ECONOMIST and former deputy governor of the Central Bank Terrence Farrell is forecasting that the present down phase of the country’s energy sector is going to be terminal, and oil and gas prices will never get back to the highs of the 1980s.
“This down phase of the cycle is going to be much longer, and it is going to be in fact terminal as far as crude oil and natural gas are concerned. If we are looking in the near future for some kind of upswing in respect of oil and gas prices, we will see prices going up a bit, but we are unlikely, in my view, to see prices getting back anywhere near, in real terms, to where they were in 1982,” he said.
Farrell, who was on several Government-appointed committees, including as chairman of the Economic Development Advisory Board, was speaking last Monday during a webinar on foreign exchange challenges in Trinidad and Tobago and the implications, organised by the Economics Department of The University of the West Indies (The UWI).
What makes this downward phase of energy prices different is because of a global energy transition, he said.
“Countries are accepting that there’s an end to fossil fuels, oil, crude oil particularly, natural gas later on, and a shift to renewables.”
Farrell said the foreign exchange challenges in T&T have their fundamental roots in what has happened in the energy sector.
“When oil prices fell in 1982, they did not get back to this level in real terms until 2007. That’s a long cycle. Prices began to rise from 2007 up to 2014, and since then we have seen prices of oil and natural gas coming down. And it is that which has precipitated the situation we are currently in,” he said.
As the economy starts contracting, the demand for foreign exchange starts falling, he pointed out.
“The demand for foreign exchange in 2015 was US$7.4 billion. In 2020, sales of foreign exchange to the public had come down to US$4.5 billion. So there has been a US$3 billion drop in sales of foreign exchange by the commercial banks to the public,” Farrell said.
Unfortunately, the supply of foreign exchange in the local market has been falling faster than the demand for foreign exchange, he noted.
“And as a result of that, our foreign exchange reserves have been declining.”
Farrell said this led to Government attempting to fix the problem by rationing foreign exchange.
On the impact of this rationing on the economy, Farrell said “most of the actors in the economy” who get foreign exchange get it from commercial banks.
He said because of the rationing of foreign exchange by commercial banks at the behest of the Government, there have been several consequences.
“A black market in foreign exchange has emerged, which I understand is fairly active, and people are quoting different rates—$8.25, $8.50 and so on for a US dollar.”
Farrell said the Finance Ministry has indicated to the Central Bank that it needs to give priority to certain kinds of demands, like from the manufacturing sector.
“Demands for food and so on have been prioritised by the commercial banks,” he said.
He said there are other demands that are not being met in a timely fashion that will begin to have consequences.
“For example, insurance companies have been having a lot of difficulty getting commercial banks to give funds for their reinsurance payments.”
Also, the remittance of foreign exchange dividends by locally based foreign companies to their offices has been another area affected by the foreign exchange rationing.
That kind of foreign exchange demand has been deprioritised by the commercial banks on the instruction of the Ministry of Finance, he said.
Farrell said this impacts confidence in the economy as foreign companies and local businesses may not want to invest here.
The right choice?
International relations lecturer at The UWI Dave Seerattan, another speaker, shared the same view as Farrell, tracing the scarcity of foreign exchange to the down phase in the energy sector.
He said because of T&T’s high dependence on the energy sector, it experiences huge swings in economic performance based on the commodity market.
Seerattan said the commodity super market ended in 2014 and has not gone back to the level prior to this period.
Dr Ronald Ramkissoon, chairman of the T&T Fair Trading Commission and former senior economist at Republic Bank, said: “We understand that we live in a mineral-based economy and in a democratic country. I think it is important to understand that we have made choices that have landed us up in the position that we are in.
“And, therefore, if we recognise that we have made certain choices in response to the external environment, we have to ask, have we made the right choices?” he said.