Pretty Good Oil Write-Up

**mazdamazda** · April 19th, 2006 09:37 AM

Oil
FIRST PERSON By Alex Magno
The Philippine Star 04/18/2006

I shudder a little every time I think about oil – especially when filling up my own tank.

Crude oil prices are currently hovering around $70 per barrel at the world market. The prospects on oil prices are not very encouraging.

The most immediate factor driving oil prices up is the possibility, no matter how small, that the US may decide to mount a tactical nuclear strike against Iran’s nuclear processing facilities. Tehran’s intransigence, under the leadership of a fanatical leader who thinks he has mystical powers, does not encourage optimism. Both China and Russia are now involved in frantic diplomatic efforts to force Tehran to submit to the international nuclear weapons regime.

In nearby Iraq, insurgents regularly attempt to blow up oil pipelines as part of their scorched earth campaign against what they consider American occupation of their country. That creates permanent anxiety about the reliability of Iraqi oil supplies.

Nor is the oil situation encouraging nearly everywhere else.

Nigerian oil pipelines are likewise threatened by rebels who have, in recent instances, resorted to bombing pipelines. Venezuela, the only major oil producer in Latin America, is led by a volatile left-wing president who is close to Cuba’s Fidel Castro and who, over the years, pursued policies that succeeded only in bringing down that country’s per capita income.

Although Saudi Arabia has, under American pressure, stepped up its oil production to prevent global demand from outstripping global supply, its known oil reserves are expected to run out in two decades. Meanwhile, China has succeeded in cornering the oil production of Kazakhstan by buying out that republic’s oil company. Kazakhstan is the world’s newest oil frontier and China wants to secure all the oil sources it can to (literally) fuel its galloping economic expansion.

Despite all these political uncertainties, global demand for oil continues to increase unabated.

In previous instances, dramatic rises in oil prices precipitated global recession. Recession brings down the demand for fuel and, consequently, tames the strategic commodity’s price.

Adept economic management in most economies allowed moderate global economic growth to happen despite the dramatic increases in oil prices the past two years. That is something we can be happy about. We do not know for certain, however, how much longer this could hold should oil prices continue to climb to previously unimaginable levels.

There are new alternatives to fossil fuels dramatically developed the past few years to mitigate global demand. New engines allow cars to run on ethyl, liquefied petroleum gas and even on hydrogen. But it will take a few more years for these technologies to hit the mass market, too late to prevent near-term pressure on oil prices.

The Philippines is particularly vulnerable to a global oil crunch. We import nearly all of our oil requirements.

To our credit, we have managed our energy and fiscal situation quite well the past few years. That quality of management required tremendous political will. It required enforcing unpopular measures.

But that quality management was delivered despite its political costs. The administration should be justly credited for the severe adversity that was averted.

Although oil prices more than doubled the last two years, we have managed to keep our inflation rate well within single-digit levels. That feat, to a major extent, should be credited to the fiscal discipline maintained by the Arroyo administration despite its great toll on this leadership’s political capital.

There are many things critics may raise about the strong peso. It cuts painfully into the profits of our exporters and will likely take away the viability of a few enterprises. It diminishes the purchasing power of families dependent on remittances. It reduces our competitiveness.

But this one thing cannot be denied: the strong peso has helped us mitigate the inflationary impact of high oil prices. Given the highly adverse global circumstances that is important. Inflation is the worst plague that could devastate the poor.

Over the past few years, too, we have dramatically improved our energy profile. We rely on oil for generating only a small portion of our electricity despite the unwise, but politically correct, ban on the use of nuclear energy.

We are next only to the US in geothermal energy production. We have put on stream new hydroelectric power plants. We have begun harnessing wind power in the Ilocos region. Our talented inventors have developed new technologies to recycle oil without pollution and to harness tidal movement for generating energy.

Because of market forces, many of our taxi operators have, of late, finally decided to shift to LPG. There is some short-sighted resistance from the major bus companies to shift to compressed natural gas. But that should, given the price pressure of imported diesel fuel, be overcome soon. The technology and financing are available.

There is an unavoidable price to pay for alternative energies. We must be prepared to pay for these in order to achieve energy self-sufficiency and reduce the vagaries brought about by the global oil situation. At any rate, rising oil prices will soon make the additional cost of alternative power sourcing almost negligible.

Because of the oil price regime, global economic expansion will be slower. We know that already. We deal with that by improving on our efficiencies in all that we do.

I weep a little every time I fill up my gas tank and every time I pay my electricity bill. But that is how things are.

What consoles me is the understanding that we have done our best to mitigate the adversity and prevent the worst from happening despite the inefficiencies of our politics and the proliferation of hypocritical moralizers on the political stage.

The real challenges that we must deal with to spare our people the worst possible outcomes lie in maintaining fiscal discipline against the dangers of myopic populism and allowing market forces to enforce prudence in the consumption of non-renewable goods.