SCMAP Perspective: 14 March 2022

SCMAP Perspective is our fortnightly column on PortCalls, tackling the latest developments in the supply chain industry, as well as updates from within SCMAP. On this column we look at the record spike in oil prices due to armed conflict in Ukraine, and its impact on the Philippines’ bid for economic recovery.

No breathing room

I saw this post on social media on the day Russia began its invasion of Ukraine. It was not of the first images of the war, but of the prices of petroleum products at a gas station somewhere in Manila. “Remember these prices,” the caption said. “It will only go higher.”

And indeed, it has. Last week we saw pump prices go up, in a response to increased volatility in the crude market due to the war in Ukraine. It’s very much a safe bet that, as you read this, prices would have increased further. The Department of Energy itself believes we may see pump prices of up to PHP 100 a liter. It’s clear there isn’t an end in sight just yet, as Russian aggression continues and western countries implement further economic sanctions as an alternative to military involvement. Analysts predict that a ban on Russian oil imports – a step the US took last week – would drive crude prices to record highs, perhaps to around USD 200 a barrel.

It goes without saying that the conflict would drive prices further, at a time when we truly start gearing up for economic recovery. Oil prices drive global shipping costs as well as local logistics costs. Oil prices impact energy prices and will result in increased operating costs. These will most certainly be passed down to the consumer, who’s already dealing with increased mobility costs as the private sector collectively mandates a return to the office with the imposition of Alert Level 1 in several parts of the Philippines.

The impact is going to last a while. We’re anticipating shipping lines to adjust their rates as contracts get renegotiated and new realities are factored in. Same for land transportation costs: already the Confederation of Truckers Associations of the Philippines have announced their intention to hike rates. Those costs will most certainly be passed down to the consumer. I imagine businesses have stripped all the costs they can strip in response to the COVID-19 pandemic, and may not be able (or be willing) to go any further without compromising profitability.

From the consumers’ perspective, the eventual rise in mobility costs – whether you’re driving or taking public transportation – will dampen confidence just as we’re batting for it to return. And if the situation somehow normalizes, who’s to say we’ll see things go back to “the way they were”?

If it felt like the threat of “stagflation” – of increasing prices and stagnating wages – could be dulled in recent months, well, nope. It’s very much alive, and right now it’s very much in overdrive. There is no breathing room.

So, what can we do? Right now, it seems, we can only go along for the ride. Efforts to stabilize crude prices will not bear fruit overnight. That also takes a good dose of geopolitical savvy, particularly in finding alternative suppliers of crude oil. Shifts to renewable energy sources would take even longer, not to mention the market for it here – particularly for transportation – is very much embryonic, meaning the infrastructure is not yet in place.

There are some interventions we can make in the short term. In recent days we’ve seen calls to review regulations and legislation, like the Oil Deregulation Law and the TRAIN Law’s provision on fuel excise taxes, to arrest spikes in pump prices. But is the government willing to pretty much subsidize our gas tanks? My impression is, with our national debt hitting PHP 12 trillion last week, the government would very much prefer to keep money flowing into its coffers – and an easy way to do so is to promote consumption. Increase that, and you have more tax revenue through VAT, among others. Why else is it compelling the private sector to return to the office despite official advice still encouraging flexible working arrangements?

The answers to this dilemma are, for better or worse, long-term ones. Continued investment in infrastructure – physical, social, virtual – may seem counterintuitive in the current situation, but it will go a long way in ensuring the Philippine economy does not stall when consumer confidence does. It also means we can address the perennial issue of high logistics and mobility costs, better cushion the economy from geopolitical volatilities, and ultimately allow businesses to better meet their customers’ needs. We also have to prioritize attracting investment in renewable energy sources to make it more reliable and cost-effective for Filipinos.

But, for now, let this column serve as another warning. In the short-term, there may be little for us to do other than weather this storm out, mitigate the effects as much as possible, and ultimately hope for the best. Get your oxygen tanks ready.