It’s tough out there in the real world and getting depressed about the situation is perfectly justified.
I go to the supermarket—Shopwise or SM—about three times a month and what I saw again last Saturday was dismal. I saw very ordinary carrots selling at P150 a kilo with the cheapest at P140. I am told that one reason vegetable prices are high is that certain black-market vegetable “importers” have been shut down.
Higher fuel costs are driving prices for consumers through the roof and there is little end in sight. Oil producers, oil transportation companies, oil refiners, oil product dealers, and governments are fully exploiting the situation both politically and economically.
Crude prices came up to the pre-pandemic price of $70+ a barrel in May 2021. After Biden’s energy policies that shut down the Keystone pipeline and restricted drilling on US government lands kicked in, oil moved to $105, up 40 percent. The Russian invasion of Ukraine has taken the price up another 20+ percent to $122.
There is only a little that the Philippine government can do to mitigate high oil prices, such as targeted subsidies for transport operators and the agricultural sector. These, unfortunately, provide a limited amount of short-term relief and not solutions.
We the People are faced with the same situation as government. Limited resources require reallocation to soften the oil price explosion. The government could subsidize the price of fuel by P50 a liter, for example, which would be great for “tomorrow” and maybe “next month.” But there would be long-term negative consequences.
That would be like you and me using a credit card to keep household spending at the same high level and still having to pay the debt in the future. It is not sensible.
While it might be true that the peso exchange rate could go to 60 to one US dollar and oil could trade above $180 a barrel, there are certain economic “laws” that come into play. “The first rule of economics: our desires are insatiable. Second rule: we can eat only three Big Macs at a time.”
A chart of the price of oil from 2004 to 2007 ($40/$75) looks like 2016 to 2018 ($35/$80). The price from 2007 to 2009 ($55/$140) looks like 2020 to 2022 ($38/$120). Prices in 2009 collapsed back to $40 because of “demand destruction.”
This “demand destruction” is a variation on the “first rule of economics” that at some price point you stop buying Big Macs no matter our desire. And it is already happening.
The swarm of what has been called “revenge buying” after the lockdowns is stopping. After 18 months of huge US imports, contracted container shipments from all countries of origin bound for the US have dropped 36 percent since May 24. Part of this is due to oil-related price increases for goods. Inflationary pressure is forcing consumers globally to cut spending, and that will cause demand destruction for oil also.
“JPMorgan has cut 1.1 mpd (million barrels per day) off its 2Q22 demand forecasts, followed by about 0.5 mbd cuts to both 3Q and 4Q. On net, this trims the bank’s expectations for 2022 global oil demand as high prices, Covid restrictions, and geopolitical conflict drive demand destruction in Russia, China, India, and Europe.”
Governments and businesses can manipulate prices all they want, but eventually they cannot fight the ultimate economic law—supply and demand.
Maybe the average citizen knows more about expectations in the real world than the average economic expert. “Consumer confidence for the next 12 months soared to its highest level in more than four years after dipping in the second quarter, according to the results of the latest consumer expectations survey conducted by the Bangko Sentral ng Pilipinas.”
E-mail me at mangun@gmail.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis provided by AAA Southeast Equities Inc.