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Oil versus rice

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FINEX Folio -- Reynaldo C. Lugtu, Jr.

FINEX Folio

LIKE the proverbial oil and water, oil and rice shouldn’t mix as it will spell disaster. Increasing prices of oil and rice in the world and local markets, respectively, have hit the Philippines hard which caused the prices of goods to climb.

Inflation rate accelerated to 6.4% year-on-year in August 2018, faster than the previous month’s 5.7% and the 2.6% of the same period last year, according to the Philippine Statistics Authority (PSA). It is seen to remain above 6% until October, based on the forecast of financial services firm Nomura.

In this period of global oil price hikes and tight rice supply, food inflation zoomed to 8.5% in August, at its fastest in nearly 10 years based on 2012 prices, according to PSA. Rice, the main driver of food prices, saw inflation of 7.1% in August. Vegetable prices rose 19.2%, fish by 12.4%, meat by 7.6%, and fruits by 6.2%.

As a result, poverty in our country may reach new highs — truly a disaster. Second quarter 2018 Social Weather Survey showed that self-rated poverty was up six points, to 48%, self-rated food poverty up by five points, to 34%, and self-rated poverty up 18 points in Mindanao, and 13 points in Visayas and National Capital Region. Its highly likely that third quarter self-rated poverty will increase significantly.

Indeed, oil and rice (or food for that matter) are two commodities that have a powerful impact on economies, countries, and its people. Individually, they have become threats to national security of countries the world over.

Nations’ dependence on oil and its shortage will pose greater risk on national, global, and energy security. In January 2017, Saudi Arabia’s energy minister Khalid A. Al-Falih warned that he foresaw a risk of oil shortages by 2020. On the other hand, in the March 2017 report of the International Energy Agency (IEA), it warned that the global investment slump of 2015 and 2016 already poses a risk to future oil supplies. The report projects that if current trends continue, spare production capacity in 2022 will fall to the lowest level since 2008 (when oil prices nearly reached $150/bbl).




Oil has become a geopolitical weapon used between the oil-producing and oil-consuming nations which will result to the possible explosion of Middle-East conflict. It has been reported that oil, among other factors and considerations, played a role in the Bush administration’s decision to invade Iraq. With 70% of the oil reserves of the Organization of the Petroleum Exporting Countries (OPEC) residing in the Middle-East, the depletion of oil in the future will pose greater risk of large-scale conflict.

On the topic of electric vehicles, the IEA estimated they will only displace small amounts of transportation fuel by 2022. Even the introduction of 50 million EVs by 2024 as some experts are projecting will only reduce global demand by 3.38% in 2024.

On the other hand, the alarming price increases of staple foods (e.g. rice, corn, vegetables), have brought woes to ordinary Filipinos. International rice prices have steadily increased since late 2016, according to the Food and Agriculture Organization. This tendency has continued unabated in 2018, reflecting an increase by 4%, its highest since November 2014.

‘Shrinkflation’ or the shrinking portions of food is already creeping into carinderia plates as prices soar. This is reminiscent of the 2007-2008 rise on world and regional food prices which brought riots in about a dozen countries — from Philippines to Haiti — which threatened national and food securities.

In 2008, five big Asian rice exporters — Burma, Cambodia, Laos, Vietnam, and led by Thailand — agreed in principle to form a cartel to be known as the Organization of Rice Exporting Countries (OREC) that would manage rice price-fixing, akin to OPEC. Many lawmakers around the region expressed concern on this planned cartel, as it could control the staple food and price it beyond the reach for millions of people. Thailand eventually dropped its plan amid opposition.

Unlike oil and its organized OPEC which has a global control of petroleum, a possible OREC in Asia has only a regional dominance. Rice exporters do not have the capacity to establish cartel in the same magnitude as OPEC, as there are over 80 countries producing rice.

The security risks associated with oil and rice, seemingly are separate impacts that nations need to prepare for. But in combination, they may pose the greatest threat and risk ever known, because one is inextricably linked to the other.

For one, many experts agree that the rising price of rice is not due to its shortage but to the uneven distribution. There is enough rice in the world to feed its entire people. The problem lies in the distribution of rice from other rice producers (apart from exporters in the Association of Southeast Asian Nations) to the rest of the countries that need it; and distribution and logistics require fuel, i.e. oil, to transfer goods from one place to another. The higher the price of oil, the higher the distribution cost, the higher price of goods transported.

Another link between oil and rice is the increasing production of biofuels. As a result of the Kyoto Protocol to reduce the world’s dependence on oil, almost all of the increase in global corn production in the last two decades went to ethanol production in the United States, depleting supplies for other uses. Critics including the World Bank, are blaming that the rise of biofuel production as contributing to the soaring price of food (rice and wheat) around the world.

Oil and rice are two separate commodities that should be tackled in combination. Nations should still be reducing its dependence on oil by developing alternative sources of energy apart from biofuels such as solar and wind energy. But they should also be developing new technologies for producing higher-yield, disease-resistant grains.

Energy and food security are two issues that need to be figured out as one. And we have the biggest stake on this as the Philippines is a net importer of oil and one of the world’s biggest importer of rice.

 

Reynaldo C. Lugtu, Jr. is President & CEO of Hungry Workhorse Consultancy Inc, a digital and culture transformation firm. He is the Chairman of the ICT Committee of the Financial Executives Institute of the Philippines (FINEX). He teaches strategic management in the MBA Program of De La Salle University. He is also an Adjunct Faculty of the Asian Institute of Management

reylugtu@gmail.com

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