Diesel shortage

Diesel prices are rising at untenable levels, which should signal to the Philippine government that its proposed subsidies are no longer acceptable. This crisis is not likely to ease anytime soon after the worst combination of factors created an environment where a shortage of diesel globally is now threatening economic recovery.

Never in the history of the oil industry has diesel exhibited a mind of its own. Usually, when crude oil prices rise, gasoline moves in tandem, with diesel meekly following a decent distance behind. This time, however, the price of diesel is rising faster than gasoline.

As a middle distillate in the oil refiners’ column, it is often considered inferior to gasoline in firepower and is thus priced accordingly. However, through the years, it has also become a source of cheap power to run generators and transportation.

Currently, there is a diesel shortage in Singapore, where most of the local oil companies get their stocks, largely due to refiners depleting their stocks to unsustainable inventory levels during the pandemic years to compensate for the huge drop in gasoline demand. Stocks are now estimated at about 30 percent below the pre-pandemic five-year average.

Demand spike

The reopening of more economies in the region in recent months has led to a spike in the fuel demand from manufacturing facilities, cargo shipping operations, freight transportation, as well as other industries like mining, and that rely heavily on diesel to fuel their activities.

Even before the Russian invasion of Ukraine last month, diesel supplies in other parts of the world were already running low. Traders had already been talking about how BP and Shell had withheld its sale of spot diesel cargoes on the German market for two weeks because of tight supply and high prices.

The situation took to a turn for the worse when Shell said last week that it would immediately stop trading of Russian crude, as well as phase out any other business it had in Russia in response to widespread public criticism in Europe.

Supply-demand quandary

For now, the seemingly quick and easy solution to the diesel supply shortage is for refiners to ramp up production until stocks are replenished to levels that will match consumer demand. However, with the current tightness in crude supplies globally, bringing up refining levels will only aggravate the situation.

Additional pressure on demand for crude will translate to higher prices, not just for crude, but also for refiners’ products like diesel. It’s a cycle that could go on and on.

A last resort to this supply-demand quandary is to ration diesel supply, which in effect will mean that affected industries and sectors will have to reduce production. This, of course, can lead to more problems, including more pressure on diesel prices.

We are really living in abnormal times: a pandemic has disrupted all that we had taken for granted, and now rising tensions because of Russia’s invasion of Ukraine is even threatening to complicate further our attempts to normalize life.

Cushioning high diesel prices

As with the rest of the world, the Philippines needs to come up with its own strategies to deal with high diesel prices resulting from the global diesel supply shortage – from ensuring that the Philippines will continue to have ample diesel fuel to mitigate the effect of extraordinarily high diesel price.

Local oil companies that import diesel should be asked to raise their inventory levels in anticipation of a further squeeze on global stocks. Likewise, an energy conservation campaign should be launched to make people more aware of the global oil supply and demand situation.

A stronger response to the high prices of fuel products, with more attention given to diesel, is needed. Cushioning the impact of high diesel prices on all essential users is essential.

So far, the government has allocated additional subsidies to the public utility vehicle sector, as well as more fuel vouchers for the agriculture sector’s food producers.

Diesel, though, is a fuel widely used by the logistics transportation sector to transport goods throughout the country. With diesel prices rising more than 50 percent compared to yearend 2021, the passed-on cost on delivered goods will be inflationary. Lower priced diesel must be made available to them.

Manufacturers who have their own generators using diesel fuel will also be affected by the currently high prices. So do power generators that rely on diesel. Fuel subsidies must likewise be extended to them.

The government can reallocate the unspent portion of the pandemic funds to support lower diesel prices. This would be a better alternative to suspending excise tax collections.

Return to normal

Two years ago, on March 16, the government imposed a lockdown across the whole country in response to the COVID-19 pandemic outbreak. Since then, 3.7 million cases in the country have been reported, with over 46,000 still considered active cases. More than 57,000 had died.

Ever since vaccines were allowed for use, over 60 million Filipinos have received the full dosage, and some 10 million given booster shots. With such levels of immunization, plus the absence of any new variant of concern to date, the government is pursuing a full reopening of the nation’s economy.

Filipinos are now learning to live with the virus, but the scars left by the economic paralysis during the last two years will need a longer time to heal. A return to normal will require a doubling of effort by everyone to recover what has been lost, and with luck, to get back on track for the country to becoming once again a tiger economy.

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