Experts, including the Bank of America, believe that oil prices might potentially increase the Brent crude as high as $100 per barrel in 2019, which was last experienced on 2014. Now the question is: If it were to happen, what could be the cause(s)? Many are well-aware that this surprising price increase is mainly about the collapsing condition of oil production in Venezuela and the potential export disruptions in Iran.
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US President Donald Trump pushes the oil price by deciding to exit the Iran nuclear deal. Brent, considered as the global benchmark, increased above $77 per barrel. Prices continue to increase by 15 since the start of the year and it’s continually increasing. The latest update shows that oil price increased by 8% last month. Investors are worried about the Iran tension as it is a major oil producer in the world, so oil supply disruptions could significantly affect all aspects of economic performance.
To ease the exit of its Iran agreement, the US President vowed to impose sanctions on the OPEC nation. Iran actually increased its oil production to approximately 3.8 million barrels a day which is more than a million barrels a day production since 2016. Another factor reducing the oil supply is an agreement between OPEC and other major oil producers, including Russia, slashing their output. Nearing the end of its agreement, the suppliers might continue working together to prevent prices from falling.
In a macro and micro state, oil is generally consumed in every aspect of the economy. The goods and services that we buy include a company’s expense for transportation. An increase in oil price means that businesses need to add an extra budget for it and this is generally passed to the customer by adding more cost to the goods and services they sell. In a bigger picture, these businesses – whether they have micro or massive operations – can collectively add pressure to a higher inflation rate. Ceteris paribus, this will also slow down economic growth. Higher oil prices make production more expensive for businesses.
While the US is one of the top oil producing countries in the world, it’s certainly not on the top list of oil reserves. Meaning, it depends on oil imports also. The oil price increase can only come either from the demand or supply side. From recent news, it’s said that the increase is mostly from supply pressures.
While we might say that we’re one of the top performing economies in Southeast Asia, the growth may be hampered by an increasing inflation rate. The BSP revised its inflation target to 4.8% in 2018 which is 6 percentage points higher than previously forecasted. Apart from inflation, a sudden spike in crude oil could be detrimental to our economy. As mentioned earlier, oil products are used in almost all aspects of the business – power generation, transportation and machineries. Why should we be worried? The Philippine economic growth may slow down due to the factors mentioned above and while the Philippine peso is slowly deteriorating, the oil price increase would place a higher burden on the poor. It is indeed a challenge for this administration to provide a safety net just in case the worse come to worst while still pursuing its plans for development.