How will the Iran war drive up your daily expenses?

You're listening to a CNA podcast. Energy prices are climbing again. The war in Iran has choked off the Strait of Hormuz and the world is feeling it. And while that might sound like a macro problem, something for economists and ministers to worry about, you best believe it has a direct line to your household budget. Your electricity bill, your hawker meal, your ride home from anywhere. I'm Andrea Heng and welcome back to the Money Talks podcast. Now today we're getting into what rising energy costs actually mean for everyday Singaporeans like you and I. Not just what's happening in the markets but where you would feel it first and whether there's anything you can actually do about it. I am leaving this difficult task to the men in the hot seat today. Dr. Pushan Dutt, professor of Economics and Political Science at INSEAD. Welcome to the show. Thank you for having me. So my rights to work, Dr. Pushan are easily a few dollars more expensive now. What about you? Do you feel it? Is that where you're feeling it first? The higher prices? Of course, if you go to the gas station here or petrol station as the British call it, you can already see that petrol prices have gone up by 15%. What I found a little bit shocking was that diesel which usually is cheaper than petrol is today higher price than petrol. So that is inverted. And of course the reason for this is that if you look at the supply hits that petrol takes versus diesel takes, they come from different parts of the world. A lot of the diesel and jet fuel comes from the Middle East. Whereas for petrol there are people have a lot more reserves. They have alternate sources. So therefore the diesel prices and the jet fuel prices are really shot up. So the first thing that we are seeing is in the petrol pump over time there will be multiple effects because transport logistics costs go up. The place where I saw is since I met Henshia and we traveled between campuses, airline prices have absolutely skyrocketed. So you travel to France quite regularly to go teach at the other campus? So how much were your flight tickets before the war and today? So Henshia, because it looks after its employees well, when we go to teach the pay for business class. So approximately down trip fare was about $7,000 prior to this. And in fact oil prices were coming down. If I look at the Singapore inflation numbers which came out the last ones in February, they look really good. This is pre war because January, February, oil prices are coming down. Now those things are running at about $15,000. A colleague of mine just left yesterday and she went on economy and she paid 6,000 euros for a round trip. Wow. Economy, this is not business. Right. Right. So therefore all of us have to now start doing adjustments either go back to Zoom like during COVID or just travel less. Yeah. So if energy costs rise and we're thinking a bit far ahead here because we like to plan our budget, everything from my hawker meal to even cooking at home. So even if I stay at home and cook, my produce might cost more because of fertilizer costs because of shipment delays, etc. My online shopping is going to be delayed, maybe even more expensive. And like you said, traveling is going to get a lot pricier. So in the immediacy of the situation, where are consumers going to feel it first? So the first thing they will feel it is in fuel prices in electricity tarries. And then unless you're lucky and you locked in like flat rates recently but lots of people will come off every month and they're going to start feeling that immediately. So transportation costs, set aside the MRTs but if you're using grab, if you're using your own car, even bus fare probably won't go up so rapidly MRT fare. But transportation fuel, food I think there will be a bit of a lag still. So transportation costs of food go up so that the whole set of retailers will pass on part of the price increase to the consumers, not all of it. They take a margin hit as well. But if the war persists, then we start getting into trouble like six months down the road. And the reason for this is that the Gulf produces urea, a huge fraction of the world's urea production comes from there and that is completely frozen. So fertilizer cost go up and as fertilizer cost go up in the next planting season, the farmer's cost go up. So there are different lag structures to it which we have to be a little bit sensitive. Like even with oil, the immediate jump that we saw is essentially in diesel and in jet fuel because the Middle East has a kind of oil which is very well suited which are called middle distillates. It's a technical term. My daughter knows more about this since she does chemistry. But essentially the US produces shale oil. So that looks almost transparent. That goes into gasoline. The Middle East has produced this middle distillate which goes a lot into jet fuel. It can also go into gasoline but also goes into jet fuel and diesel. Of course, natural gas which in Singapore 90% of it comes from natural gas are electricity. So therefore the lag structures