Arbiter

In the face of potential economic stresses brought about by sharply rising crude oil prices, the public’s natural impulse is to look to government for relief. At the risk of courting even more public disapproval, government finds the need to go through the motions of delivering relief from the economic fallout of higher oil prices.

The inherent danger in this situation is that government could trip into blunt policy instruments implemented in the name of bringing the public relief from an economic scourge. The remedy could be worse than the problem.

The political dynamics of the oil price question is exactly similar to the political dynamics arising out of the sharply appreciating peso.

The rising peso harms two influential constituencies: the community of exporters and the OFWs. Whenever the currency rises sharply, these two constituencies, or those who speak in their name, raise the appropriate howl.

In order to appease these two constituencies, government finds it necessary to undertake such things as providing exporters with currency hedging facilities and offering OFWs investment instruments to help offset their “losses” incurred from converting the same amount of dollars for lesser pesos. The last few months, we saw something that might have been unthinkable in another time: the BSP losing money trying to defend the dollar.

The amount of relief these measures provide the beleaguered constituencies is doubtful. The economic wisdom of continuing to encourage our exporters to depend on currency advantages rather than on competitive production processes even more so. But we do these measures nevertheless in order to appease articulate constituencies —even if a much stronger peso is, in fact, our strongest hedge against sharply rising, dollar-denominated crude oil.

We might find some worthwhile lessons from the way the large financial houses responded to the subprime crisis. Many of the large financial houses — such as Merryl Lynch, Bear Stearns and Citigroup — preferred to write off billions of dollars in losses rather than invite unwanted regulatory intervention in what is, after all, an efficient financial system. Taking the losses was less painful than the horrors of blunt policy instruments that could constrict the free market.

In the case of rising crude oil prices, government authorities are now considering a possible cut in the tariff rates of the fuel imports at predefined price milestones.

The proposed tariff cut is now being justified as being more economically beneficial because, according to some computation, the loss of tariff revenues will be offset by averting a decline in economic activity caused by expensive fuel. I am not very sure about these estimates. Economies do not mature by getting the price wrong or by sending out the wrong price signals.

Last time I checked, we already had one of the lowest tariff rates for imported fuel. Those tariff rates are way below the costs the public sphere assumes from the deleterious health and environmental consequences of oil consumption. Now we want to cut those rates even more to produce comparatively cheaper domestic pump prices — even if we already have some of the lowest pump prices in the world.

On top of the tariff reduction proposals, government is now exploring more regulations on energy consumption. These range from inane things like banning Christmas lights (inane because energy use tends to drop during the colder months due to less air conditioning use thus causing a seasonal energy surplus that cannot be stored) to some proposals that resemble energy rationing.

We already have discounts on fuel consumed by the most inefficient forms of public mass transport. Soon, from the fools who have made a cottage industry out of marching in the streets, we might hear demands for outright fuel subsidies.

I am a little hard-nosed about policy questions such as these ones. Some might consider it heartless although it is really just hard-nosed.

I think that price should be, to the best possible extent, the only arbiter of economic behavior. If oil prices go up, then consumers should just tough it out rather than penalize the public sphere through lesser revenues or diversion of scarce fiscal resources for subsidies.

If fuel is expensive, people will use less of it. They will be more prudent. They will make sacrifices in comfort, evenly distributed across the board.

Historically, after every oil price shock, the global economy contracts. Recession is the only proven cure to excessive oil pricing. Recession is painful. But it is the only way to cure excessive pricing.

If governments around the world subsidize oil to avert recessions, everything else will be screwed up. And there will be no reliable market check on oil pricing. Governments simply fall into disastrous indebtedness.

We are not on the verge of recession yet. Staggering as the price of oil might be at present, they have not yet approached the tipping point reached before when adjusted for inflation. The tipping point that will bring about recession is well beyond $100 per barrel.

There will be pain, no doubt. For the month of October, our inflation rate ticked up to 2.7%. In another age, that would be amazingly low. But in these days of disciplined monetary management, 3% seems to be the margin of acceptable inflation.

Had the peso not been appreciating as it had, we might have crossed that threshold earlier. But the peso is appreciating.

The less intervention there is in the currency market, the better insulated we will be. And the less revenue government gives up by lowering tariff on oil, the better we will be able to manage our fiscal affairs and keep our economy strong.