Petro price dips: Boon or bane?

ariel nepomuceno_1FOR three straight weeks, the prices of diesel, kerosene and gasoline have been reduced on an average of P3.20 per liter for diesel, P3.30 per liter for kerosene and P1.60 per liter for gasoline. The reason? Oversupply in the international market.

The International Energy Agency said the world will see further decline in the prices of petroleum products following Iran’s comeback to the market. Already, oil prices are currently trading on an average of $29 a barrel, a phenomenon we have not experienced for the last 10 years. Iran’s market reentry effectively counters the cuts made in production by other non-Organization of the Petroleum Exporting Countries players, according to financial and trading analysts.

Some groups are rejoicing but some sectors are hurting.

The boon

Filipino consumers will greatly benefit from this regime of low oil prices. Since most of the oil products in the country are imported, consumption spending will be stimulated, purchasing power increased and markets  positively impacted.

Lower oil prices would normally mean cheaper fares particularly in airfare, consumer products and utilities. Since production costs are depressed, industries such as manufacturing (particularly the automobile sector) and mining will reap most of the advantages. Couple this with an inflation rate of between 1.5 percent and 2 percent according to the Bangko Sentral ng Pilipinas, more investment and busy market activity are expected to happen due to low interest rates.

Initiation and completion of pending infrastructure projects, which the country badly needs, should, likewise, benefit from the downturn. Hopefully, the current situation will provide the impetus for the government to spend and focus on these projects.

The bane

ON an international level, major oil producers, such as the Middle East, Latin America and Russia, are now experiencing very low economic growth rates. China is similarly affected.  The adverse effects of more reductions in oil prices will be most glaring in the stock market. Major oil companies like Petrobras, Total and the other heavyweights are putting a halt to investments, particularly in shale, oil sands and even renewables, as their established engines of growth cannot be relied upon to deliver the profits it needs to fund other projects.

More retrenchments, downsizing, cost-reduction initiatives on the part of these oil giants can affect global economic growth and will surely impact the financial and equity markets.

As for the Philippines, the resiliency of our economy is often attributed to the steady and heavy flow of remittances from our overseas Filipino workers (OFWs), the bulk of which are found in the Middle East. Most of our OFWs are employed by companies that are either directly engaged in the petroleum industry or are contractors, suppliers or service providers of these oil giants. The shipping sector is similarly affected, especially those which are used in the transport of equipment utilized for both upstream and downstream activities of these companies. If layoffs and retrenchments continue to persist, then this will translate into disastrous consequences to our economy, not to mention the challenge that this shall pose to the reintegration of these OFWs into our society.

What to do?

There are two sides of the coin and the government, together with the private sector, must prepare a backup plan for a scenario where the temporary upside of falling oil prices would fade.  The local economy is part and parcel of a bigger world market that is interdependent in scope and operation.

Ultimately, the gains from this  low price environment must improve our fiscal position by making good and robust fiscal policy responses.  There is no room for complacency.

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