Opinion
- Editorial- Commentary
William
Lucie-Smith: How
high will oil go?
During March oil prices rushed past US$100 per
barrel. The days of low oil prices now seem a distant
memory. Just to recap; the increases have not been
slow and steady but the result of extreme volatility
and unpredictability. Those with long memories
will remember the inexorable rise in oil prices
from US$2 in 1970 to US$35 a barrel in 1984.
Many forecasts in 1984 had oil prices reaching
US$100 by the year 2000. A combination of the Iranian
revolution and the Iran-Iraq war had contributed
to the shortage and speculative price rises. This
soon reversed itself and from 1984 oil prices began
a decline, falling to below US$12 in 1994. I hope
some can remember the consequences to the Trinidad
and Tobago economy which included the cut in public
servants' salaries, an IMF austerity programme
and massive devaluations. Although there was a
recovery with oil prices reaching US$27 in 1997,
by 1999 it was back below US$10.
Since 1999 we have seen prices rise exponentially.
Despite temporary setbacks and many predictions
that the spike was temporary, prices raced past
US$100 a barrel in March 2008, peaking at US$110,
before falling back to the current levels of around
US$100. While there are many predictions as to
where prices will go now the reality is that predicting
oil prices is no easier than picking winners at
the races.
I have recently read two very professional forecasts
on the future of oil prices.The first suggests
that significant increases in the costs of production,
the weakness of the United States dollar, the lack
of new discoveries and the continued increases
in global demand combine to ensure that the days
of cheap oil are gone forever. This suggests that
while the price will remain volatile and surge
on political instability and fall on surplus stocks,
oil is unlikely to fall below US$90 at any time
and will probably continue to average above US
$100 per barrel.I find this a very plausible argument.
The second report I read suggested that the high
prices are largely speculative and that there
is adequate supply to the market. Additional
supplies may become available from Iraq and Iran
but even without the alternative energy sources
and oil sands production means there will be
no shortage. The weakness of the United States
economy will lead to a reduction in global demand
and because of the extreme price elasticity of
oil it is likely that there will be a fall of
at least 30 per cent in oil prices (and perhaps
more) over the next few years. This argument
looks equally plausible.
There are two things we can be sure of. Oil prices
will remain hard to predict and will be extremely
volatile. We must also be aware of several other
factors. First, the costs of production are rising
in Trinidad and the production is falling. The
surpluses available from oil production do not
reflect the huge price increases. Secondly Trinidad
is no longer an oil economy but a gas-based economy.
While our production of BTU oil equivalent is increasing
this is now dominated by natural gas rather than
oil. This will not reverse and so oil prices are
no longer of prime significance.
Prices for gas, LNG, and other commodities (e.g.
methanol, ammonia and urea) are far more important.These
have by and large been much more stable than oil
prices and have not provided any massive windfall
to the Government that you might imagine if you
thought Government revenue reflected oil prices.
One further consequence of oil price rises is
the value of the US dollar. There appears to be
a symbiotic relationship between the two in which
high oil prices are accompanied by a weak dollar.
As our revenues are in United States dollars we
suffer from this impact both in revenue and in
the real cost of our other imports.
The
real purpose of this article is to suggest a
certain amount of caution must be exercised when
considering the economic future of T&T. Certainly
the gas-based economy is stable for the immediate
future but costs of oil and gas production are
rising and surpluses may be under pressure.
History has shown it would be wrong to rely on
high prices being sustained and it is imperative
for the Government (through the Heritage Fund)
and individuals to maximise savings. It may be
churlish of me to remind us all that we did not
save enough between 1970 and 1984 and it was
the reversal of energy prices after 1984 that
led to major hardship in T&T. This was exacerbated
by the fiscal mismanagement of the economy when
we were in surplus.
It is imperative that we do not risk that again
and that we understand that there are many negative
consequences of high energy prices. Not least of
these are the non-energy deficit, the weakness
in the dollar and higher import costs leading to
high food prices and inflation. This must be addressed
as a priority.
Let me put it simply food before jets, minimum
wage before imported labour, infrastructure, education
and health care before buildings and savings before
any reversal in fortunes.
William
Lucie-Smith,
is columnist of the Trinidad Express.
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This
commentary was originally published by Trinidad Express, Monday,
April 7th 2008. Petroleumworld
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News 04/06/08
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