Hang tight, rough ride ahead

The nation may begin to feel the devastating effects of the Middle East conflict as early as next week, economists warn, which could only be a foretaste of a broader downturn in our living conditions.

The Brent crude index has hit nearly $93, which was last seen more than a year after the start of the war between Russia and Ukraine in February 2022. It reached a high of approximately $98 per barrel in September 2023.

The upsurge was driven by tight global supplies and OPEC+ production cuts, after which prices declined and remained below $93 throughout 2024 and 2025.

Based on Department of Energy records, local gasoline prices peaked at P75 per liter and diesel at P70 per liter during those periods.

While Iran is not a major oil producer, ranking only around sixth in the world, and its production accounts for about four percent of global supply, it controls the Strait of Hormuz, where about 20 percent of petroleum transported by tankers passes through.

Iran blocked the area and oil prices started to rise as supplies were delayed.

Transporting crude oil involves insurance, the premium for which has become very costly per stranded ship.

That additional expense is passed on to consumers, resulting in the price spike in petroleum that will persist until a resolution is reached.

The country’s failure to support additional indigenous fuel sources, such as expanded natural gas exploration, has led to a dependence on external factors that affect supply and prices.

Factories also depend on petroleum, which means an immediate inflationary effect across industries.

Despite only a few remaining power plants running on diesel, coal plants and other power facilities still use oil products in some way to generate electricity, thus affecting electricity prices.

Transportation costs constitute a substantial portion of food distribution costs, so an increase in the prices of basic commodities will hit the poorest people hardest.

Since the country imports crude oil and pays for it in dollars, more foreign currency is needed to buy the more expensive petroleum. When more dollars leave the country, the peso weakens, making importation more expensive.

A long war will be catastrophic for our economy, given the country’s cited import dependence, suggesting that the Marcos administration is ramping up its debt addiction. Government obligations have already reached P18.13 trillion, according to the more recent state figures.

Some 35 percent of the total debt is externally sourced. Of these foreign obligations, about 80 percent is in US dollars.

When the peso weakens, foreign debt increases in value because more pesos are needed to pay the same amount in dollars.

The current debt level is already the highest in history, measured by the debt-to-gross domestic product ratio. The rate is around 63 percent, which is the highest in more than 20 years.

The borrowing clip is similar to the period of the pandemic. An economist said the idea behind borrowing is to generate economic growth.

If the economy grows faster than the debt, borrowing more is reasonable and sustainable. In the Philippines, the reverse appears to be unfolding, with debt growing faster than the economy.

If the debt burden becomes too large, the country could face a situation similar to 1983 when it struggled to meet its obligations, declared a default, and sought assistance from the International Monetary Fund.

Should that happen, the country would have come full circle across two Marcos eras.