Will Lower International Prices of Oil Benefit the Philippine Economy?

Will Lower International Prices of Oil Benefit the Philippine Economy?

The international prices of oil have been plunging. As a net importer, the mainstream sees, lower prices of oil should benefit the Philippines.

But has it?

Superimposing GDP data with the US Energy Information Administration’s end-of-the-period data on US WTI crude oil prices, the correlation between the GDP and WTI has been different than popular perception.

Since 1999, Philippine GDP has risen concomitant with higher oil prices and vice versa. Or, in three occasions when oil prices slid or plummeted, GDP followed.

The Philippines imports about ninety percent of its oil supply from the Middle East, specifically, Saudi Arabia has a 37.7% share, Kuwait 24.6%, UAE 18.6%, Qatar 6.2% and Oman 2.6% (Department of Energy 2017).

The US WTI crude prices used here is for comparison purposes only.

Though there may be many factors influencing the price of oil and GDP I cite three rudiments.

Forex exchange movements. Example, a strong domestic currency may offset rising oil prices, while a weak currency may amplify it.

External factors. The crash of oil prices in 2008 was in reaction to the seizure in the US financial industry which eventually morphed into the Great Recession. Instead of helping the GDP, the plunge in international oil prices reflected on the transmission mechanism of global economic weakness to the Philippines. GDP nose-dived to near recession in 2009.  GDP nose-dived to near recession in 2009. But the fiscal stimulus package, the Economic Resiliency Plan of 2009 shielded the economy from it. Aside, with relatively clean balance sheets, the Philippines wasn’t as vulnerable then as today.

A similar dynamic occurred in 2014-2015, where oil prices crashed tagging along with the Philippine GDP. China’s stock market crash occurred in 2015. The global oil crash prompted several global central banks to launch negative interest rates in 2016. In defense of the banking system, the BSP launched its QE.

Domestic Forces. I previously used the analogy of Vibranium which powers Marvel Comic’s Black Panther’s Wakanda empire.

Let us assume that the local scientists have discovered the conversion of water into energy to substitute for oil and other natural sources of energy. Because facilities for the use of this energy has been mass produced, it became the ONLY source of the nation’s power. However, like in Marvel hero Black Panther’s dominion Wakanda, this energy has been classified and exclusively used in the Philippines.

So what would be the price of oil and its byproducts here?

Because demand for oil is zero (value is zero), therefore, the price of oil is zero. So the fluctuations of oil prices in the international markets will neither have an impact nor influence on the prices in the economy.

The point of this exercise is to demonstrate that the influence of international oil prices on the local economy depends on the extent of the value of oil and its byproducts to domestic demand.  

See Why Oil Prices Haven’t Been the Principal Cause of Inflation; NEDA’s Failed Model, Inflation’s Crybabies and the Perfect Inflation Storm! June 10, 2018

So what would be the impact of lower oil prices abroad here? It depends.

If international prices of oil and energy drop significantly to the spur an offsetting spike in domestic demand for these, then the volume of imports will be least affected. Ceteris paribus, consumers benefit from lower energy prices. However, there will be little change from the imports perspective.

If the plunge in the international prices of oil has been a manifestation of an intensifying fragility in the global economy, then such frailty should be expected to reflect on the domestic GDP eventually.

Seen from the CPI perspective…

At its recent peak, international oil prices have remained distant (31% off) from its 2013 high, yet the October CPI at 6.7% have surged 60% past the July 2014 high at 4.19%. Such gap exhibits the loosening statistical relationship between oil prices and the CPI, or oil’s diminished impact on the CPI. The Core CPI (ex-food and energy) corroborates such relationship.

Nevertheless, a decrease in a relationship is not the same as no relationship. Thus, the plunge in November’s oil prices will still have some effects on the CPI. Pump prices, reports say, will be rolled back significantly.

More importantly, the continuing incredible dive in money supply growth in October reinforces the perspective that demand from some sectors (consumers?) has slowed dramatically. And such escalating economic infirmities should exhibit its presence in the CPI and the GDP eventually.  

The current state of domestic liquidity doesn’t seem to support a vibrant demand for energy products. Of course, this may change.

The BSP hedged its CPI forecast with a wide range of 5.8 to 6.6% for November. Did they not get any tip from the Philippine Statistics Authority (PSA)? The PSA will report on November’s CPI next week.

And because of falling international oil prices, the National Government proposes to recall the suspension of fuel excise tax hikes. The President said that he would study it.

The hike in excise tax will have more of an impact on the domestic economy than the drop in international prices of oil.

And the bait and switch used in the international oil prices to justify fuel excise tax hikes is a useful example of example of Professor Thomas Sowell’s first lesson of economics and politics (Is Reality Optional?)

The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.

As been repeatedly noted here, the inflation tax constitutes an integral part of the financing of the NG’s aggressive public spending.

High CPI will indeed slow, but only to the point that it becomes less of a hindrance to the goals of the political system.