Oil shock, food shock

The impact of the Russia-Ukraine war has finally hit 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.  All these items are now adversely affected by the oil and food inflation.

The International Monetary Fund on March 5  said that the Russia-Ukraine crisis has spurred further rises in already elevated energy and food prices that will particularly stress poor households around the world. 

The war in Ukraine is “a catastrophe” for the world which will cut global economic growth, said David Malpass, the president of the World Bank.

“The war in Ukraine comes at a bad time for the world because inflation was already rising,” said Malpass. 

Crisis hits the poor

The World Bank CEO said the economic impact of the war stretches beyond Ukraine’s borders, and the rises in global energy prices in particular “hit the poor the most, as does inflation”.   Food prices have also been pushed up by the war, and “are a very real consideration and problem for people in poor countries”.

The Philippines imports nearly all its oil requirements. Its rice output is consistently short by two million tons a year. In 2020, the country imported 2.23 million tons of rice, equivalent at that time to $1 billion. In 2021, rice imports were to rise to 2.6 million.

At the pump, diesel and gasoline prices are expected to double from their year-ago prices. Rice, meanwhile, is the staple Filipino food. It accounts for 15% of the poor Filipino’s household’s expenditures which are 55% food.

With higher rice prices, expect the pan de sal, a morning staple in most households, to rise in price, if not shrink in size, or both.

Russia produces 12% of world’s oil

Russia produces 12% 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% share of global natural gas supply.  In 2020, Russia exported 37% of its natural gas production and supplied 45% of Europe’s NG imports.  According to J.P. Morgan, about 70% of Russia’s gas exports to Europe pass thru Ukraine using three major pipelines.

At the same time, Russia accounts for 17% of global exports of wheat.  Ukraine accounts for another 12% of global wheat exports.  Ukraine is also the fourth largest exporter of corn.

Supplies disrupted

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.  

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 infra for delivering gas and its other products.

The IMF said the invasion’s economic damage on Ukraine is “already substantial,” as many seaports and airports have been closed and infrastructure have been destroyed. 

Wheat prices up 70%

Per an ING study, the price of wheat has gone up 70% this year, with prices hitting their highest since 2008. Corn is up 30%, with prices the highest since 2013.  Soybean prices are up 25%; prices are the highest since 2012.

Benchmark Brent crude is now at $126.54 per barrel, up $3.33 or 2.59% on March 8. 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 staggers out of its worst pandemic.

Crude to rise to record price

 West Texas Intermediate (WTI) crude was $121.98 per barrel, up $2.58 or 2.60% March 8.  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% 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%.

With the invasion, suddenly, Russia has no buyers, for up to 70% 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 price 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.

All commodities to rise in price

“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% 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 average in history. 

$150 per barrel oil

A $150 oil price per barrel would have 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: 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 Congressman Joey Salceda talks of a P117 per liter price of gasoline, which means a near doubling in gasoline and diesel prices.

Duterte must act

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.

Salceda 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 1%.  So if inflation is currently 3%, it will be 3.6% or 4%, 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%.

Worst still to come

House Fuel Crisis Ad Hoc Committee co-chairperson Joey Salceda said on March 9 the “worst is yet to come”.  He sees further increases in the pump prices of refined petroleum products in double digits or near double digits.

After this year though, the fuel price situation could improve, with the price of gasoline, diesel and other refined petroleum products going back to old levels when crude was at $60 to $80 per barrel.

“Current crude prices is at $127 [per barrel]. At the pump, this may translate to an increase of around P11.1 [per liter] on gasoline, P9.25 [per liter] on diesel, and P8.88 [per liter] on kerosene by mid-March,” Salceda said talking to reporters by viber.

“While we are certain that the situation will eventually abate given long-term trends in population patterns, the rise in renewable energy, and energy and fuel-efficient technologies, we are also certain that in the short run, the worst is yet to come,” noted the Albay 2nd district congressman.

According to him, Russian oil supply will continue to be suppressed even if the Ukraine crisis sees resolution, as sanctions will likely continue to be imposed on Russia, which accounts for around 12% of global oil supply. Russia invaded neighboring Ukraine two weeks ago.

“Oil-producing [countries] will continue to maximize the opportunity to claw back losses from when oil futures sank to record lows during the pandemic (around $60 per barrel).

“I expect no significant reductions in oil prices until June at the earliest. By then, crude oil spot prices will likely have approached $180 [to]190 per barrel,” he said.

“If these highs are reached, total price increases since 2021 will have been: P58 for gasoline, P53.75 for diesel, and P47 for kerosene,” added the economist-solon.

“To say that Filipino consumers have been absolutely battered by successive fuel price hikes this year is an understatement.”

Salceda said that since 2021 pump prices have increased by P30.9 for gasoline, P31.75 on diesel, and P25.94 on kerosene per liter. January 2021 prevailing prices were P38 per liter on gasoline, P27 on diesel, and P36 on kerosene.

“If projected increases for next week are realized, we may see total price increases to jump to P42 on gasoline, P41 on diesel, and P34.82 on kerosene,” he said.

All these factored in, Salceda sees overall inflation to hit as high as 5.2 to 5.4% by June, “considering added pressures on bread (Russia and Ukraine are among the world’s largest producers of wheat), typical power demand surges during the summer months, and second-round effects of oil prices on transport costs, electricity, food (especially fish), and other basic commodities”.

Impact more of collateral damage

During President Duterte’s meeting with the cabinet on March 7, Finance Secretary Carlos Dominguez analyzed the impact of the Russian invasion.

Although the conflict between Russia and Ukraine does not involve the Philippines directly,  neither Russia nor Ukraine is a major trading partner of ours, “the Philippine economy will likely be collateral damage. It is as if we are hit by a ricocheting bullet. These indirect shocks are likely to be felt through four major channels.”

These are: the commodity market, the financial market, investments, and the impact on our fiscal health.

Dominguez explained: “First, oil and food prices are expected to go up as Russia is the largest exporter of natural gas and wheat (trigo); while Ukraine is the fourth largest exporter of corn. As the conflict continues, Ukraine and Russia’s main trading partners, predominantly the European Union, will look to trade with other countries such as US and China, where we are buying both wheat and corn, thereby pushing up the prices of commodities in these markets as well.” 

Surge in interest rates likely

“Second, the conflict will also likely cause a surge in interest rates or cost of borrowing which was already expected to go up even prior to the crisis because of the US Fed’s tightening of monetary policies. The conflict will increase the perception of risk in investments.” 

“Third, investments are likely to decline or at least be on hold in the face of uncertainty, which may cause investors from the West to be more conservative or postpone their planned investments. Once sanctions are imposed, it will take a long time for investor and consumer confidence to return to normal.” 

“Lastly, all the aforesaid economic impacts will likely require government support to protect our vulnerable citizens and the critical sectors most affected by the crisis and this will stretch our budget even further.”