In the movie The Perfect Storm, the fishing vessel owned by George Clooney’s character is eventually overwhelmed by a giant wave generated by the confluence of two massive storms in the North Atlantic. What can we do so as not to be overwhelmed by the global pandemic and the collapse of oil and gas prices?
The problem is uncertainty. We don’t know how long the pandemic will last, and we don’t know how long oil and gas prices will remain depressed. Therefore what we need to do in these circumstances is to make conservative but reasonable assumptions and craft our strategy based on these.
Notwithstanding extraordinary monetary and fiscal accommodation, recessionary conditions will roll through the global economy. Even as China emerges from its recession in the second half of 2020, the US and Europe will then be in the middle of their slowdown, emerging only in the first quarter of 2021. Emerging market economies will drag on global growth well into 2021.
On the pandemic, we’ve been told that a vaccine, which is the only ultimate solution, is 12 to 18 months away. The suppression strategy every country is now pursuing does not eliminate the virus and periodic outbreaks are possible. So we can assume that the restrictions now in place worldwide will only be lifted gradually over the next 12 months. Some semblance of normalcy will not return until the middle of 2021. There is no way that the private sector and the Government can carry the labour force for that long. The resources are not there, even when we draw down heavily on the Heritage and Stabilisation Fund (HSF). Unemployment will increase. So we have to convert that into an opportunity to reform the labour market going forward.
Paradoxically, the course of oil and gas prices is even more uncertain that the pandemic. The Saudis tried before to force shale oil out, and blinked. Russia is trying to force US shale gas out of the European market which it dominates. There is a lot at stake for both those actors. The Saudis have a lot of oil in the ground and are running out of time to extract as much of it as possible before peak oil demand in ten to 15 years. With OPEC dead in the water, it’s every man for himself, and the Saudis have among the lowest lifting costs. Small margins with high volumes might be their new strategy.
Five years ago, it was “lower for longer”; now it looks like: “much lower for much longer’’. In that scenario, the oil majors—BP, Shell, BHP—are in serious trouble. The value of reserves on their balance sheets will be significantly reduced. Capital expenditure programmes will be curtailed; high cost sources of oil and gas reserves will be abandoned; and they will accelerate the pivot to renewables. That spells bad news for Trinidad and Tobago. The majors will eventually depart these shores, leaving the nearshore fields to smaller companies who can operate at lower cost. Revenues will decline, even if production can be sustained. Deep water projects will likely stall and never get to final investment decision. A global recession, low product prices and high gas prices will combine to cripple the Point Lisas petrochemicals companies. This scenario may not happen, but it is what we should be planning for.
So how should we respond to this scenario? The fundamental objective must be to build a new base of productive activity outside of the energy sector which is focused on exports. This means making investment in people, in ideas, and in new systems and processes. More investment means less consumption.
Second, we need to appreciate that the necessary and valid response to the pandemic will actually compromise the medium and long-term strategy because it will 1. accelerate the decline in the foreign exchange reserves; 2. increase the fiscal deficit and domestic debt well beyond acceptable benchmarks which we have already breached; and 3. deplete the savings in the HSF. In addition, the balance sheets of the commercial banks and other financial institutions will be compromised by their pandemic response as well as by the fall in local and global asset prices. While the risk of failures of financial institutions remains low, they will have to be much more guarded in their risk appetites going forward until balance sheets are repaired.
Third, the stabilisation of the external account remains top priority. Allowing the managed flexibility built into the exchange rate management system to operate is still the best response. We have tried to avoid the pain associated with getting prices right. But the time has arrived when the pain becomes inevitable. This applies not only to the exchange rate, but also to the multiplicity of subsidised prices—for fuel, transportation, water, electricity—that taxpayers have been made to bear over the years. With oil and gas revenues significantly lower, and lower domestic revenues from a weakened non-energy economy, there has to be a zero-based approach to government spending, culminating in a smaller budget, with more carefully targeted transfers, and capital expenditures which stimulate higher labour productivity and innovation in the private sector.
The commission-agency type of private business, incentivised by an overvalued exchange rate and by government spending on tenderpreneurs, has to be replaced by active, targeted support for businesses which have the desire to export to the global economy. That means support for and working with the tourism industry in T&T, with agriculture that serves agro-based manufacturing in food and beverages, and building out government-industry-university collaboration for our own innovation eco-system. We will need foreign investment, and lots of it.
These are all ideas which have been developed and put to government before. Our perfect storm conditions now require that we embrace and implement them with unrelenting resolve and focus, abandoning in the process our obsessive dependence on oil and gas, which remain critically important, but which can no longer be the foundation of our future economic success.
—Part 1 was published yesterday