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Research paper about oil price hike in the philippines

Oil price hike is just the beginning: The domino effects of Russia-Ukraine conflict

MANILA, PHILIPPINES – MARCH 07: Motorists queue at a gas station a day before a huge price hike on petroleum products is implemented, on March 07, 2022 in Quezon City, Metro Manila, Philippines. (Photo by Ezra Acayan/Getty Images)

These past few days, drivers have been scratching their heads in anxiety as oil companies have been giving hints about a looming oil price hike. Until Monday (March 7), Shell, Caltex, Seaoil, and CleanFuel have already announced that starting Tuesday, there will be an increase of P5.85 per liter for diesel, P3.60 per liter for gasoline, and P4.10 per liter for kerosene. Unioil, meanwhile, is implementing a lower price increase: P3.85 per liter on diesel and P2 per liter on gasoline.

Immediately, highways and national roads across the country have witnessed long lines of private and public vehicles on gas stations, hoping to tank up before the implementation of this oil price increase by 6:00 a.m. March 8.

At around 9:40 p.m. March 7, Yahoo Philippines met Elmer Saavedra, a staff member in a gas station in Batangas City, putting a barrier in their gas station to signal drivers that they cannot accommodate new customers anymore. This rarely happens as they are typically open 24/7, just like many other gas stations across the country. Saavedra’s gas station is located along the national highway that is typically quiet and deserted by late evening. But last night, there remained a long queue of vehicles in nearly all gas stations, all hoping to get their oil charge.

“We have been tanking up customers’ cars the entire day today, nonstop,” he said in Filipino, adding that he lost count of the cars that he fueled up already. “No wonder we ran out of supply here today. It has been a long day for us. My right arm is almost numb now.”

The oil price hike, however, is just the beginning; as oil prices increase, so do other products and services (particularly on energy and transportation) that rely heavily on oil; prices of basic commodities such as rice and meat have been starting to increase already, too, especially as most of these are transported by gas-powered vehicles from faraway farms to the markets. All these are on top of currency depreciation.

The recently announced oil price hike is not even the projected highest amount it could post yet; Dubai crude has breached the $80-mark and, as supply struggles to keep up with demand, the price of oil is projected to rise even more.

MANILA, PHILIPPINES – MARCH 07: Shares in Asian markets declined on Monday amid fears of an inflation shock in the world economy already reeling from pandemic-era snarls as the ongoing Russia-Ukraine war continues to send oil prices soaring. (Photo by Ezra Acayan/Getty Images)

This oil crisis is already a worldwide phenomenon. In the United States, for example, oil prices are surging at pace drivers have not seen since the onslaught of Hurricane Katrina in 2005, which devastated the country’s oil and gas industry. While in Sri Lanka, nearly a thousand bakeries have already closed due to a severe shortage of cooking gas caused by the dwindling foreign exchange reserves.

One of the solutions that the Philippine government has thought of to curb the price hikes in the country is the P24 billion that was initially allocated as ayuda or financial aid for the agriculture sector, which also includes the P3,000 fuel subsidy for 162,000 farmers and fishermen. However, the Department of Agriculture admits that this is not enough, although this is also all that they have.

Samahang Industriya ng Agrikultura (SINAG) said in a recent interview with the nightly newscast 24 Oras on GMA Network that based on current numbers, only less than 10% of all farmers and fishermen across the Philippines will receive some form of financial aid. They suggest that the government reallocate some of the budgets that were previously given to other sectors and departments.

Meanwhile, the Department of Trade & Industry said in the same 24 Oras report that they only received one request for a price increase for basic commodities as of now since the start of Russia’s invasion of Ukraine. They also said that they do not see any official increase in the suggested retail price for basic goods yet – which is contrary to what is happening in the markets already.

They stressed, however, that the government, under the Price Act, has the power to control the prices and impose a price ceiling in cases of a natural calamity, for example, or other major events that could cause economic shocks.

Explaining the Philippines’s relations with Russia, Ukraine

Service members of pro-Russian troops in uniforms without insignia drive a tank during Ukraine-Russia conflict on the outskirts of separatist-controlled city of Donetsk, Ukraine March 5, 2022. REUTERS/Alexander Ermochenko

Economists and energy experts have been closely monitoring the conflict between Russia and Ukraine since early this year; they knew that if it escalated, the Philippines and many other countries – even those outside Europe – would be affected as well.

