Gasoline prices may rise to P90/liter; inflation to 7 percent; peso rate to P65/dollar

THE United States and Israel’s unprovoked war on Iran that started Feb. 28 will have major adverse consequences on our economy, already weakened in the past 12 months because of high interest rates, weak investment sentiment due to a steep fall in investor confidence, persistent inflation, peso weakness and slowing global demand.

We are such an unlucky country that major external shocks will hit us just when we have the most incompetent and corrupt government since the elder Marcos. Indeed there are parallels. Benigno Aquino Jr. was assassinated in 1981, creating political instability which was worsened by the global debt crisis that started in 1982.

The Philippine elite got so exasperated over the economic meltdown that they backed the coup attempt in 1986 that led to the EDSA uprising. This time another external shock will be coming on the heels of the political instability created by the shanghaiing of Marcos’ arch-enemy, Rodrigo Duterte, to a foreign kangaroo court and the disclosures of massive corruption of this administration.

While the war rages 7,300 kilometers away from us, the country has two huge vulnerabilities. First, up to 80 percent of our oil consumption is imported from the Middle East, which accounts for up to 27 percent of its total energy consumption. The certain rise of oil prices will push up prices of nearly all commodities, and even disrupt economic activity. The cessation of shipping through the Strait of Hormuz, the only sea exit for tankers carrying Middle East oil, will be very damaging for us; it could even result in shortages and a rationing system the current incompetent government will be unable to manage.

The energy department has already estimated the first round of increases as a result of the US-Israeli war on Iran: gasoline, plus P1.10 per liter; diesel, plus P0.50 per liter; kerosene, plus P0.90 per liter. Oil prices jumped roughly 8 percent to 13 percent immediately after the war erupted, from the pre-war Brent crude price of $70 to $73 per barrel.

Benchmark

Most international oil analysts are predicting that if the war continues, the benchmark Brent oil price will rise to at least $100 per barrel.

Using recent pump prices in Metro Manila as a reference point, projected increases under different oil scenarios are as follows:

– At $100 per barrel, gasoline prices could rise into the P72 to P78 per liter range. Diesel could increase to P65 to P71 per liter. An 11-kilogram household LPG tank could rise by approximately P125 to P285.

– At $120 per barrel, gasoline could move into the P81 to P91 per liter range. Diesel could approach P74 to P82 per liter. LPG tanks could increase by P250 to P500.

These estimates even appear optimistic, as fuel prices reached their all high time in June 2022 as a result of the Russia-Ukraine war’s oil shock of 2022, even if no supply disruption of Middle East oil occurred: gasoline, P90.10 per liter; diesel P86.67; kerosene, P85.09 per liter; and LPG, P1,200 per 11-kg tank. Some analysts are saying that with the Russian war against Ukraine limited to that area in the world, in contrast to the US war against Iran which has spread all over the Middle East, gasoline prices could even go beyond P100 per liter.

Such increases obviously will not be borne only by private vehicle owners. Public transportation fares would also rise, hitting hard the bulk of the nation’s population. Agricultural production costs would increase. Food distribution costs would rise. The cumulative effect would be broad-based cost pressure across the economy.

The country’s second big vulnerability involves remittances from the 2 million overseas Filipino workers (OFWS) in Middle East countries whose US military bases Iran has and will be hit by Iranian missiles. There is certainly the possibility that some of these will miss their targets and instead explode into civilian areas. Already, OFWs in Dubai have asked the government to transport them ASAP back to the country.

A prolonged regional conflict would not immediately eliminate the Middle East demand for Filipino labor, since Gulf economies have substantial financial buffers and long‑term development plans. However, higher uncertainty, potential slowdowns in construction and services, and tighter security conditions could alter hiring plans or lead to fewer new contracts. Any noticeable decline or even stagnation in remittance growth would weaken domestic consumption, especially among low‑ and middle‑income households that rely heavily on these inflows.