are different. The natural gas has been hit very fast. Yeah, exactly. Because of what's happened in Qatar, the Ras Lafane LNG facility was quite badly hit as collateral damage in the war. Was it not? Yeah, so that produces something like 17 to 20% of the global supply and the other thing is that the US also produces a lot of natural gas but it exports it to Europe. As most of the natural gas for this region actually comes from the state, through the state of Hamas, that sort of frees this up. But even the US or Europe will not be insulated because these are all global prices. So these are world prices. So if natural gas prices go up in Asia and I'm a US exporter, why will I send it to Europe for a cheaper price? I will actually send it to Asia. And then as the European spammy, a high price, the same price as well. So every time the prices go up, I was talking to somebody, the Singaporean and he was very angry that petrol stations here raise the petrol prices immediately. Even though the petrol in the tank, they had actually bought at much cheaper rates. So I teach a course on pricing to MBAs and I tell them that the way you think about costs is opportunity costs. So for the petrol station, the cost of the petroleum is not what they paid in the tanks but it's the replacement costs. So that's the opportunity cost of the science. So the replacement cost is going to be much higher. So therefore they should, when they're putting margins, they should put it on the replacement costs, not the cost that they actually paid. So that's the correct way to actually do pricing. So they even sell later on, right? That's not what they're trying to do. They are essentially trying to not get squeezed, right? Sure, of course. And of course, because the demand for petroleum for gasoline is not very price sensitive, you can pass on a lot of it to the consumers. Not all of it, but sort of a lot of it. Petrol prices also have this phenomena which is called that rises like a rocket and falls like a feather. Okay. So there's a shock boom, it goes up. But when the shock beaters out, let's say the Trump and the new Iranian leader get together and they agree to stop the war, prices will come down, but it'll come down much more slowly. So that's petroleum electricity pricing. Let's talk about that. So obviously you warned us earlier that we are going to likely feel it in our electricity prices. We know that SB Group adjusts power prices quarterly. Q2 is coming soon, round the corner. Given where gas prices are right now, what should we realistically expect at the next revision? I mean, we're already seeing some providers charging over 11% higher to some consumers. So I think they will have to increase prices, right? So the Singapore is a market-based economy, right? So the leadership, the economic steam believes in markets and as an economist, of course, I also believe in markets, right? The markets provide you with signals in terms of how you have to adjust your behavior. Sometimes it's painful, sometimes it's pleasurable, right? When prices are going down, right? So I think from the electricity tariffs will go up, people sort of face it. Again, keep in mind that everything I'm saying is subject to the caveat as to how long the war lasts. Precisely. People always ask me when is the war going to end, right? And I actually don't have much of an idea, right? So I think the most precise way to sort of say this is that you're actually not asking for a prediction. You're asking for a prophecy. And I'm no prophet. it. Okay, so you going back to what you were saying, right, about electricity prices and where they headed to. So you're saying that they'll definitely go up and it is very highly dependent on how long this war persists. Right. So, but I think that the government like they did in 2022, 2023. So keep in mind that inflation, CPI inflation in Singapore climbed up to 6%. So therefore the government will have to give targeted waste for households to deal with this spike in the cost of living. Part of we've seen this post-COVID. Right. You know, there were GST vouchers, there were CDC vouchers, there are U-save rebates, etc. So I think the good thing is that Singapore still has, you know, healthy, solid reserves like the fiscal position is very, very strong, unlike many other governments, which means that they do have the space to smooth it out for especially the households at the lower end of the income distribution because for them, food, fuel, transportation are a big part of the budget, right. If like if you are a billionaire, you know, you are not going to notice it. Should I be looking at locking in perhaps a 24-month fixed price plan or stick to a discount of a regulated tariff price plan because I think a lot of consumers, especially when they are first time homeowners, you're not really sure what you're getting into when you're purchasing or signing up for your utility bill or your utility provider or plan. So maybe help us walk us through this understanding of what we can do in terms of locking in a favorable cost structure for our energy needs at home. It's a