But how, exactly, is the Philippines affected by this conflict? The Philippines is located more than 5,400 miles (8,700 kilometers) from Russia’s capital city, Moscow, and more than 5,100 miles from Ukraine’s capital, Kyiv. How come a conflict that is happening geographically far from the Philippines has dire effects on the Filipinos?

Francis Esteban, Head of Far Eastern University’s International Studies Department, told Yahoo Philippines that, in the first place, the Philippines has diplomatic relations with both Russia and Ukraine, although the Philippines has more engagements with Russia than in Ukraine as reflected by having formal diplomatic embassies in Moscow.

Geographically, Russia is the biggest country in the world. Militarily, it is a nuclear superpower; they have the second-largest expenditure in military and defense. Economically, they are the second-largest producer of oil and gas in the world.

Ukraine, on the other hand, is strategically located between Europe and Russia and hosts a bounty of natural resources that it exports across the world. The Philippines, for instance, imports 60% of wheat from Ukraine.

“To an average Filipino, the economic effects of this conflict is really something he or she will feel,” said Esteban. “Oil price hikes are always followed by a price increase in almost all commodities. If Russia would further escalate its invasion and more sanctions are given, the more it will be isolated from the global economy, isolating its gas and oil as well.”

Service members of pro-Russian troops in uniforms without insignia are seen in a truck in the separatist-controlled settlement of Rybinskoye during Ukraine-Russia conflict in the Donetsk region, Ukraine March 5, 2022. REUTERS/Alexander Ermochenko

According to the European Central Bank, an increase in oil prices decreases consumer purchasing power, especially among direct users. Also, an estimated ⅓ of the economy’s overall use of oil is direct consumption and an estimated ⅔ of the economy’s overall use of oil is in the production of non-energy products.

Esteban also noted that the effects of the Russia-Ukraine conflict go beyond economic; at this point, the Philippines must understand already that Russia’s aggression is a clear disregard for international law and a rules-based approach in dispute resolution.

“This is quite alarming,” he said. “Russia is a major power, and as such, its disregard for international laws may serve as a precedent for others to follow.”

In the recent United Nations resolution demanding that Russia “immediately, completely, and unconditionally” withdraw its military forces from Ukraine, 141 out of 193 countries support in favor of it while only five – Eritrea, North Korea, Syria, Belarus, and Russia – voted against it. Thirty-five countries, including China, India, and South Africa, abstained.

Esteban also stressed that continued escalation can also have “spillover wars” in effect.

“Though this is less likely to happen, China, for example, might be emboldened to pursue its invasion of Taiwan considering it has always planned to do so before,” he said. “If this happens, our foreign and defense policy should be strategically decided since this will be close to our interest, geopolitically speaking.”

What to do amid foreign conflicts, price hikes

MANILA, PHILIPPINES – MARCH 07: A worker adjusts the prices of fuel on a display as motorists queue at a gas station a day before a huge price increase on petroleum products is implemented, on March 07, 2022 in Quezon City, Metro Manila, Philippines. (Photo by Ezra Acayan/Getty Images)

In the CNN Philippines Presidential Debate last February 27, presidential aspirants discussed their strategies and plans to address the problem, assuming they are the sitting president.

Senator Panfilo “Ping” Lacson emphasized special provisions in the national budget where aid can be given should Dubai crude oil reach $80 on average for three months, while the Department of Agriculture has P500 million in its budget that can be used for fuel subsidies.

Vice President Leni Robredo, meanwhile, said that there must be an automatic suspension of excise tax or the tax on the production, sale, or consumption of a commodity. Doing so would push the oil price down to P10 per liter.

While implementation of the value-added tax would be possible in cases of external economic shocks like this, Robredo said that doing so must be scrutinized to ensure that charges that are not supposed to be shouldered by the consumers would not be passed on. This, she said, would reduce a family’s expenses by nearly P600.

Leody De Guzman stressed that the oil deregulation law must be scrapped already. He said that if oil will not be regulated and will be left to the hands of big oil corporations, they will take advantage of the situation to double their earnings while consumers bear the brunt of the crisis.

