Surviving the energy crisis

The current war between the United States and Iran is potentially one of the most serious economic threats in history. If the war continues and develops into another Afghanistan, it could lead to a global recession. Experts have estimated that even if the war would end soon, it would take six months or longer to fully restore the flow of oil and gas from the Persian Gulf.

The Persian Gulf is the route for shipping oil globally from the major oil exporting countries like Iran, United Arab Emirates, Kuwait and the eastern part of Saudi Arabia.

I remember the previous old shocks that resulted from turmoil in the Middle East. In the late ‘70s, the Arabs led by Saudi Arabia turned off the oil flow from the Middle East. The effect on the world and the Philippines was economic disaster. In the Philippines, there was also a spike in oil prices, coupled with a shortage of gasoline and other petroleum products. There were long queues at every gasoline station. I was lucky because my wife had a relative who owned a gas station. However, we had to fill up our gasoline tank in the middle of the night so that we would not be witnessed by other people.

Fatih Birol, the head of the International Energy Agency (IEA), recently said that politicians and even the global oil market were still underestimating the scale of the crisis. Referring to the blockade of the Strait of Hormuz, Birol said: “I am not sure that the depth and the consequences of the situation are well understood.” The IEA has drawn up a list of recommendations on how households can cut their fossil fuel use. This list includes working from home, slower speed on motorways and reducing the usage of electricity.

The Iranian attacks in the Persian Gulf and the Strait of Hormuz have caused havoc among shipping and energy companies. Recently, there was an estimated 3,200 ships stuck in the Persian Gulf, awaiting passage through the Strait of Hormuz. Before the American attack on Iran, around 100-135 ships per day pass through the Strait. Since the beginning of the war last February until recently, only a handful of vessels have been allowed to pass.

Several governments like China, India and Japan are negotiating with Iran for safe passage of their ships through this Strait.

When the US and Israel suddenly launched their strikes on Feb. 28, the US and most of the world believed that the war would not last long. This belief was heightened by the killing of the top leaders of Iran, especially the Ayatollah Ali Khamenei. The speculation is that Trump believed that this would be like his attack on Venezuela. Upon Maduro’s kidnapping, the Venezuelan government immediately sued for peace with the US and capitulated to US demands.

However, in the case of Iran, the hostilities are reaching the fifth week. Trump has just said that the US and Iran have started negotiating for a ceasefire. But Iran has denied that there have been any negotiations.

While the hostilities continue, there are more serious damages. According to the Qatar government, its liquefied national gas (LNG) plants, the world’s largest, have stopped production due to drone strikes. This has caused gas prices to drastically increase, especially in Asia, which is the biggest market. This also is the raw material for fertilizer and chemicals. The longer this conflict continues, the worst consequences are the shortages, price spikes and the disruption of certain supply chains.

On a longer turn, even if the war ends soon, there will be doubts about the security of the Persian Gulf and the Strait of Hormuz. The Iranian regime now knows that this whole region can be used as a weapon anytime there is tension and disagreement with the US and Israel.

The Philippines should learn a couple of lessons from this Middle East conflict. The first lesson is that we must stop depending on the Middle East which now supplies more than 90 percent of our imports of crude oil and LNG. The Philippines must first diversify its sources of supply and look for other sources, especially nearby countries like Brunei and Malaysia.

Then it should go farther and develop sources of supply in other countries like Canada and Nigeria.

Another lesson is that the Philippines should prioritize diversification of its energy sources by drastically lessening its dependence on crude oil-based products. This means increasing the use of electric vehicles for private and public transport.

Then, the exploitation of renewal energy like solar, wind and geothermal should be encouraged by the government through subsidies, tax breaks and financial incentives.

It’s also obvious that the government must accelerate the development of the second Malampaya natural gas field.

Finally, it is time to review and amend the Oil Deregulation Law. In times of emergency like this, the government must step in to control the entire energy industry and must act on what is best for the interests of the people. It must be accepted that the private sector will always raise a premium on making a profit for their business and not for the interest of the nation.