Oil prices will not spike to $100 per barrel. At least, not at this time.
Over the last few days, global oil prices have softened. This was after Iran downplayed the Israeli counterattack on its military facilities. Israel, for its part, declared that this particular operation was completed.
Last Friday, Israel launched missile attacks across three Iranian provinces, including Tehran. About 140 Israel Defense Forces (IDF) planes participated in this attack. At least half of pilots who joined this effort were reservists. A significant number were women.
Iran did not specify the damage it incurred. This is its usual practice.
Israel was more forthcoming in its damage assessment. Its pilots attacked Iranian air defense systems and missile production facilities. As a result, the Iranian military is now virtually blind and vulnerable to further attacks from the air. The attack destroyed Iranian missile production sites.
The Islamic country will be unable to produce missiles for at least two years. Tel Aviv claims all of Iran’s long-range missiles have been destroyed, leaving the country with only short- and medium-range missiles. Iran is estimated to still have about 2,000 operational missiles – none of them capable of the range needed to attack Israel.
This might sound perverse: the scale and targeting of the Israeli attack was the best possible outcome. It satisfies the need to retaliate against Iran’s Oct. 1 bombardment of the Jewish state. But it was not of such scale as to justify the entry of other powers into this regional conflict.
More important, the Israeli counterattack did not target Iran’s nuclear facilities. Nor did it target the country’s oil processing centers. Some of the hardliners, including Donald Trump, had urged Israel to use the counterattack as an opportunity to cripple Iran’s nuclear capacity.
Israel’s tempered counterattack is a concession to the frantic diplomacy that went on the past few weeks. The US, in particular, pressured Tel Aviv to avoid hitting nuclear sites and oil processing plants. The Biden administration did not want the situation in the Middle East to spiral out of control on the eve of crucial presidential elections happening a week from today.
While Israeli leader Benjamin Netanyahu defied Washington’s opinion in the assaults against southern Gaza and Lebanon, he clearly yielded to US pressure in shaping the scale of the counterattack against Iran. This could be because his country needed US air cover and the advanced THAAD missile defense system in case Iran comes back with a more massive air assault.
Joe Biden expressed hope that, in the wake of Israel’s retaliatory strike, the situation in the volatile region might somehow calm down. This could be wishful thinking.
At any rate, with global demand for oil declining, we could see prices for this vital commodity softening. The worse the markets wanted to see was bombed out oil refining facilities in Iran.
With Israeli offensives going on in both the Gaza and Lebanon, however, peace in the Middle East remains beyond reach at the moment.
Downside
Domestic pump prices, unfortunately, will not fully reflect the softening of global oil prices. This is because the peso’s exchange value vis-a-vis the US dollar has softened more significantly.
Unlike previous episodes in the continuing saga of the peso’s exchange rate, the latest round of depreciation did not happen because the dollar was strong. If fact, it happened when the dollar was weak. Gold prices overshadowed the dollar as the sanctuary of choice. Quite correctly, our BSP sold gold to foreign buyers to take advantage of high global prices for the mineral.
Even more remarkable, the peso declined even as we posted record high levels in our foreign currency reserves. Therefore, it is not supply-and-demand pressure playing on our currency’s exchange rate.
It remains true, however, that we continue to suffer a high balance of trade deficit. We seem unable to sell anything, other than gold and migrant labor, to the international market.
The only other factor that seems to influence the peso’s depreciation is the reduction of our policy rates.
Interest rates, we recall, escalated globally as a key policy tool to hold down inflation. Higher interest rates cooled the economies. Because they discouraged investments, high interest rates restrained economic expansion. Pushing down inflation was the priority over economic growth.
The past few quarters, as inflation rates declined, monetary authorities began reducing policy rates. The most observed rate adjustments were those of the US Federal Reserve. Our own monetary authorities generally took their cue from the interest rate decisions of the Fed. When the Fed began cutting back rates, we followed suit.
Lower interest rates favor economic growth. But there is a downside to it. High interest rates helped us protect the peso’s exchange value. Lowering rates meant exposing our currency to the downside pressures.
Thus the softening of the peso after we cut down interstate rates. This is a complication to the otherwise beneficial effects of a low interest rate regime.
A few analysts believe we should undertake more interest rate cuts in the event Donald Trump wins the US presidency next week. This is to mitigate whatever recessionary pressure this event might create – particularly since Trump threatens to raise tariff rates on goods coming from other countries and even replacing federal taxes and raising revenues from taxing trade.
Managing monetary affairs is always complicated, balancing upsides with the downsides.