Former senator Ferdinand “Bongbong” Marcos Jr., who was absent during the CNN debate and other major presidential forums and interviews, does not have a clear, solid stand on the issue. He first said that there was no need for him to take a stand on the issue because the Philippines is not directly involved in the conflict. Later, he shifted gears and said that Russia should give due regard to Ukraine’s sovereignty and the safety of their people.

MANILA, PHILIPPINES – MARCH 07: A man loads a tricycle with gasoline from a used liquor bottle sold on the side of a road, a day before a huge price increase on petroleum products is implemented, on March 07, 2022 in Quezon City, Metro Manila, Philippines. (Photo by Ezra Acayan/Getty Images)

Needless to say, the intensifying Russia-Ukraine conflict reveals that foreign policy, more than ever, should now be taken more seriously.

“Historically, Philippine foreign policy has always been dominant in the worldviews of our president,” said Esteban. “Though protocols and mechanisms remain the same even after each presidential term, the domain of foreign policy has always been centered on the sitting president’s worldview. This makes sense since the commander-in-chief is the principal architect of our foreign policy.”

So, now that the 2022 Philippine national election is nearly two months away, Esteban said that the electorate must decide to elect a decisive and responsible leader and look into presidential candidates’ positions on the matter. This would reveal what kind of a worldview a leader has. Given the increasing complexity of foreign relations, all the more the Philippines needs a chief commander who would know what to do during a great external economic shock.

If Esteban were to advise the national government on what to do in light of the crisis, he said, “The government should ensure the safety and wellbeing of the Filipinos in Ukraine and surrounding countries. That should be our primary foreign policy objective in the conflict. We should take the side of peace and join other peace-loving nations in our support of Ukraine. This is a war of aggression perpetrated by Russian President Vladimir Putin. Let us remember our history.”

He added, “As it is evident in the events before World War II, neutrality and appeasement only embolden the oppressor.”

Juju Z. Baluyot is a Manila-based writer who writes in-depth special reports, news features, and opinion-editorial pieces for a wide range of publications. He covers cultures, media, gender, and the 2022 Philippine elections.

Can Cheap Oil Hurt Net Importers? Evidence from the Philippine Economy

Abstract: Conventional wisdom suggests that oil price increases have a negative effect on the output of oil-importing countries. This is grounded in the experience of the US between 1940s and late 1980s where recessions are generally preceded by oil price increases. In this paper, we evaluate the impact of oil price shocks on the Philippines–– a developing country and a net oil-importing economy. Following Kilian’s (2008) structural decomposition of real oil price change, we find indications that the recent oil price decline may have lowered the Philippine economy’s output growth, potentially due to the economy’s reliance on remittances from abroad and the export market.

– Arlan Brucal and Michael Abrigo, University of Hawaii Economic Research Organization (UHERO), East West Center, September 12, 2016.

Review by Trevor Fitzpatrick

Since the beginning of 2016, oil prices have hovered around $30 to $50 a barrel. These current prices are about a third of the 2008 peak crude oil price of $145 per barrel. The recent significant drop in oil prices are the greatest we have seen since the 1980s. Like many other price fluctuations in goods, the recent drop in oil prices have benefited some more than others. Conventional wisdom suggests that low oil prices will benefit oil consumers while oil exporters will suffer. As the case may be, the effect of low oil prices is not that simple.

On September 12, Arlan Brucal highlighted the importance of looking at the causes of recent oil price changes, and their direct and indirect effect to an economy through international trade and factor mobility. Focusing on the Philippine’s economy as a test case, Arlan finds an indication that the recent oil price drop may have slowed down the growth of the country’s gross domestic product (GDP) by 5.5 percent. This seemingly counterintuitive result is largely due to the fact that the Philippine economy is heavily reliant on service exports, a component of the national output that suffered heavily from the recent oil price drop. Demand for crude oil has not recovered from the 2014 slump, and still cripples oil-exporting economies, which host most of the overseas Filipino workers (OFWs). Over the past decade, remittances received by the Philippines from abroad account for about 15% of the country’s GDP. The share of remittances to Philippines’ total output is significantly higher than India and China – the two biggest recipients of remittances in 2014 – and much higher than world averages.

