AS recently as June, the headline of a report on the website of the Canadian Broadcasting Corp. read, “Days of cheap energy over”. The report was based on a study by the International Energy Agency that was released that month. The study talked about the massive capital costs of the world’s estimated $1.6 trillion of investments in energy. The report predicted that “we’ll also be paying at least $15 more a barrel for most oil.”
But a funny thing happened since then: Global crude-oil prices have dropped by 40 percent.
I wrote in mid-October that the game was changing with regard to crude-oil prices, as the United States and Saudi Arabia were doing everything they could to squeeze Vladimir Putin and Russia by forcing oil prices to go lower. But once you start trying to manipulate the markets, they may take on a life of their own. Sometimes you eat the bear; other times the bear eats you.
Falling demand, with China as a good example, combined with increasing production in the US, has combined with the price manipulation to put oil prices in freefall. At the recent meeting of the Organization of Petroleum Exporting Countries (Opec), Saudi Arabia would not allow a decrease in Opec production, guaranteeing that prices will go lower.
While the conventional wisdom is that this drop in oil prices substantially hurts Russia, you will notice that the response from Moscow has been that Russia can survive low prices. Russia’s debt-to-gross domestic product ratio is the lowest among the Group of 20 countries. Russia can continue to pay its debts; Opec member Venezuela cannot. Furthermore, Russia has a “rich uncle” that everyone is afraid to mention, because, otherwise, the West would have to acknowledge that Putin has them in a corner. China will do whatever is necessary to help Russia as a slap to both the US and to Europe.
All the comments about the Philippines’ economic growth going forward are not taking into account the major positive effect of cheap oil on this economy. Oil is now trading below $70 a barrel, and could drop to $50, $40 or even lower. No one knows. Imagine the increase in your excess personal cash if gasoline prices go back to P30 a liter.
But here is where it gets very interesting for the Philippines in the future.
A recent study from an analyst at global financial institution Citigroup plotted the breakeven oil price to meet production costs of every oil field on the planet. Costs range from the Kashagan Ph1 field in Kazakhstan, which needs to have oil priced at $108 a barrel, to the KG-D6 project in India, which has its barrels priced at $25 each. These estimates are projected through 2020.
While proven reserve numbers are sketchy, at best, we know that there is oil and natural gas in the West Philippine Sea (WPS, or South China Sea). The estimated breakeven price for oil and natural gas found in this area is $48 and $55 a barrel, respectively. Those prices make WPS oil some of the cheapest to produce in the world.
Sometimes the Philippine government’s reaction to global situations and events is similar to that of a schoolboy who is always two or three lessons behind his classmates. The Chinese government has expressed a desire for bilateral talks with the Philippines. China appeared to offer a hand of possible cooperation at the recent Asia-Pacific Economic Cooperation summit in Beijing. Perhaps, this might be a case of what Sun Tzu wrote: “When envoys are sent with compliments in their mouths, it is a sign that the enemy wishes for a truce.”
If the Philippine government becomes more proactive in pursuing cooperation with China, it might bring Beijing to the negotiating table. But one thing is certain: Without formal bilateral talks, China is going to continue encroaching on the Philippines’ territory—and the natural resources found in it—and there is nothing that Manila can effectively do about it. The policy that the government has followed in the last couple of years has accomplished little.
The stakes in the WPS are increasing rapidly, even as the Philippines’ strength is diminishing.
Send me an e-mail at mangun @gmail.com. Visit my website at www.mangunonmarkets.com. Follow me on Twitter at @mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.