Several things have changed over the past month. The global economy is now poised to face another severe slowdown and rising inflation as a result of the Middle East conflict. While the impact on countries may differ in magnitude, the oil supply shock will squeeze economic activity and raise prices significantly.
Another global recession is likely to occur.
For the Philippines, we are faced with a triple whammy. First, the country sources its oil from the Middle East, which passes through the now-closed Strait of Hormuz. Second, since oil is priced in US dollars, demand for the currency has increased significantly across countries—causing the peso to weaken. Third, 40 percent of overseas Filipino workers (OFWs) are in the Middle East, putting about 20 percent of total cash remittances at risk.
Oil Supply
The government recently announced that oil supply can last up to 60 days. Petron also announced that it is able to source Russian oil. We import crude oil from Saudi Arabia, Kuwait, the United Arab Emirates, and Iraq—and these all pass through the Strait of Hormuz. This roughly represents 40 percent of our oil requirements, which go to Petron for refining into finished oil products such as gasoline, diesel, kerosene, and jet fuel.
As for the other 60 percent, we import finished products from Singapore, Korea, and other Asian countries; these countries also source their crude oil from the Middle East. Hence, they too are severely affected by this supply disruption.
Here are some important things to understand:
Not all crude oil is the same. Each refinery is configured for a specific type. We might wonder why we are not importing crude from our neighbors Malaysia and Brunei. Their crude supply does not match the configuration of the existing Petron refinery, which is designed for cheaper Middle Eastern crude.
It takes two to three weeks for crude oil to reach Asian refineries from the Middle East. Since the war has been ongoing for about five weeks, the last ships that exited Hormuz have likely already delivered their cargo, which has probably been processed and sold. This means that in the next two weeks, the actual supply crunch will begin to affect markets. Worse than rising prices will be the availability of consistent supply. Even if supply is available for Petron, it cannot make up for the 60 percent that is imported as finished products.
The Peso
The supply issue is prompting countries to conserve or accumulate US dollars due to actual or anticipated oil price increases. Each country will need more dollars to buy oil. As the Philippines is a net importer, a weaker peso will make it more expensive to purchase the goods and services the economy needs. This situation will likely keep inflation elevated for the rest of the year.
OFWs
The Middle East hosts the largest concentration of OFWs, with approximately 40 percent based there. Nonetheless, Gulf countries are not the largest source of remittances, accounting for only about 18 to 20 percent of total cash remittances. If the war continues, many OFWs may need to be repatriated and will no longer be able to send money home.
The fact that 40 percent of OFWs account for only 18 percent of remittances suggests that many are employed in less-skilled occupations, mostly as domestic or service workers. These OFWs typically come from lower-income families, and their remittances are a lifeline for daily needs. They may benefit from a higher exchange rate, which could help cushion the impact of rising domestic prices.
What Can Be Done Now?
We should stop treating this war as a temporary event. Even if a ceasefire happens today, it will take weeks to a month for shipping to resume, not to mention the time needed for refining and distribution. Additionally, damage to oil infrastructure will take time to repair. We can expect oil prices to remain high for at least three months—and possibly up to a year.
This means we should not rely heavily on subsidies, as these are not sustainable and will strain an already tight fiscal position. For those most directly affected, targeted—not blanket—subsidies should be used. We cannot control the price of something we do not have. We should also stop comparing our prices with those of our neighbors, as our oil industry structures differ.
a. Given supply uncertainty, even if the war ends, rationing is a real possibility and should be communicated early. A tiered rationing system could be implemented, prioritizing essential uses of scarce oil. Government office work and private travel should be among the lowest priorities.
b. Work on revising the Oil Deregulation Law, including pricing mechanisms. For example, the Mean of Platts Singapore (MOPS) could be adjusted from weekly pricing to biweekly or monthly to reduce volatility.
c. Mandate strategic oil reserves beyond 60 days and ensure transparency in reporting.
d. Avoid crafting unnecessary regulations, such as mandating carpooling.
Stop highlighting the weakening peso as a headline issue. The peso is not the worst-performing currency in this environment. The Indian rupee, Thai baht, and Korean won have also weakened significantly due to heavy dependence on Middle Eastern crude. Currency movements also reflect investor confidence. Governance should focus on proactively addressing medium- to long-term issues rather than short-term, unsustainable measures and excessive regulation.
Strengthen the business process outsourcing (BPO) sector and provide necessary support. The BPO sector is another key pillar of the Philippine economy, contributing more foreign exchange than remittances—about USD 40 billion, or roughly 8 percent of GDP. It is largely shielded from the oil crisis. The government and private sector should work together to ensure that power and telecommunications services remain stable.
Fully implement the telecommuting law. Subsidize co-working spaces. Provide tax deductions for transportation allowances and related expenses.
Support renewable energy by making solar and related investments more affordable and tax-deductible within a specified timeframe.
These are just some policy options and are not exhaustive. What is important is for the government to acknowledge these options and help the public understand their benefits and costs. The government’s primary role in this situation is clear and effective communication.
For policy adjustments, it should avoid excessive regulation and punitive measures; instead, it should incentivize where possible.
However, responsibility does not rest solely with the government—the private sector must also provide support where it can.
We all have a role to play in this changing environment. Adjustments in lifestyle and spending patterns will be unavoidable. At the very least, we may find some benefit in cleaner air, with fewer vehicles and less traffic.
—
About the author
Dr. Ang is an Economics professor at Ateneo de Manila and Director of ACERD. He earned his Economics degree from UST, a Public Policy master’s from NUS (Singapore Government Scholar), and a PhD in Applied Economics from Osaka University (Japanese Government Scholar, 2006). He studies how economies work—and how to make them work better—focusing on labor, development, competition, privatization, and public finance.