Arlan and Mike’s study employs Kilian’s (2008) vector autoregression (VAR), which decomposes oil price shocks into supply shocks, aggregate demand shocks and oil-specific demand shocks. Supply shocks are unanticipated changes in the global crude oil supply. These supply shocks could emanate from exogenous geopolitical conflicts, discovery or new resources, or technology (i.e. fracking). Aggregate demand shocks are unanticipated changes in real economic activity, which includes economic booms in China or economic recessions that reduce the demand for industrial commodities including crude oil. Oil-specific demand shocks are changes in the demand for crude oil that are not related to aggregate demand shocks. These shocks include precautionary demand shocks associated with the future oil demand-supply conditions. An example of which would be a sudden drop in the price of oil because of the looming conflict in the Persian Gulf in the early 2000s. The study finds indications that the recent drop in oil prices are driven by a combination of both aggregate demand and oil-specific demand shocks. These findings are in contrast to the popular view that cheap oil is due to an oil oversupply caused by the surge in US oil production (Figure 1).

Figure 1. Historical Decomposition of World Crude Oil Price Changes

Note: Each bar reflects the relative contribution of each estimated structural shock to oil price changes for the period 1976-2015.
Source: Brucal and Abrigo (2016)

While the results appear to be quite convincing, their external validity is yet to be established. Indonesia presents a potentially good comparison example for this study. Indonesia and the Philippines share many commonalities: multicultural/ethnic, developing countries, nations that consists of many islands, exportation of laborers to many oil producing countries, etc. Does Indonesia have a similar pattern of remittances from overseas workers in oil producing countries, and do cheap oil prices negatively affect these remittances to Indonesia like they do in the Philippines? The fact that Indonesia is an exporter of oil could make the comparison difficult, but there are recent arguments and evidence that Indonesia’s oil production is starting to decline and that it is starting to consume more oil than it is producing. While Indonesia presents one interesting case to compare the Philippines with, further research could be expanded to include a number of countries with a wide range of dependence on remittances, which might help to establish if remittances is indeed a major mechanism.

Additionally, it was pointed out that the Filipino diaspora in the US was not accounted for, or that the US-Filipino diaspora did not make up a noticeable population and source of remittance as some the other overseas Filipino populations. One would assume that the US Filipino diaspora would still be a large population. Taking into account that cheap oil prices have been associated with economic booms in the US, we could possibly hypothesize that remittances from Filipinos in the US would increase. Could this US-Filipino remittance recover the losses felt from the loss of petro-dollars and remittances from Filipinos that work in oil producing countries? This could be another aspect to consider.

The negative impacts that Arlan’s findings could have are possibly reflected in the lack of sophistication of the Philippines workforce. Continued export of unskilled laborers to oil producing countries and the reliance on their income partly being shifted back to the Philippines is potentially holding its economy back. However, if the Philippines is labor abundant and capital poor, the Philippines may be better off by exporting workers to labor deprived countries. Perhaps further development of the workforce could help decrease some of the reliance on service jobs in oil producing countries. Further education and development in human capital can certainly help. The Philippines could also encourage more foreign direct investments as well although negative impacts particularly on natural environment would have to be monitored.

Arlan and Mike’s study is part of a bigger project that studies the impact of oil price-related shocks to developing countries. Most of the current literature has focused on the more advanced economies of the world like the US. Hopefully, Arlan and Mike’s study will help fill the void in the literature on the impacts of oil prices on developing countries. Future studies building upon what Arlan and Mike have done are highly anticipated.

BLOG POSTS ARE PRELIMINARY MATERIALS CIRCULATED TO STIMULATE DISCUSSION AND CRITICAL COMMENT. THE VIEWS EXPRESSED ARE THOSE OF THE INDIVIDUAL AUTHORS. WHILE BLOG POSTS BENEFIT FROM ACTIVE UHERO DISCUSSION, THEY HAVE NOT UNDERGONE FORMAL ACADEMIC PEER REVIEW.

Trevor Fitzpatrick is a graduate student at the Department of Urban and Regional Planning (DURP) – University of Hawaii at Manoa