Oil prices are rising in the Philippines and the Russian-Ukraine crisis has little to do with it.
by Isabella Balcon
When oil prices started rising in the country, Filipinos were quick to assume that it was mainly because of the economic sanctions on Russia brought about by their military invasion of Ukraine. To provide context, Russia has declared war when it invaded Ukraine by sending military forces on the ground after months-long of surrounding the country. The United States and its allies responded by sending aid to Ukraine and imposing sanctions on Russia which included limiting exports of electronics and aircraft parts, while the European Union (EU) has also imposed sanctions on Russia’s financial, energy, and transport sectors.
Additionally, since one of Russia’s main export is oil, it also served as leverage for the US and EU to cut its ties with Russian oil companies to halt the military invasion in Ukraine.
While these assumptions are true, it only makes up a part of the explanation as to why oil prices are rising not only in the country but in the whole world.
One less (major) oil supplier means less supply and higher prices
From what we can glean in our introduction to Economics subject, an increase in demand results in higher prices, especially if there is also a significant decrease in supplies.
The economic sanctions put forth by the US included banning all oil imports from Russia, the second-largest oil producer next to the US. President Biden considered this embargo as a “powerful blow” against Russia regarding its invasion of Ukraine.
Despite the complete oil ban, President Biden aired his reluctance because it may affect oil prices domestically. But the US imported 245 million barrels of oil from Russia last year — just 8% of the country’s oil imports.
While this amount does not mean much for the US, Europe’s situation provides a different story since it heavily relies on Russian oil. In fact, in 2021, 60% of Europe’s oil imports came from Russia alone.
That was why when the oil ban happened, the US was able to completely ban importing oil while Europe’s best move was to phase out their reliance on Russian fuel by two-thirds at the end of the year.
This move was not easy for the two nations, and, ultimately not for the whole world as well.
With the sanctions imposed on Russia, the nations had to seek alternative sources from other oil producers especially since Europe’s phase-out requires it to replace its oil with other oil-producing nations.
And because there’s less supply now and more demand for oil, you can guess what happens next.
But how is the Philippines even affected?
The European Union imports 60% of its oil from Russia. But since it plans to stop depending on Russia for its oil by the end of the year, then it will have to look for other producers to get its oil supply. These other producers may come from the Organization of the Petroleum Exporting Countries+ (OPEC+) where the US gets its oil from, or Asian oil-producing countries, where the Philippines gets its oil from.
So while the Philippines is not dependent on Russia for oil, its total oil import of 81.9% in 2021 makes it highly dependent on China, Singapore, and South Korea. This means that while the Philippines remains scott-free from the Russia-Ukraine crisis, it cannot shield itself from the volatility of today’s interconnected global market.
Additionally, the oil price hike comes from issues that have been present long before the crisis even happened.
The pandemic as the real culprit
It’s an understatement to say that the pandemic affected more than just the health industry in the whole world. As we examine the situation, several industries have become affected by the lockdown and the oil industry is among them.
This problem has emerged in 2020 when countries imposed nationwide lockdowns forcing people to stay at home for months (or even years in other countries). Consequently, vehicle usage has significantly decreased, resulting in a drop in demand for oil. This has resulted in the oversupply of oil in the market which prompted a drop in oil prices to as low as minus $40 in the US. Unable to keep up with the lack of demand domestically and globally, numerous major oil companies started shutting down plants.
Among these companies in the Philippines was the Pilipinas Shell Petroleum Corp. (PSPC), which decided to permanently shut down its refinery in 2020 and transform it into an import terminal due to the challenges caused by the pandemic. Petron Corporation also temporarily shut down its refinery in May 2020 as it reported a 15 billion Peso worth of inventory losses during the lockdown.
Internationally, the Organization of the Petroleum Exporting Countries+ (OPEC+) also decreased production to 9.7 barrels per day, a 10% cut in global production, to support its prices.
These progressions seemed to somehow solve the issue of price drops; however, when the lockdowns around the world started to ease, oil demand increased at a fast rate, which is said to even surpass pre-pandemic levels.
And when the demand for something rises, the price increase follows suit.
Why not produce more oil then?
Producing oil is not an easy feat as Maciej Kolaczkowski, the Oil and Gas Industry Manager from the World Economic Forum’s Energy, Materials, Infrastructure Platform, explained. He states that one reason why companies aren’t so keen on producing more oil was that oil suppliers are now more cautious in increasing their production.
This was the case for OPEC+, which is scaling up its oil production slowly amidst the increased demand for oil for fear of oversupplying the market again. In addition, numerous oil companies have also struggled due to the shortage of workers as well as finding equipment, thereby slowing down the process of bridging the supply-demand gap.
Second, the long investment cycles also play a role. According to Pavel Molchanov, an analyst at Raymond James, the process of producing oil may take 6 months to even years before the increased supply takes effect. This statement was echoed by Kolaczkowski who said that oil production can take up to a decade to reach the first production the moment resources are confirmed.
What happens now?
So far, experts can only guess what the future holds for oil. Kolaczkowski expects that oil prices would fluctuate long-term since they are difficult to predict given the unprecedented turn of events.
The recent pump price rollbacks in the Philippines as global prices for oil have started going down serve as an interesting case for this.
According to Energy Undersecretary Gerardo Erguiza during his interview at the Laging Handa government briefing, the reduction of oil prices was due to China imposing another lockdown which halted the country’s economic activities and lessened their oil consumption.
Another reason was that the earthquake in Japan prompted its refineries to export oil because they shut down its power plants. Since manufacturers ranging from automotive chips to laser diodes have shut down, the country’s demand for oil has significantly lessened.
These events serve as implications on how volatile the global market trends are. Since the global market is governed by supply and demand factors, certain events can trigger market prices to fluctuate, as can be seen during the pandemic and the Russo-Ukrainian war.
This gives us a lesson that we can never be too sure of the global market trends in the long term but we can be certain that one event happening on the other side of the globe can trigger a chain reaction that eventually affects us too.