russian oil, gas, and wheat.
For other countries who want to buy Russian oil, gas, and wheat, there is a problem: how to transport them to the buyer and how the buyer can pay for them. The West has cut off Russia from the global banking system. Its money, rubles and its holdings of foreign currencies, are not recognized by the rest of the world. Think of you giving away hard-earned US dollars at Rizal Park and nobody pays attention to you because everybody thinks you are a nut and your money is fake.
Ukraine, for its part, cannot produce its corn and wheat because the Russians are coming and it is too busy warding off the conquering Russians. Besides, the Russians would have destroyed Ukraine’s infrastructure for delivering gas and its other products.
Per an ING study, the price of wheat has gone up 70 percent this year, with prices hitting their highest since 2008. Corn is up 30 percent, with prices the highest since 2013. Soybean prices are up 25 percent; prices are the highest since 2012.
Benchmark Brent crude is now at $126.54 per barrel, up $3.33 or 2.59 percent yesterday. Brent crude broke above the $100 per barrel mark March 3 last week for the first time since 2014.
Even before the Russian invasion, crude prices were already on the upswing because of higher demand as the world was staggering out of its worst pandemic.
West Texas Intermediate (WTI) crude was $121.98 per barrel, up $2.58 or 2.60 percent yesterday. At $120-126 per barrel, crude is at its highest since hitting the record $142 per barrel in 2008.
J.P. Morgan predicts oil at $185 per barrel, if the Russia-Ukraine war lasts until the end of the year.
The US itself imports Russian oil, of between 600,000 and 800,000 barrels per day, about 10 percent of US oil imports. Before the war, Russia was exporting 6.5 million barrels of oil and oil products per day, with Europe and the US buying 66 percent. With the invasion, suddenly, Russia has no buyers, for up to 70 percent of its oil exports, even with a $20 per barrel discount for its Urals oil.
If the world is to stop buying Russian oil, crude prices must rise to $120 per barrel. That price has been breached. “So large is the immediate supply shock that we believe prices need to increase to $120/bbl and stay there for months,” said Natasha Kaneva, head of Global Commodities Strategy at J.P. Morgan, on March 4, 2022.
“An extended period of geopolitical tension and elevated risk premiums across all underlying commodities is now expected, with far reaching implications across global commodity markets,” says J. P. Morgan. Price increases of 10-20 percent are expected for all commodities.
So far, analysts seem to have a consensus of oil stabilizing at $150 per barrel. That would be the highest in history.
A $150 oil price per barrel would have a devastating impact on the Philippines and its people.
On Tuesday (March 8), oil companies imposed the biggest increase ever in pump prices of petroleum products so far this year: P5.85 for a liter of diesel, P4.10 for kerosene and P3.60 for gasoline. At my favorite gas station, diesel max is now P61.49 per liter, turbo diesel P63.49, xtra advance P68.30, and xcs P69.05.
Albay Rep. Joey Salceda talks of a P117 per liter price of gasoline, which means a near doubling in gasoline and diesel prices.
Salceda has called on President Duterte to act.
“It is Duterte’s moral obligation to the people to provide relief because that means almost 70 days of suffering already without relief, any form of relief from government,” Salceda told reporters after the hearing of the House ad hoc committee on fuel crisis.
He suggested Duterte declare a state of economic emergency to allow him to use the government’s calamity fund.
Such a state of economic emergency would also enable local governments to use their calamity funds to provide relief to tricycle drivers, farmers, and fisherfolk.
Duterte estimates the country will pay $4.5 billion or P244 billion more for its oil bill which will amount to $14.5 billion this year.
The impact of a higher oil bill will, per Salceda, be additional 20 centavos per kwh or P40 per month for those consuming 200 kwh per month; P1.62 in jeepney fare, and P2.21 in tricycle fare. The increase in overall inflation is .6 to one percent. So if inflation is currently 3 percent, it will be 3.6 percent or 4 percent, year on year.
Higher oil prices, Salceda warns, “will destroy our momentum for recovery.”
By the way, Salceda’s CREATE Law saved big companies P78 billion in income taxes. You know what the big companies did? Instead of reinvesting the money as Congress had hoped, to create jobs, the big companies simply pocketed the money—as cash dividends.
No wonder, during the pandemic peak, the net worth of the Philippines’ top billionaires increased 30 percent.
