$100

With crude oil prices now hovering above $90 per barrel, industry analysts are saying the vital commodity should soon be priced at $100 per barrel perhaps as early as yearend.

Not too long ago, we held that oil at $30 per barrel was absolutely unthinkable. Over the past few months, oil prices have climbed rapidly to triple that price. Oil at $100 per barrel is now perfectly imaginable.

Domestically, that should translate into gasoline pump prices at well over P50 per liter. The impact of that price regime on the inflation rate, the composition of consumer spending and over-all economic expansion will be major.

Several large trends influence the continuous climb in the price of fossil fuels.

The most basic, of course, is the supply and demand situation. Current oil demand approximates available supply. Because of that, any minor incident — a hurricane in the Gulf of Mexico, tensions in the Turkish-Iraqi border or the shutdown of some oil wells in Mexico for routine maintenance work — could easily fuel speculative pricing.

The last surge in oil prices that brought it firmly above the $90 level was due to a report showing that US strategic reserves were falling short and forecasts that winter demand in the northern industrialized countries could be higher than programmed. Add to that speculative buying by the Europeans who were taking advantage of the wider variance between the euro and the dollar, making dollar-denominated oil cheaper from a euro perspective at least for the moment.

Upward pressure on oil pricing is likewise driven by the entry of the large hedge funds into the commodities futures market. These are driven into the futures market by declining profitability in the housing mortgage market and dropping interest rates everywhere. With their awesome financial muscle, the hedge funds could convert passing anxieties into actual speculative pricing for the vital commodity.

The rising purchasing power of consumers in the two most populous economies — China and India — further exacerbates the supply and demand configuration. Rapid economic expansion in these two giant economies is converting into steeply rising demand for fossil fuels.

The rising middle classes in both China and India are now using more energy, buying more cars and moving about more frequently. Those middle classes number in the hundreds of millions and any change in their consumer habits will have great strategic consequences for the rest of the world.

As late as a year ago, economists were forecasting global recession should oil prices hold at about $70 per barrel. That did not happen.

The powerful tools at the disposal of modern monetary authorities resulted in effectively holding down inflation despite the surge in oil prices, although at some cost to the rate of economic expansion especially for the emerging economies. By tweaking policy interest rates, monetary authorities are able to barter growth potential for tolerable inflation rates. This week, for instance, the US Fed cut policy rates by 0.25% — just enough to avert a recession without driving up inflation.

The current oil price spiral will have profound effects on the strategic balance of power in the world.

In the oil price spirals of the seventies and the eighties, the biggest beneficiaries were the oil producing economies organized through the OPEC. In those earlier cycles, the oil producing economies influenced oil prices by behaving as a cartel and curtailing production levels in order to conserve the life span of their own oil deposits.

Those earlier price spirals brought tremendous wealth and global influence to the Arab nations and a few other major producers like Norway (creating sustainability for the last workable welfare state), Nigeria (benefiting mainly the military tyrants there) and Venezuela (later squandered by that leftist clown Hugo Chavez).

The biggest beneficiary of this latest price spiral is Russia.

Over the past decade, Russia has developed her massive oil and gas resources to become the single most important supplier to the world. Russia wisely used her oil and gas revenues to  pay down the accumulated debt from the former Soviet Union, relieving both herself and the other new nations from the former Soviet bloc from a crippling debt burden. With her debt largely paid down, Russia is now using oil revenues to become a major financial force in world affairs.

China, with her over-performing economy and scarce oil resources, has looked far ahead and basically acquired Kazakhstan’s entire oil industry to secure her energy security. That strategic acquisition should help insulate China from oil shocks, especially considering that it has also made long-term investments in other energy sources such as the massive Three Gorges dam complex which generates clean hydroelectric power comparable to several nuclear plants.

Coal dependent India and the other emerging economies that do not strategically control oil deposits are left vulnerable to oil price shocks. If Russia is the biggest winner in the current price spiral, the biggest loser are the oil-importing emerging economies. They will face declining growth into the foreseeable future.

In the present situation, the Philippines is considered vulnerable not only because it is an oil-importing country but also because it is dependent on the recession-prone US market for much of its exports. That energy vulnerability has been mitigated by investments in geothermal power (we are now the second largest geothermal power producer in the world) and current investments in alternative fuels such as biodiesel and ethanol.

We can further lessen our strategic vulnerability by more intensive development of the Malampaya field, greater use of compressed natural gas and the rapid development of our mining sector to help offset a higher oil import bill. In the meantime, we will have to manage as best we can the impact of higher pump prices.