difficult decision, right. So and this is not just to do with tariffs. It's the same thing that we face when we, you know, refinance our mod gauges, for instance, right. You could get a fixed interest rate for two years or three years, you know, but you could get a floating rate and if you know, world interest rates are falling and Singapore interest rates are falling, you know, and interest rates are high, the floating sort of makes sense. But this requires you to forecast these things, right. And we know that forecasting is really, really difficult. It's like being a profit. Yeah, it's like being a profit. So like even I have, you know, locked in interest rates, you know, on my mod gauge at a very high level and then, you know, suddenly everything sort of resolve themselves. And I'm still locked in at a very high interest rate. So I am in no position to give, you know, like, you know, concrete suggestions. But here's what I can say, right. So it's very difficult to forecast whether, you know, oil prices, energy prices are going to go up and down. So the way to think about is it depends on your risk preferences. Okay. So if you are willing to sort of take the risk and, you know, you are an optimistic person, then maybe go for a floating rate, you know, it will come down. But if you are sort of risk a verse and you like predictability, then go for a fixed rate. But you might have post decision regret when everybody else is floating rate is coming down and you are stuck with a high fixed rate. Tariq, I will only advise that, you know, hindsight is perfect. Don't beat yourself up. You know, remember all those things are sunk off. So just, just, you know, they say hindsight is always 2020. Exactly. So, you know, just, just, just take it in the stride and move on. Yeah. So in the meantime, while we ride out this uncertainty, is there anything that I can do to protect my household budget or do I just really bite the bullet and live through it like we did COVID? I think it's the latter. But, you know, let's be a little bit systematic about it, right? Because we can, we've seen this in the data. So I'm going to, you know, and I've done a little bit of research on this into how consumers adjust their spending when there's a big shock to the system. Okay. So there are, there are various what economists call margins of adjustment, essentially think about it dimensions of adjustment, right? So, so one of the dimension of adjustment is think about that you have like a wallet, a size of the wallet, which you're allocating for spending, you can start adjusting that size. Okay. So, you know, you can choose to actually maintain the size of the wallet and run down your savings, right? Other people post COVID, we, you know, doing inflationary times, they actually generated more sources of income, right? You know, so they might be, you know, if you are, if you are a delivery person, you just deliver for longer, right? If you're, if you're an office worker, you might work overtime, right? So, you might have a side hustle even, right? Exactly. Or you, you know, people were doing multiple jobs, right? So, so that's one way to maintain the size of the wallet or you maintain it through by running down your savings, but most people what they do is they shrink the size of the wallet, okay? So, most of them reduce it to some extent, right? The second level of adjustment then comes is that what are you going to do in terms of allocating the wallet to like different categories of expenditure, right? There are certain things which you cannot adjust very quickly, like, you know, if you are driving to work and dropping your kids, you're going to be, you're going to do that, so you sort of take a hit. Over time, you could adjust this a little bit more by more fuel efficient cars, maybe take the MRT, you know, get your kids to do them, take the MRT, which might require a bit of convincing sometimes. So, so you can start, so you can postpone like big consumption items, right? So, you were planning to replace your iPhone, okay, run it for like a year longer, right? You can also, you know, adjust it, you know, in terms of not just in terms of postponement, but also, you know, in terms of the quality of the goods, right? Yeah. So, so a lot of people what they do is they sort of downshift in terms of the brand. So, marketing people talk about something called a lipstick effect. Yes. So, so what they see is that when there's a crisis, people start to stop buying like this Chanel perfumes and stuff, but they, you know, they downshift, but they so lipstick sales actually actually sort of go on, right? So, so that's another so so on the quality and the brand, you sort of step down, even if you're thinking about holidays, don't go to Tokyo, you know, go, you know, drive into Malaysia or maybe take a bus into Malaysia. Take a ferry to Batam. Yeah, take a ferry to Bintan Batam. So, you know, so there are various modes of adjustment, you know, I would tell your listeners sit down and think about how are you going to what you'll do with the size of your wallet? How will, how will you change your