Oil prices receive a lot of attention in both the local and international press, with a general underlying assumption within T&T that higher oil prices are good for our economy. In reality, we need to look at a wider range of commodities, and the relationships between them, if we are to understand the impact of commodity prices on our economy. The movements in commodity prices play a prominent role in not only government revenue, but credit injections for new energy sector investments and business strategies for energy service companies. Keeping track of the changes in energy commodity prices help guide companies, across the energy value chain, to plan their future business decisions and pay particular attention to issues such as staff retention and business expansion. Last year, the Energy Chamber and the Central Bank teamed up to develop the Energy Commodity Price Index (ECPI). The ECPI is a summary measure of the price movement of T&T's top ten energy-based commodity exports, weighted by each commodity's relative share of its value. The commodities and their weights are: LNG (40.0 per cent); oil (16.6 per cent); Ammonia (11.8 per cent); Methanol (9.4 peer cent); Diesel (7.0 per cent); Motor gasoline (4.3 per cent); Natural gasoline (3.5 per cent); Jet fuel (2.7 per cent); propane (2.4 per cent); and Urea (2.3 per cent).
There is a direct correlation between the movements in the index and the country's energy export earnings, which, in turn, affects our balance of payments. There is also a correlation between the movements in the index and Government revenue, though this is less direct as price changes in different commodities have different effects on how each company's taxation is assessed. Based on recent political upheavals in North Africa and the Middle East, plus the earthquake and tsunami in Japan, energy prices are expected to fluctuate in the coming months. From Chart 1, it is clear that the ECPI is at its highest point since November 2008.
LNG and Crude Oil
LNG accounts for just over 30 per cent of T&T's exports and for the beginning of 2011 Henry Hub prices have hovered around the US$4 to US$5 per million British thermal units mark. The relatively weak price of LNG for the period is due to an oversupply of LNG on the market. In the United States-this country's largest market for LNG-the Potential Gas Committee has revised its estimates of America's gas reserves. The committee has raised its gas reserve estimates by almost 40 percent over its 2006 assessment. The increased estimates are due mainly to improved technology for tapping into shale gas formations. According to the committee, shale gas accounts for two-thirds of America's recoverable reserves and are enough to supply the country for 90 years (though technical and environmental issues still remain). Higher crude oil prices have both positives and negatives for the economy of T&T. It is not widely recognised that T&T is a net importer of crude oil, and has been for some time. Last year we imported 24,944,324 barrels of crude oil and exported 16,584,513 barrels of crude oil.
Crude oil is imported for the refinery and so higher crude oil prices mean greater expenditure of foreign reserves. Further, higher oil prices translate into a greater fuel subsidy. The Ministry of Energy and Energy Affairs estimates that when the oil price is US$75, the fuel subsidy is about $2 billion, and when it is US$100, the fuel subsidy is about $3 billion. On the positive side, petroleum products tend to closely track crude oil prices, so higher crude oil prices also mean higher export earnings from diesel, gasoline, jet fuel etc. Overall, the Energy Commodity Price Index has shown a fairly strong correlation with oil prices, despite the fact that natural gas prices have remained relatively flat (See Chart 2). The overall increase in the commodity index has been driven higher not just by oil, but also by some fairly rapid increases in ammonia and methanol prices. Chart 3 shows both ammonia and methanol have been steadily increasing since January 2009 to present. This trend is expected to continue as demand for methanol is expected to increase from 70 million metric tonnes in 2010 to reach more than 80 million metric tonnes in 2011, with most of the demand growth coming from North East Asia.
Challenge for future developments
Overall, the increase in the Energy Commodity Price Index is positive news for the economy of T&T: it means more foreign exchange earnings and higher Government revenue. Disaggregating the figures, however, highlights some additional issues that need to be considered in the national policy agenda.
This includes the issues of declining oil production and the commensurate increase in crude oil imports and the challenges of developing new upstream gas projects to replace declining reserves. Furthermore, while the high petrochemical prices are good news in the short-term, it does also raise the possibilities of increased competition for new projects in the medium-term. Low natural gas prices raise the possibility of new petrochemical facilities being located in the United States and Canada, close to major markets. Indeed, there have already been some developments in this regard. This is a trend we need to monitor closely.
For more information on this article and the Energy Commodity Price Index, contact: Sherwin Long at: sherwin@energy.tt, or: Stein Trotman at: stein@energy.tt The index is also available online: www.energy.tt