Shocks

On the basis of recent inflation in past shocks, three plausible scenarios can be outlined, analysts say. If oil stabilizes around $100 per barrel, overall inflation could drift into the six to seven‑and‑a‑half percent range, much higher than the central bank’s two to four percent projection. It would erode household purchasing power, particularly among lower‑income groups that spend a larger share of their budgets on food and transport.

If oil prices rise toward $120, inflation will be in the eight- to 10-percent range, roughly replicating the pressures seen during the Ukraine war spike. A severe scenario involving a major disruption at the Strait of Hormuz, with oil surging beyond $150 per barrel, could push inflation into double‑digit territory, possibly in the low teens. At that point, the country would be facing a general cost‑of‑living shock that would be politically and socially destabilizing.

The exchange rate is another important transmission channel. Because oil is traded in US dollars, higher oil prices increase the Philippines’ dollar import bill. All else being equal, this raises demand for dollars relative to pesos and puts downward pressure on the local currency. Before the escalation in the Middle East, many private forecasters expected the peso to trade around P56 to P59 per US dollar in 2026. This, however, assumes relatively stable oil markets and only moderate external shocks. Those assumptions no longer hold.

With oil at nearly $100, the peso could easily weaken into the high‑P50s to around P60 or P61 per US dollar, even without a financial panic. If oil moves toward $120, the currency could slide into the low‑P60s, perhaps around P61 to P64 to the US dollar. Under a severe oil shock with prices above $150, a mid‑P60s peso, and short‑term spikes near P70 in periods of market stress, cannot be ruled out. Currency depreciation would amplify inflation by increasing the peso cost of all imports, from fuel and food inputs to spare parts and capital equipment, and would complicate the central bank’s task.

In the years before the fall of the Marcos dictatorship, because of the political instability at that time created by the Aquino assassination and the global debt crisis, inflation zoomed from 10 percent in 1983 to 50 percent in 1984. Inflation was contained at 10 percent in 1985, but at the cost of a severe 7-percent economic contraction This happened in the 1980s, it can happen this year and the next.

Inflation

Inflation in the past months was near the central bank’s target, giving it a window to lower interest rates to support growth. A sharp oil‑driven inflation spike would close that window quickly. To maintain credibility and prevent inflation expectations from rising, the central bank would likely have to keep policy rates higher for longer, and in a severe scenario might even be forced to tighten further.

The resulting higher interest rates would cool credit growth, dampen investment, and restrain consumer spending. These would also raise the government’s debt‑servicing costs at a time when fiscal space is already constrained. The authorities would be caught in a classic policy trade‑off: control inflation at the cost of slower growth, or tolerate higher inflation in the hope of preserving momentum, while risking a more painful adjustment later.

War‑risk premiums and insurance charges for vessels operating in or near the Gulf have increased, and some lines have rerouted or delayed sailings. The Philippines depends heavily on key imports such as wheat, fertilizer, machinery, electronics, and a wide range of intermediate goods used in manufacturing and assembly. Higher freight and insurance costs raise the landed prices of these imports, resulting in higher food costs, construction materials and manufactured products. These higher logistics costs can quietly but steadily contribute to inflation and reduce the competitiveness of export‑oriented companies.

There is however a silver lining in this perfect storm that will hit us. Just as the Philippine elite decided to kick out Marcos Sr. in the 1980s thinking this could save the economy, it might decide similarly now, especially with Marcos Jr. being much more incompetent and corrupt than his father, and failing to develop strong ties with the military.

---

Facebook: Rigoberto Tiglao

X: @bobitiglao

Website: www.rigobertotiglao.com

The post Gasoline prices may rise to P90/liter; inflation to 7 percent; peso rate to P65/dollar first appeared on Rigoberto Tiglao.

Gasoline prices may rise to P90/liter; inflation to 7 percent; peso rate to P65/dollar
Source: Breaking News PH