allocation? These are must-hats. These I have a little bit more discretion over and I can adjust within that, you know, do I really need to do the brands? Yeah. Do I really need to go for fancy meals, you know, once a week? I think the question, the underlying question is also what's your sacrifice? What level of sacrifice or risk you're willing to take to to your personal bottom line, right? So, one of the things is that, you know, the the risks you run in certain crisis is that you might lose your job, you know, so then, you know, you might lose your, you know, your watch stocks and stocks have fallen massively, so your portfolio is in a mess. I don't think this crisis is like that, okay? So, this crisis, you know, it might impact, you know, let's say financial assets, but it's not going to impact the main asset of Singaporeans, which is houses, okay? So, that way or sort of your wealth is, is, is pretty much stable. Yeah. You know, I don't think this, this oil price shock is going to lead to massive unemployment or things like that, which means your jobs, they're probably more threatened by AI than by, then by, you know, what's happening in in the state of hormones, okay? So, so, you know, think a little bit about the short term, but also think about the long term, maybe, you know, go for a skills future, of course. Yeah. Take this time to buckle down. Exactly. You know, have a think about your life where it's going. Yeah, I think that's generally good advice because when everyone is feeling a bit downtroddened by the news and what's happening in the state of hormones, it's also a time for us to reflect and say, okay, while I think about what I'm going to spend on, why not spend on something that's worth investing in, which is the future, right? So that I can be resilient in case of future crises. Speaking of investing, there are people who are invested in things like energy stocks, commodities, airline stocks, consumer staples, utilities, things that are price sensitive as it relates to what's happening in the state of hormones vis-a-vis oil prices. How should these investors be thinking about their portfolio? You'll have to go in a sense sector by sector and think about how these will be impacted. And, so there are these short term shocks, you know, which, which, and volatility is very high today, right? You can see oil prices, stock prices, exchange rates, all of them moving really, really rapidly, right? So, so in these kinds of scenarios, most people are very prone to panicking and making making big changes to their portfolio. I would advise them, don't, okay, in fact, don't even look at your portfolio, okay? This is not the time to get more anxiety to your children. Yeah, because if you look at your portfolio, you're going to see that it is shrinking rapidly, let's say it's corrected. Everything's red. Right? And what do you do? You get, you have a panic attack and you sell, right? And then let's say, you know, the the war gets over and then it goes up and then you're seeing that it's going up, so you go in. So what you're essentially then doing is you're telling when it's low and you're buying high, which is the opposite of what you should do. Like your standard investor should just be broadly diversified, that takes care of it, like you were saying, commodities, consumer discretionary, et cetera. And diversify across markets as well. One of the biases we see in the data is that most investors have what is called a home market bias. So they buy too many of-- let's say Singaporeans will buy too much, Singaporeans stocks, and Singaporeans bonds. Given how easy it is to participate in global equity and global bond markets lesser, but equity markets, definitely, just sort of be diversified and not panic. Just hold on, just keep in mind we came through COVID. We came through the global financial crisis. We've experienced many of these kinds of shocks. And in the long run, we seem to be doing OK. Yeah. And I think that's a good note for us to end our conversation on Dr. Pushan. Thank you for the reassurance. And thank you also for helping us understand just the severity or the level of impact that this war has on our household expenditure. Hopefully it is as short-term as we would like it to be. Maybe we'll check in with you when the war is over and then see how we review our finances from there. And thank you so much to the Money Talks community as well for tuning in. I now want to leave you with a question because I'm curious myself, have you already started feeling the pinch and where or what's the first thing that you have cut back on? I personally have cut back on my right hailing services. You can check my account. I'm talking to my producers here. Let me know in the comments from wherever you are listening or watching us from. Or you can also email us directly at [email protected]. Big thanks to the team Tiffany Ang, Net Fetalveiro, Jeonine Johari, Ho Pei Ning, Joanne Chan and Charlene Tan, video and sound by Zikri Aiman, Norfa Issamhari and Shah Rian. I'm Andrea Heng signing off for the Money Talks podcast. Keep calm and carry on.