[OPINION] Oil, gas, and the CPI 1

[OPINION] Oil, gas, and the CPI

Dean Dela Paz

Posted at Feb 17 2022 03:54 AM

The country is now in the middle of a mad campaign, a frenzy existential in nature and a sharp counterpoint to our manic depressive quest to regain the democracy we constantly lose whenever we experiment with terrible leaders coming from comfort zones achieved after 21 years of a nightmarish dictatorship. The paths for both good and evil have been cleared and we are racing towards an existential Armageddon that could spell the difference between a hopeful future or another enduring hell.

But rather than politics, we will focus on a sector of the economy firmly in the clutches of political operators tasked to oversee a critical driver of domestic productivity that when manipulated could spell the difference between regaining our waylaid democracy or forever losing it to perpetual authoritarianism.

Politics and the economy are intertwined in our milieu in more ways than we would like. The unforgotten dictator plundered and drove us deep into indebtedness. To this day, the costs we continue to pay remain scars both calloused and fresh.

Indulge us basic backgrounders on cost inputs that have gone through the roof in recent weeks, catapulted not only by global catalysts but also by poor and incompetent energy management by officials who recently announced accursed increasing energy rates, diminished power supply and the possibility of blackouts.

The alarm is raised not only for its impact on the prices of essential goods within the basket that comprises the consumer price index (CPI), but for how it might affect our ballots this May 2022. After all, power outages during critical political exercises are nothing new.

Energy is a critical determinant of the political economy. It catalyzes inflation, reduces the inherent value of the peso and purchasing powers. The charge on our energy officials is critical. They control two related industries. One is the oil, gas, and fuels industry. The other, the electricity and power sector. Both are economic drivers of gross domestic productivity (GDP).

Fuel prices, whether oil-based, gas or from renewables are connected to the CPI in a cause-and-effect manner. Any upward movement sets price trends in the CPI. The correlation is measured by the input-output econometrics and the composition of an economy’s basket of goods.

Since the seventies, when global economies were threatened by fuel shortages, to today when threats are borne out of an entirely different enemy, different economy-specific CPI reflect differently. In western economies, their basket has developed to include more service inputs than life-sustaining essentials like food that are directly impacted by fuel and power costs.

The linkage in the 1970s where the CPI rose over tenfold based on benchmark oil prices showed over 70% of the elements within the economic basket were directly impacted.

Western economies however developed. By replacing elements in their basket with services substantially de-linked from fuel and power costs, they reduced their dependence on these cost catalysts. Their current correlation now hovers between 50% to as low as 30%.

Unfortunately, aggravated by toxic political influences, energy mismanagement, dereliction, and an imminent return to an authoritarian kleptocracy, our CPI still reflects the 70% to 100% correlation. The evidence does not lie. Food production remains directly and negatively impacted by high fuel and power costs.

This highlights how local and global politics continuously undermines our development. A case in point is the exponential negative impact of losing control over our Malampaya offshore gas fields.

Rodrigo Duterte’s ill-advised pivot to an insatiable hegemonic military superpower hellbent on seizing our offshore wealth, through force or corporate backdoors and wormholes, is part of Duterte’s dark legacy likely to be perpetuated by a successor likewise cozy with the same Duterte wooed.

Such pirouetting is shared by political operators who surrendered the servicing of vital offshore resources to a controversial entity with proven ties to a foreign state-run offshore oil conglomerate.

The resultant stranglehold is not simply on sovereignty and energy security, plus what would have been our millions now diverted to a single entity on the sly, but it is also on the debilitating costs inflicted on the man-on-the-street, his cliché basket of goods, and by May, possibly on the sanctity of his ballot.

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(Dean dela Paz is a former investment banker and a managing director of a New Jersey-based power company operating in the Philippines. He is the chairman of the board of a renewable energy company and is a retired Business Policy, Finance and Mathematics professor.)

Disclaimer: The views in this blog are those of the blogger and do not necessarily reflect the views of ABS-CBN Corp.