Economist weighs oil price impact (BusinessWorld)

Published in the August 19, 2005 issue of BusinessWorld

The Economy

BY JENNEE GRACE U. RUBRICO, Senior Reporter

Economist weighs oil price impact

1.2% reduction in GDP seen

A 30% increase in crude prices this year from 2004 will slow the economy by 1.2%, a University of Asia & the Pacific (UA&P) economist said.
Peter Lee U, Dean of the UA&P’s School of Economics, told reporters yesterday that the projection is based on International Monetary Fund (IMF) computations which show that a 10% increase in crude prices slows down economic growth by 0.4%.
"Given what the recent prices have been, and since [Dubai prices have already hit] $55 [per barrel] and I expect that to go down [after other countries complete their stockpiling for winter], we’re going to end with an average of over 30% over the average of 2004. Using the rule of thumb of the IMF, there may be a 1.2% reduction in GDP," Mr. U said.
He noted that the 1.2% reduction will solely be due to the oil price hikes. Other factors like the political instability will likely further erode economic growth.
He also said that based on IMF figures, the Philippines, along with Korea, will be among the hardest hit by increasing oil prices in Asia.
Mr. U said the computation could not be applied directly to the government’s 5.1%-5.2% GDP forecast for the year since the government has already factored in some Dubai crude hikes for this year.
"The target already takes into consideration the high oil prices. But I think they were not anticipating this level of increase of oil prices," he said.
Mr. U also said higher oil prices will adversely impact inflation. Based on historical trends, however, this will not be as sharp as the effects on economic growth.
He also said the oil prices at this point could justify the deferment of taxes on oil, but added that the government has to make a judgment call on this.
"If you have only one bullet, you have to decide if you’re going to use it now, or if you wait until later," he said.
Removing taxes on oil may ease pressure on pump prices but will cut into government revenues. This will have an impact on interest rates and the country’s credit ratings, he added.
If the government pushes through with oil rationing, he said it will need to address several issues, foremost of which is the manner of implementation.
If the government limits the amount of fuel that a vehicle could get per day, this would only push vehicles that do not need as much fuel to sell the extra allocation to those that need it at a higher price, Mr. U said.
"This will have the same effect as raising prices... Rationing is better left to the price system."
He projected Dubai prices hitting $70 per barrel next year.
"There is no respite from high oil prices. For the rest of the year and next year expect prices to remain high because this is caused by external factors beyond our control... Oil reacts on political tension," he said.