SUNDAY 13TH MARCH, 2016 – UWI TODAY
9
At the start of this fiscal
year, on the assumption of
an oil price of US$45 per
barrel, therewas already
a projected revenue
shortfall of $21 billion.
Since then, oil has reached
US$28 per barrel with
global analysts projecting
that it could reach as low
as US$20 per barrel.
How longwill this crisis last?
There are no crystal balls, just best guesses. The
international market (outside of our control) will dictate
what happens. We are price takers in this game and our
fortunes fluctuate (not for the first time) on the basis of the
dynamics at play in the global market; whether it is changing
geopolitics, deliberate efforts to squeeze competitor fuels off
market, or shifts in supply and demand.
Since 2014, there has been a growing global glut of
oil and gas. It would take almost a year of consumption at
current levels to use up this surplus and bring the market
into supply and demand equilibrium. The likelihood of
increased demand is constrained by economic slowdown
in China, Japan and the Eurozone. In addition, the US,
once the largest net importer of oil and gas is today a net
exporter thanks to shale oil. While it still imports more than
10 million barrels of oil per day from 80 different countries,
with OPEC remaining the biggest supplier, its overall
imports are at a 17-year low while the nation’s production
rate is at a 24-year high because of hydraulic fracturing.
Even as the oil price falls below US$30 per barrel,
OPEC, usually the global price stabilizer, has taken a stand
not to curtail production to drive prices up but is allowing
the price free-fall, arguably to bring US shale oil to its knees.
Saudi Arabia has the deep pockets to do this with $741
billion of currency reserves and a $15 billion surplus at the
end of its last fiscal year. It can run budget deficits for several
years without harm to the country’s finances.
Then there is Iran, estimated to comprise the world’s
fourth biggest oil reserves. With the removal of sanctions
by Europe and the US, Iran has announced its full return
to the global oil market by ordering an immediate increase
in production, prompting warnings from fellow OPEC
members that it risks prolonging the biggest price crash
in a decade.
Major oil companies are cutting back. The Brazilian
oil company has cut its five-year investment programme
by 25%. While this will eventually lead to a slow-down in
production, that time is not in the immediate future.
Where does all of this leave Trinidad and Tobago?
If the trends in the global energy market continue, we
will experience further revenue decline, worsening foreign
reserve, more currency devaluations (whether formal
or informal), job losses, price increases, cuts in transfer
payments, capital flight, brain drain as more and more
young professionals are unable to find jobs, worsening social
tensions and criminal activities.
We can either buy time by drawing down on the HSF
and selling off assets to prop up an obviously overinflated
expenditure while we wait for the price of oil and gas to
recover or we can take responsibility for turning adversity
into opportunity. I hope for the latter. This requires us to
be realistic to the worst case possibilities and get on with
the task of deciding what needs to be done to minimize the
fall out and return to positive growth in the fastest possible
time in such a climate.
Economic Diversification
To repeat my mantra, economic diversification is
priority one, two and three. There are no quick fixes to this
and it is not an exercise in volunteerism or one where clear
responsibility and accountability are difficult to trace. It is
also not rocket science and there aremany success stories for
us to be guided by. It is a full time job needing the requisite
expertise resourced and dedicated to the task of determining
through robust analysis the areas of focus.
We no longer have the financial luxury of simply
identifying a “new growth sector,” say film, setting up a
special purpose vehicle, an advisory committee, giving
grants to film makers and hoping for the best, without any
key deliverables or performance indicators to measure
whether we are achieving the stated objective.
We need to determine whether we have sufficient
comparative and competitive advantage in the film industry
to render it an industry with revenue, employment, and the
capacity to generate foreign exchange. A desire for a film
industry is not sufficient to justify it being resourced by
taxpayer’s dollars. This requires a detailed analysis of the
global and local film industries, future trends, competitors,
geographic scoping, input-output, value chain; all geared
towards evaluating the potential for a profitable industry.
The next stage would be to develop a plan of action based
on a strategy.
What I am describing here is by no means an exercise
in academic report writing but a robust practical approach
which has been proven and tested in some of the most
competitive countries: Finland and Norway two examples.
This requires full-time bodies out in the field gathering data,
others on technology analysing data and studying global
industry trends and yet others studying competitors and
best practices approaches. It requires true collaboration
amongst all stakeholders; working together in an industry
cluster with a management structure for implementation of
strategy. We need political will for such an approach, as it is
business unusual for Trinidad and Tobago and necessitates
decisions which prefer competence over loyalty.
To sum up, we have to get serious about the business
of economic diversification now that money has become
a scare commodity, the limited sums must be allocated
in ways to maximise the potential for multiplication. Yes,
governments have spoken of commitment and resourced
diversification, but they have failed at strategy, delivery and
accountability because monetary flows from oil and gas
dimmed the conditions of necessity.
We are again at this junction of economic decline, not
for the first, second or third time. Each time though, it is
more difficult to reverse as the level of State dependence
is further entrenched, the national expenditure larger and
larger and the global dynamics more volatile. Unless there
is another war in the Middle East, or it is in the interest
of developed interest to see the price of oil climb, we are
in for a reasonably long dry spell from oil and gas. The
diversification imperative is stronger than ever. We must
strengthen our efforts to the task but in new, practical and
transformative ways, guided by data-based analysis and
strategy.
Economist Indera Sagewan-Alli is the Executive Director of the Caribbean Centre for Competitiveness, UWI St. Augustine.
