THE substantial fall in the global price of crude oil over the last months is certainly good news. Everyone has more money in his or her pocket with the drop in the price of gasoline, and that is good for each of us personally, as well as for the economy.
The first notable macroeconomic effect for the nation has been a reduction in the inflation rate over the last three months with many prices going down. Because the Philippines is still basically a cash-based economy, this reduction in money directly spent for petroleum products will go for other purchases, rather than simply paying down debt, as is happening in other countries. That will have a positive impact on overall economic growth in the months to come.
The economic follow-through effect of lower oil prices has been quantified by the Oxford Economics Ltd. Group in its latest report. Oxford Economics provides economic forecasting and modeling as one of the world’s foremost independent global advisory firms. In a study of 45 countries around the world, Oxford Economics projected the longer-term effect on the gross domestic product (GDP) growth rate through 2015.
The global economic press earlier said, “The biggest winner would be the Philippines, whose economic growth would accelerate to 7.6 percent on average over the next two years” (https://www.bloomberg.com). This is based on an expected increase in the GDP of about 1.5 percent. By comparison, the US would see growth increased by 0.785 percent; Thailand by 1 percent; and South Korea by 0.5 percent. Losers are the major oil-producing nations like Saudi Arabia and Russia, both down 3.75 percent.
But don’t get too excited.
These forecasts are based on the price of crude oil going to $40 per barrel, which the price has not yet fallen to, and staying at that price through at the least the rest of 2015 and further in 2016.
The projection of the better GDP figures is based on the previous price of crude oil at $84 per barrel, a price last seen in September 2014.
Therefore, the price of crude oil must continue to fall by over 50 percent, from $84 per barrel. Further, the $40 price per barrel must continue at least through the end of 2015 to gain the full 1.5-percent advantage to the Philippine economy.
That is a lot to expect of developments to happen.
But the importance of this report is an understanding of how critical oil prices are to the Philippine economy, something that we have been saying for months. We transport our goods and people using fuel-inefficient cars, trucks and buses, rather than electric light rail and traditional railways.
Lower oil prices are great, but should not be considered a savior of the economy.
Image credits: Jimbo Albano