Boomerang

No one expected oil prices to descend to the levels we now find them. There is good news there, and also bad news.

The good news is pretty obvious. You can fill up your tank these days and not end up a pauper.

The other day, minimum fare for a jeepney ride was cut – at the instance of the jeepney operators themselves. That gives commuters some relief, even if they sit in infernal traffic inhaling deadly fumes.

Taxi fares might be cut next week. Trade officials are now checking if the suggested retail price for prime commodities could be adjusted downwards to take into account lower transport costs.

Further down, plane fares could be cut. Fuel is the single biggest cost item in your plane ticket. There could be some relief in that too – although the DOTC will still be there to make sure our lives remain miserable.

Overall, lower oil prices will increase disposable income, temper the inflation rate and very likely improve the quality of life of most of us. That sounds really good.

But oil prices are not just low. They are profoundly low. One analyst did estimate that oil prices today, adjusted for inflation, are lower than they were before the oil crisis of the early seventies.

The regime of low prices were finally broken when the producers organized cartel. Money, in large amounts, moved from oil importers to the exporters. Expensive oil pushed the industrial world into recession. The banks were filled to the brim with petrodollars that were lent to developing nations too freely until the debt crisis of the early eighties happened.

Then oil prices climbed down, under pressure from global recession. By the onset of the nineties, the Soviet Union broke up. The Eastern Bloc dissipated. The Cold War ended. All these because Russia was heavily dependent on energy exports.

The cycle reversed once more. Oil prices climbed as global growth spiked, driven by China’s double-digit expansion.

After the 2008 financial meltdown, oil prices were depressed. Then they rose again as the world recovered, driven by quantitative easing in the industrial economies and growth driven by low interest rates in the emerging economies.

Now, with new technologies able to literally squeeze oil from shale, the world faces oversupply of the fossil fuel. Awareness of climate change saw massive shifts to renewable energy sources. Oil prices began to fall again.

From over a hundred dollars per barrel, oil pricing has now dipped to below $30. At the present profoundly low prices, changes will happen. Market power has shifted from suppliers to buyers. The old global economic arrangement has become unhinged.

The direst forecast I have seen about oil pricing is that a barrel of oil could push up to $40 per barrel by the end of this year. That is still too low.

At $40 per barrel, those who squeeze oil from shale will not break even. They will likely go into bankruptcy.

At $40 per barrel, countries like Saudi Arabia will run huge deficits. There will be less public spending among the oil exporters. Retrenchments will follow that. Migrant workers will be the first to be laid off. Many of those migrant workers are Filipinos.

During the age of petrodollars, massive public spending among the oil exporters sucked in labor from other countries. Without petrodollars, labor will be forced out and sent back home.

The Philippines is one of the countries that responded to the demand for labor in the booming oil-exporting economies. Today, we have an army of 10 million migrant workers whose toil returns billions of dollars of remittances to our economy.

Remittance inflows spoiled us. We did not crave for direct investments. We did not improve on the competitiveness of our exports. We did not modernize our agricultural systems. We were pretty content with the pattern of demand-driven growth powered by remittances.

The end of the age of petrodollars will therefore hit us bad.

Hundreds of thousands of our migrant workers will likely be repatriated – forcefully in some cases. We have probably reached the peak of our remittance flows. Further expansion of the domestic economy can no longer be driven by remittances.

We need to quickly shift to investment-led growth. But we have not prepared for that. We do not have the infra in place. We have not laid down investment-friendly economic policies.

We were lax. We thought we could get by with our dilapidated infra and rotten agricultural systems, importing beef and chicken and garlic and onions from elsewhere using money remitted by our migrant workers.

The profoundly low oil price regime will boomerang on us because we have become too dependent on exporting labor to the rich oil exporting countries. Those rich oil exporting countries will quickly become poor resource-dependent economies.

How can we absorb our returning army of migrant workers when our unemployment remains high? How can we sustain consumption-led growth without huge remittance inflows? How do we pay for all our imports when we have so few viable exports?

These are the great strategic questions of this time, as the era of petrodollars draws to a close. The global economy will inevitably enter into another, probably tumultuous phase of rebalancing. We have to find our nation’s place in whatever new arrangement is emerging.

This should be the great questions of this presidential election year – except that we do not really decide presidential contests on the basis of the large questions. We decide our elections on sentimental themes, even if this is never the best way nations shape their fates.