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Impact of production cuts by OPEC+ may be offset by economic slowdown


By Alyssa Nicole O. Tan, Reporter

ANY upward pressure on oil prices resulting from production cuts agreed to by the oil cartel, acting in concert with Russia, could be offset by the expected recession in advanced economies, dampening demand for fuel, a prominent economist said.

“The impact is uncertain,” Bernardo M. Villegas, professor emeritus at the University of Asia and the Pacific, told BusinessWorld in an email. “The recession expected in the developed countries may reduce demand for oil. Thus, a reduction in oil supply may just match the reduction in demand.”

“It is most probable that the price of oil will remain below $100 per barrel. Thus, the impact of the reduction in supply may be minimal on the Philippines,” he added.

The Organization of Petroleum Exporting Countries (OPEC), which coordinates supply decisions with major producers who are non-OPEC members like Russia, recently announced production cuts despite pressure from the US, which had asked for a postponement of the decision until after the US midterm elections on Nov. 8. OPEC acting in concert with non-OPEC producers is referred to in the energy industry as OPEC+.

Saudi Arabia, which calls the shots in OPEC on the strength of its status as the leading producer, has said the production cut was needed to deal with rising interest rates in the West and a weakening global economy.

Rino E. Abad, director of the Oil Industry Management Bureau at the Department of Energy (DoE), said the speculation will affect the price of oil regardless of the actual supply-demand fundamentals.

“My educated guess is it won’t affect us supply-wise but of course any decline, we know for a fact, even if it’s just 500,000 barrels, almost always (results in) speculation on the price,” he told BusinessWorld in a phone interview.

“I think the more immediate effect is that there would be price volatility rather than (a significant drop in) supply,” he added.

Mr. Abad said the production decision may ultimately haunt OPEC+.

“By increasing the price, you’re creating inflation, and the people cannot really purchase as much volume as they did before, so that will result in the further decline in demand, and that is not what you want in the first place,” he said.

He added that inflationary conditions would provide fuel for an expected recession, further decreasing demand for oil.

Institute for Climate and Sustainable Cities (ICSC) Energy Transition Advisor Alberto Dalusung III said in an email to BusinessWorld that oil remains the primary source of energy for the Philippines, citing the latest Energy Balance Table published by the DoE. “Therefore, we expect that transport will be the most affected sector.”

The Philippines, as a net energy importer, can only respond to the supply and price signals set by the market, Mr. Dalusung said.

“The current situation points to a need to rethink our energy strategy for the transport sector,” he said. “There have been initiatives to electrify aspects of the transport sector, primarily commuter jeepneys and buses.”

“I think that a more targeted action plan is needed to mainstream these initiatives,” he added.

Foundation for the National Interest Trustee Charmaine M. Misalucha-Willoughby, in an email to BusinessWorld, said the Philippines will “inevitably bear the brunt of OPEC’s decision due to its high dependence on oil imports.”

“This is due to the Philippines’ embeddedness in global supply chains, which are still recovering from the pandemic and are now disrupted by Russia’s invasion of Ukraine,” she said.

“Another reason for the negative impact of OPEC’s decision is that the Philippines under the new administration has yet to solidify a clear economic strategy,” she added.

To successfully respond to global energy shocks, Ms. Willoughby said the Philippines can invest in renewable energy and pursue external partnerships to address climate change.

Ms. Willoughby said the government needs to come up with “economic and security strategies, (and) diversify international relations to cooperate with like-minded states on environmental concerns.”

She does not support a proposal by President Ferdinand R. Marcos, Jr. to source fuel from Russia.

“Any moves towards Russia will put the Philippines in an untenable position. The Philippines should maintain its stance against Russia’s invasion of Ukraine to be consistent with its position against China in the West Philippine Sea,” she said.

“If the Philippines continues to vacillate from one decision to another, the country then becomes an unreliable member of the international community,” she added.

Mr. Dalusung, meanwhile, expected the President to “consider all options for our oil and fertilizer supply, pressure from other parties notwithstanding.”

“Foreign policy is a balancing act that I leave to our officials,” he added.

However, he noted the ultimate need to transition towards more sustainable sources of energy.

“The cost impacts of these international actions have made fossil fuels so much more expensive that there are no more cost concerns on the transition to more renewables,” he said. “The good news is that solar and wind power projects are among the fastest ways to add capacity.”

He welcomed the Department of Justice’s (DoJ) legal opinion in favor of opening up renewable energy projects to 100% foreign participation.

“I have always taken a contrary position on the interpretation of some constitutional provisions that treat renewable energy sources such as solar and wind as if they were mineral resources, subject to state-defined limits on foreign participation,” he said.

“Renewable energy resources are not exhaustible and their proper use will not deprive future generations of the same resources,” he added.

Ms. Willoughby said this could only work if there are substantial economic reforms in the Philippines to ensure oversight and accountability of foreign companies.

Mr. Abad said the government’s short-term plan is to provide relief packages and financial assistance to the transport and agriculture sector. Meanwhile, the medium- to long-term solution was to develop indigenous supply to reduce dependence on energy imports.

“The solution is to lower the dependency on imports and the only way to do that is to encourage and further develop the indigenous supply,” he added.

This will likely take up to 10 years to explore and another five years to develop, Mr. Abad said. “That will be a long time but that should be started now.”

“We have to start at some point,” he said. “We may not gain the benefit now, but at least 15 years from now the people will benefit from that indigenous supply.”

He also said that there was “nothing wrong” with the DoJ legal opinion, adding, “Opening up (the renewables industry) is the intent… It’s primarily grounded on the need for investors that could provide faster and bigger investment.”

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