WHATEVER happens in the coming days and weeks in the Persian Gulf, the energy shortages across most of Asia are going to drag on for months. Of course, those of you who have read my earlier columns will probably remember that I’ve characterized the problem here in the Philippines as a price crisis and not a supply crisis, and may be wondering why I’ve just used the term “energy shortage.” That is because the latter is a broader term, and the other two are more direct manifestations of it.
An energy shortage means that energy demand cannot be completely met, either because the energy simply isn’t available (supply crisis), or it is too expensive to obtain (price crisis). As of now, we have ample energy supply, although the risk of supplies running out is increasing the longer the situation in the Persian Gulf continues, but the prices for energy remain unmanageably high. As a result, we are forced to make reductions in our energy demand that we otherwise would not, and thus are experiencing an energy shortage.
OK, so enough with the semantics; the clarification was necessary, however, because online nitpickers will seize on any apparent inconsistency. I don’t really mind that, because it does keep me on my toes. As I already said, the energy shortage in this part of the world is going to continue for some time. Even if the war ended today, the biggest obstacles to restoring a “prewar” environment are things that cannot be overcome quickly, infrastructure and shifts in policy and behavior.
First, the infrastructure. There has been some degree of damage done to petroleum production infrastructure in every country around the Gulf, some of it severe. A couple of weeks ago, Qatar Energy, which runs the huge Ras Laffan liquified natural gas (LNG) processing facility — the source of about 80 percent of the LNG we use here — said that its output would be reduced by about 20 percent for the next five years. That 20 percent represents more LNG than the Philippines exports in a year, so it definitely will have an impact on prices, and perhaps even supply. The damage to various oil refineries in different countries will slow output to some extent, too, and will take months to restore.
Then there is the Strait of Hormuz, which is quickly shaping up as the flash point for whatever comes next in this war. Even if the strait was opened “completely” right now — as in, if both the United States and Iran back off entirely and allow free passage to all ships through the critical waterway — the bottleneck will take several weeks or months to loosen. There is quite a traffic jam on either side of the strait, and safety dictates that only a certain number of ships can pass through at any one time. The bigger issue is that a significant area of the strait has been mined, which for the moment has limited ships to two narrow channels on the Iranian side of the strait. The US is supposedly working on demining the area, or is at least planning, too, but since the Iranians who planted the mines are apparently unsure where all of them are — thanks in part to the US blowing up some of the ships and crews that did the work — clearing it may take several weeks.
All of these things are going to keep the flow of oil, gas, refined products and other critical commodities such as urea for fertilizer constricted for some time, reducing supply availability for some places and keeping prices elevated for everyone. The second factor, however, is not as obvious, which is hoarding behavior on the part of governments and distributors to protect against the risk of renewed conflict and new supply shocks. Every country that does not already have some form of “strategic reserve” is clamoring to create one now, including the Philippines. Likewise, big industries such as power generators, large manufacturers and airlines are laying on additional fuel inventories to whatever extent they have the capacity to do so.
Ordinarily, having some backup supplies readily at hand in case of a crisis is prudent, but human nature and economic considerations being what they are, the tendency is to ignore the problem until a crisis is at hand. Maintaining a reserve of petroleum products is expensive even under the best conditions, because unlike the impression we may have from every post-apocalyptic movie we’ve ever seen, petroleum products have a relatively short shelf life; the more refined they are, the shorter the time they can be kept before they degrade into something unusable. They are, after all, organic compounds, subject to decomposition.
So, having a reserve is not just a matter of buying up a bunch of crude oil, or gasoline, or LNG, and storing it away in tanks until it is needed, but rather a continuous management exercise of distributing aging supplies and replacing them with fresh ones. Since it is expensive to do that, the easier choice for governments and large fuel users is to avoid it in times when supplies and prices are benign, which is fine, until they suddenly are not.
Here in the Philippines, the biggest responses of the government to the ongoing crisis have been to roll out subsidies for critical sectors such as transport — actually, only transport, I’ve not heard of any for anyone else — and to implement various energy-saving measures. The subsidies are unsustainable, because they are not being fed by some significant national wealth resource, but rather government revenues from taxes. The energy-saving measures, such as the shift to shortened workweeks, will have a severe effect on the overall economy in large part due to the high proportion of informal employment.
As a recent analysis by Oxford Economics explained, “fewer working days can also quickly erode incomes for daily-wage and contract workers. Because these households tend to have high marginal propensities to consume, the hit to consumer spending is usually immediate. We estimate that the Philippines’ retail volumes fell by almost 4 percent by the third month after a global oil price shock, one of the largest declines in the region.”
In effect, what the government is doing is achieving energy conservation through demand destruction, rather than efficiency gains, and this is going to hit middle- and lower-income households the hardest. If the war is resolved immediately, this might only mean a period of economic doldrums here until maybe the end of this year, but at this point it looks as though the downturn may go on for far longer than that.
ben.kritz@manilatimes.net
Bluesky: @benkritz.bsky.social
Website: www.badmannersgunclub.com
