Opinion
- Editorial- Commentary
Mary
King :
Inflation
and petroleum depletion
The
newspapers last week quoted the Central Bank
Governor as admitting that T&T is experiencing
the symptoms of the Dutch Disease. It is indeed
a confirmation of the statement I made in the Senate
Budget debate five years ago when I diagnosed that
we were suffering from the disease. The papers
also claimed that the symptoms of the disease include
rising inflation, an appreciation of the real exchange
rate, a shift from goods production to service
production (not strictly true) which contributes
less to growth and sustainability and a slowdown
in non-energy export growth, particularly in the
manufacturing sector.
In
my article, "Exchange Rate Flexibility" ,
3rd, December, 2007, I quoted from Sester who showed
that the Dutch Disease has no direct impact on
the nominal exchange rate (at the commercial banks).
However, he sees is that if the nominal exchange
rate is held constant or allowed to depreciate
as the TT$ is now doing, the result is indeed inflation
if the resource windfall is all released into a
country of limited absorptive capacity, as is T&T.
Sester suggests that to constrain the deepening
of the Dutch disease we need a conservative fiscal
policy which includes limiting the impact of the
real appreciation of the currency of the petroleum
exporting country through freezing some foreign
exchange and even allowing nominal exchange rates
to appreciate.
The
Central Bank Governor in agreeing that fiscal
policy provides a special challenge for natural
resource based economies demurred by saying that
higher oil revenues provide these governments with
the opportunity to increase public spending on
priority economic and social goals. However, these "fortunate" governments
are faced with the trade-off between pressing development
needs and the limits of the countries' institutional
and absorptive capacities. The Governor also warned
us before of the slippery slope of economic decline
after a 10 per cent inflation rate. We only need
to look at the success of Botswana(a resource rich
country) to see that our Executive (as hinted by
the Governor) lacks the policies and institutions
required to manage a resource rich country.
The Central Bank correctly identified one result
of the Dutch disease as a shift from our already
small manufacturing sector to the production of
non-tradable goods and services-a move in the direction
opposite to what we need if we are to sustainably
diversify the on-shore economy.
We have found ourselves in a situation in which
Peak Oil is in part driving the price of imported
food, now running at an inflation of 10 per cent
on average the world over, which many see as
a demand for investment into local agriculture-i.e.
encouraging the banks to give loans etc. However,
because of the profligate spending of the Executive
(under whose watch agriculture declined) the
Central Bank is taking money out of the economy,
to curb spending so limiting investment in order
to constrain inflation. Our Government may be "fortunate" that
energy prices are high but the poor and the middle
class are being ravaged by inflation.
The Minister of Energy referred to the fact that
we have large reserves of heavy oil (as does
Canada and Venezuela). But he admits that it
is expensive to tap these resources. However,
with increasing petroleum prices and adequate
technology it may become cost effective to produce
these reserves. Though petroleum prices are going
up we are being told that exploration and production
costs are going up also, if not faster, as is
the risk of finding anything in the new fields.
As a result Big Oil is asking for more incentives
to go looking for new reserves. In my Express
article "Peak Oil-Less Govt Revenue" 27th
August, 2007, I commented that:
"Countries
with the Dutch disease are caught in a catch
22 situation since the exploitation
of and returns from the natural resource are the
unique drivers of the economy. The petroleum revenues
due to government (that reflect the exploitation
and increased production costs funded by further
incentives) will be consequently reduced. Peak-Oil-
Gas is reached for such governments when the change
in nett revenue from taxes (less incentives) with
respect to corresponding change in production is
inconsequential. What this means is that the remaining
petroleum yet to be explored or exploited is un-commercial
or does not even exist. Then, the depleting proven
reserves would be all we have subject to technological
or economical change."
Hence it is not good enough for the Minister of
Energy to simply say that we are going looking
for more petroleum, that we will exploit our heavy
oils. We need to also get an indication of the
expected marginal returns-a definition of where
we are on the returns-depletion curve for petroleum.
Mary
King is
a columnist of The Trinidad Express (maryking@tstt.net.tt).
Petroleumworld does not
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This
commentary was originally published by Trinidad Express, Monday,
March 3rd 2008 . Petroleumworld
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