I would like to thank the Colm Imbert for taking the time to respond to a letter I had published over the weekend with regards to the current oil price situation. It is quite refreshing to see busy parliamentarians willing to debate with common folk. It speaks highly of our Members of Parliament.
However, I was disappointed that the goodly gentleman didn't offer a complete rebuttal to my letter. He went to great lengths to explain the effect that the fall in oil prices had on oil revenue. I will concur with the analysis he offered in his letter. It is expected that a fall in oil prices will reduce the tax take from oil revenue. This is a logical conclusion. However, his analysis would make it appear that either oil price has fallen to zero or oil production has fallen to zero, so that this overall reduction is overstated.
The mechanics of the supplemental petroleum tax (SPT) that there is a base tax rate for different producing regions below US$90. Above US$90-US$200, SPT is calculated as a sliding scale. Not quite complicated, but too onerous to explain in the space permitted. In summary, however, the tax take is not as exaggerated as he claims.
According to analysts, such as Goldman Sachs, the ongoing price war between Saudi Arabia and the US shale oil producers may have a medium-term effect on the price of oil and we may see a barrel of oil fluctuating between the US$75-$85 range for some time to come. However, while this should be worrisome to us, it does not signal catastrophe for our economy. It has to be acknowledged that we are predominantly a gas economy. I would ask him to agree with this fact that our hydrocarbon revenues are derived in the following ratio, 85 per cent gas-based and 15 per cent oil-based. His letter didn't address this fact.
In fact, his analysis made it appear that our hydrocarbon industry consist of a homogeneous product: oil. He only concentrated on one half of the story, that is, what will happen to oil revenue. Currently, gas prices are rising, which is typical at this time of the year with winter conditions in the US.
Also, we are selling our gas at above market prices, which is even more significant.
They normally say that the best illustration is the simplest. I will attempt to make this example as simple as possible to illustrate what is currently happening with our energy revenues. Assume we have a fruit stall selling two fruits only, mangoes and pineapples.
Mangoes are $5 each, and pineapples are $30 each (they are extremely large and sweet). We sell 170 mangoes and five pineapples, so that revenues are $850 from apples and $150 from pineapples, for a total of $1,000, split in a 85 per cent-15 per cent ratio. Assume the price of pineapple falls by 30 per cent to $21. However, there is a concurrent 20 per cent rise (this is incidentally the rate at gas prices are rising) in apple prices to $6.25. Assuming inelastic demand for fruit, the quantity demanded does not change. Revenue would now be $1,020 from apples and $105 from pineapples, for a total of $1,125, an increase from before. In short, and as simplified as this example may be, this is what is happening in our energy market.
Using basic economics and mathematics, Imbert, I have attempted to rebut your incomplete analysis. You mentioned that a little knowledge is a dangerous thing. Presenting selective evidence is even more dangerous, as it could lead to erroneous conclusions.
As Mark Twain said, there are three types of lies: lies, damn lies and statistics.
Ricardo Jimenez
Diego Martin