Lack of fuel reserves, AI industries amid oil crisis drives up Phl inflation: BSP

The Philippines’ higher inflation rate compared to its neighboring countries—also exposed to global economic pressure—can be attributed to a lack of strategic oil reserves and limited artificial intelligence (AI) capabilities, the Bangko Sentral ng Pilipinas told a Senate panel Thursday.

BSP Governor Eli Remolona Jr. said the Philippines remains the most vulnerable to global oil supply disruptions among its ASEAN neighbors because it relies heavily on oil imports, unlike Indonesia and Malaysia, which maintain commercial and operational fuel stockpiles.

The Philippines imports almost all of its oil (95 to 98 percent) from the Middle East, making it overexposed to global price spikes and supply shocks stemming from the ongoing United States-Israel war on Iran.

“We are the ones affected by the oil crisis. Unlike Indonesia, although they are still importing, they have oil. Same with Malaysia; they have oil, but they are importing a little. But us, we really don't have oil,” Remolona said during the first hearing of the Senate committee on finance on the proposed 2027 budget.

Remolona’s remarks came in response to Senator Risa Hontiveros’ query about why the Philippines posted higher inflation than its regional neighbors—Malaysia, Thailand, and Vietnam—even as the majority of ASEAN countries are vulnerable to global headwinds.

In July, the Philippines’ headline inflation was logged at 6.2 percent. Although it slightly decreased from 6.4 percent in June, it remains comparatively higher than Malaysia (1.8 percent), Thailand (1.95 percent), and Vietnam (4.4 percent).

Indonesia’s inflation rate also eased to 2.88 percent in July, dropping from 3.34 percent in June.

Remolona said the Philippines needs to “diversify” its sources of oil imports to reduce exposure to abrupt disruptions and price shocks, since tensions from the Middle East war remain volatile and could result in the closure of the Strait of Hormuz and halt exports to the Philippines at any time.

Aside from the lack of dedicated state-owned strategic fuel reserves, the Philippines having a limited high-tech AI sector to compensate economically compared to neighboring countries is another contributing factor, the BSP chief added.

“You can also divide economies into those that have AI, and those that don’t. We don’t have AI—at least not [advanced] AI—so economies that do have AI can compensate for the lack of oil. So in that sense, we are really at a disadvantage,” Remolona remarked.

Pax Silica may help

The Philippines currently produces traditional low-bandwidth semiconductors, which he stressed are insufficient to support advanced AI applications.

When pressed by Senator Robin Padilla on whether the United States-led Pax Silica initiative could be beneficial to the Philippines, he replied: “If it materializes.”

An initial assessment by the Bases Conversion and Development Authority revealed that the Pax Silica high-tech industrial hub in New Clark City could consume 65 to 90 million liters per day, equivalent to up to 36 Olympic-sized pools.

This further fueled opposition from critics, who feared that heavy extraction could threaten irrigation for local farmers, reduce access to potable water for nearby residential communities, and drive up electricity rates.

As the country’s central bank, the BSP’s mandate is to safeguard price stability, although Remolona admitted that taming inflation in the face of supply shocks remains a big challenge.

“Since the start of the war in Iran, oil prices have risen sharply. As a consequence, our energy prices and our food prices went through the roof. There is little the BSP can do about the price of oil, except that our tools are limited to those coming from the supply side,” he said in his opening speech.

The BSP chief noted that while inflation has moderated in recent months, it remains well above their target of 3 percent.

Remolona said the gross domestic product could also recover in the third quarter and particularly in the fourth quarter, citing the anticipated acceleration of government investments.

Senator Camille Villar asked what factors are behind the quarter two slowdown and what could drive a recovery in the next two quarters.

“The main factor is obviously the collapse in government investment. But this is in an effort to discipline government spending, which is understandable. And the government, I know, is making strenuous efforts to accelerate investments. So we think that should work, and so that by the fourth quarter we should be back on track,” he replied.

Several lawmakers in both chambers of Congress have pushed for the creation of a government-managed strategic petroleum reserve, or stockpile, to build a buffer stock and help stabilize prices during oil crises.

In July, Energy Secretary Sharon Garin told senators that the Philippines has been in talks with the United Arab Emirates and Japan concerning Manila’s plan to establish a national and a strategic oil reserve.

A whopping P5 billion is needed to build a reserve for 1 million barrels alone, and construction could take about a year.

Garin claimed that the DOE intends to finish construction in the last quarter of 2027, if not the first quarter of 2028, before President Marcos Jr. leaves office.