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ARE WE PREPARED FOR THE NEXT OIL SHOCK? by Ken Howell

posted 12 Nov 2014, 19:53 by Gerry Kangalee
There is a school of thought which holds, that oil and gas wealth is a curse, on some oil and gas producing countries.

 

Such countries, it is argued, derive a substantial part of their revenue from oil and gas and that revenue to a large extent drives the economy. The problem, however, stems from the short-sightedness of the governments charged with the responsibility to manage this resource as well as the proceeds accruing from it.

 

Prior to the 1970s when oil prices were low, this country, was a substantial producer of Sugar, Cocoa, Coffee, and Bananas for export. These products, contributed substantially to the GDP of the country. When OPEC was formed and oil prices sky-rocketed, the then PNM government treated agriculture as a bastard child and abolished planning.

 

That anti-planning, anti-agriculture attitude was adopted by successive governments. In order to explain that behaviour sources in the know suggest that influential elements, who monopolize the importation of certain staples into the country, are the ones who benefit from this lack of enthusiasm of governments, in the past to treat agriculture as a priority area for development. The view was also held that we have oil dollars so we can purchase all the food we want

 

On many occasions, scribes who contribute articles to the print media, speak to the question of the need to diversify the economy away from oil and gas. Some describe such an approach as “developing the onshore economy”; something which is worthy of serious consideration and must not be left up to the private sector.

 

It is my view however, that if such a decision is adopted by any government which does not see planning as central in conceptualizing and designing of  any development plan which has the potential to change the economic landscape, then any half-hearted approach would not be acceptable. Governments have been adopting an approach to development which seems to suggest that somebody had a vision in their sleep and decided to build things without the necessary studies being done to support the project which eventually ends up costing the tax payers millions of dollars.                                                                                                                                      

 

Recently there have been a number of projects at various stages of construction for which the public have not been told about the studies done on such questions as population density, projected population growth say in the next twenty five years, which is necessitating the construction of some of these structures. I refer here to the Couva children's hospital, and the University that is being constructed in Debe and such other intended projects.

 
DEVELOPMENT PLAN

I am not against the provision of facilities in these areas but when such large expenditures are to be incurred they must be seen to be a part of a development plan which is aimed at meeting the overall economic needs of the country and fit into a master plan. In building the economic infrastructure to accommodate diversification, connectivity and relevance must be uppermost in the minds of the planners.

 

Let us examine what we have been doing as a country. In the energy sector, we have been inviting foreigners to come and develop our energy resources. Some of our assets in the energy sector are suffering from wear and tear and are in need of a complete overhaul; many of them should be replaced because they have depreciated substantially in value, and have outlived their usefulness.

 

 With regard to natural gas, NGC is a valuable asset but the authorities have not been able to aggressively market its expertise in targeted markets; the construction industry is dependent on the public sector investment programme to throw money their way and as a result is unable to guarantee employment continuously. Some companies in the manufacturing sector have succeeded in accessing markets outside of CARICOM, but others are not in such a fortunate position and so, their dependence appears to be entirely on the CARICOM market to export their products.

 

Tourism is largely the domain of Tobago and it was never able to take off here in Trinidad because not enough is being done to market the Trinidad product outside of Carnival. The commercial sector is entirely dependent on the public purse. To the unconcerned observer it does not appear to be so, government transfers which are translated into salaries and wages usually find their way into the hands of the operators in that sector.

 
JOY OR SORROW

Just listen to the comments coming from the Down Town Owners and Merchants Association, during the Christmas season and you would hear their cry of joy or sorrow depending on whether spending was very high or low. That sector does not bring revenue into the country. But they are one of the largest consumers of foreign exchange.

 

Against that background, what are our options in the face of falling oil prices with a national budget of more than sixty billion dollars pegged on the assumption that oil prices will remain stable at $80.00 per barrel? Since the Budget was approved, the price of oil fell below $80.00 and it is expected to fall even lower.  It would seem to me that we are approaching a situation resembling pre 1970. The difference however, lies in the fact that natural gas is now a buffer which can insulate the economy somewhat, along with the Heritage and Stabilization fund.

 

This can buy the government some time to examine its options: such as, deciding in which areas it should trim expenditure and whether it would be necessary to continue borrowing funds to finance the budget deficit. However, taking into account the fact that we are in an election season, this government will obviously focus all its attention on measures which will help to create favourable conditions under which it could win the 2015 elections.

 

It is difficult to understand why governments, past and present, failed to be pro-active and recognize the need to behave in a manner, in which notwithstanding the oil and gas wealth, it could plan, taking into consideration the worst case scenarios. Such a mind-set if adopted, can insulate a country; not entirely, but may cause it to come out of a crisis in much better shape than if it did not implement options of that nature; specially in these times, when the climate in the geopolitical arena is about to reach freezing point once again.

 

This should tell us that we need to be on top of our game, in analysing how we should position ourselves as a country to benefit from the shift from a uni-polar to a bi-polar world where the BRICS countries, Russia, China, Brazil, India and South Africa are now in contention with the USA for leadership in influential centres where major financial decisions are made and for access to resource markets. 

 

For example, how do we view the situation in the Ukraine?  Are we buying the stories that are coming out of the mouths of vested interests in the West? Are we aware of the fact that the fall in oil prices was orchestrated once again, as it has been in the past? On this occasion it was Saudi Arabia and the USA who created the conditions for the fall.

 

Saudi Arabia unilaterally decided to increase oil production in order to pump more oil on to the market, while America who began to increase its oil production largely from shale is now less reliant on imported oil. This caused a glut on the market, thereby, taking the price down with it as well. Some forecasters believe that the market will be bearish for a short while for somewhere between the first and second quarters of 2015, before becoming bullish again, while others believe it will last for the whole of 2015.

 

Those who believe that it will be a short period base their analysis on the very real possibility that for some producers of shale oil the cost of production will become prohibitive if prices continue on a downward slide, thereby causing them to incur losses since it will become unprofitable to drill for oil when the returns result in such narrow margins.

 

The current world situation must be seen as a warning that we cannot continue to be re-active to crises, whether they be internal or external. We must become pro-active. We must begin to prepare for the next oil shock.

    

 

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