Cheap oil and other commodities: The bright and dark sides

The price of a barrel of crude oil had recently dropped to as low as $38, but is currently at $45. The prospects are they would remain at this relatively low level for some time.

Recall that as late as 2014, crude prices have ranged between $115 to $120 per barrel. They have gone down dramatically. And the return of Iran to the normal market for energy augurs more supply, aside from all the other factors that have caused oil prices to fall recently.

The bright side of cheap oil. For our country, this development has been a great boon. The beneficial side wins over some of the losses we might potentially incur. For us, is the calculus of cheap oil. But we must be aware of the factors that causes those losses.

The reason is our crude energy needs are still very substantial and are largely imported from other countries. So, an era of cheap crude prices will be a major gain in terms of improving our trade and payments position.

Moreover, the benefits are felt in the real economy, from consumption to production activities. Most goods we consume have an indirect energy content because oil is an input to most production processes. Then of course when we use it directly as fuel as in transportation, it also comes in cheaper at the pump. Thus, the benefits to consumers and to producers are real.

The dividend from cheap oil is obvious. Periodic inflationary threats from rising oil prices have diminished. In fact, falling transport oil prices at the pump had been experienced.

The drop in domestic consumer pump prices, however, has not happened to the fullest extent of the drop in crude prices. Some of the benefits have gone to government – its share of the price drop had stabilized tax revenues from oil products. It can also be said the oil companies operating in the country had also pocketed part of the gains in terms of additional profits.

The ‘grey’ side of cheap oil. The gains we get from cheaper oil at home also have their costs to those involved in production and harnessing. The immediate impact of cheaper oil is the reduction in the incomes of the oil country producers.

Of course, that is not our concern. But new oil money made the producers very prosperous. These country producers hired many workers from other countries to harness their new wealth and develop their own countries.

Filipinos who have found prosperity working in oil-producing countries will now be adversely affected. The decline in the oil revenues of the oil producers could lead to domestic economic retrenchment in these countries, since their principal source of income is from oil exports.

Some layoff of workers would be inevitable, which means a potential decline in  remittances to the extent of how dependent we are on Filipino labor working in the Middle East.

Today, the dispersal of OFW manpower is wide, and the Middle East is no longer the main concentration of OFW workers that it used to be.  There is however still a significant number of OFWs stationed there to work. So, the likelihood of a major drop in OFW incomes is not likely to materialize.

There is another aspect of these price developments. In order to insulate the country from excessive dependence on carbon energy, much effort has been exerted to diversify the country’s energy future.

The current energy picture with cheap oil in our midst could help to slow down the efforts to diversify the country’s sources of energy. The price incentive puts carbon type energies – led by crude oil and its derivatives – at a great advantage.

The country’s efforts to develop alternative energy sources should not necessarily be held back. Other sources and competing technologies are themselves likely to adjust to the price competition.

The agricultural and mineral commodities.  Energy might be important to us as an essential material for producing output and services. There are, however, other commodities that we rely on to earn income, and to supply other important needs. They also belong to the nation’s lifeline.

Coconut oil and copra are essential aspects of the edible oil markets. We depend on the rice, corn, and wheat trade for the balance of our import needs in food. We produce significant amounts of minerals (copper, gold, nickel).

The country further makes gains when we are import dependent and the price of commodities fall. But we get hurt also when the prices of the commodities we export get clobbered in their respective markets.

Each of these commodities – including crude oil – is uniquely dependent on specific industries and markets. In recent years, however, they have behaved roughly the same pattern of prices.

For a while however, the continuous high growth of the Chinese economy during this period had been a driver of commodity prices despite the drop in economic activity elsewhere.

The buildup of inventory, the continuous lack of recovery of most of the world economy, and finally also growing uncertainty in China’s growth – all these contributed to a major decline of commodity prices. The recent US economic recovery was not making an impact as yet.

From 2011, however, the decline in the prices of other commodities had been very severe as well.

In the case of metals, all major exports of the Philippines, the fall in their prices happened over a five year period, unlike oil’s which was precipitous in 2014. Copper, gold, and nickel – all important sources of export income of the Philippines – suffered in price declines.

Copper is off its peak price of $4.5 per troy ounce in 2011 (February) to a $2.34 low in 2015 (August). Nickel prices are not any better off. From a peak of $13 per pound in February 2011, it is today around $4.5 per pound.

Nickel benefited from the ban on nickel ore exports imposed by Indonesia’s unilateral move by lifting Philippine exports of nickel and its price momentarily. However, nickel price decline has continued to be severe.

The World Bank predicted in its Commodity Markets Outlook in 2015 that a decline  in the index of nine key commodity prices could happen. Between 2011 and last day of 2014, its three industrial commodity price indexes consisting of energy, metals and minerals fell by more than 35 percent each. In fact the declines through to the current dates have continued.

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