With the budget expected to be read early next month by Finance Minister Colm Imbert, economist and lecturer at the University of the West Indies, Dr Roger Hosein, believes it should be based on an oil price of US$35 a barrel and a natural gas price of US$2 per mmbtu.
Dr Hosein painted a grim picture of the state of government finances and said the conservative oil and gas prices would ensure the Government is less reliant on the energy sector and manages the country on the new realities of its economic situation.
"I think it should be based on an oil price of US$35 and a gas price of US$2. The oil price of US$35 reflects forecasts of the multilateral lending institutions, which average in the case of the IMF at US$41 for the next year. The price of US$35 would also start the process of the state becoming more accustomed to being dependent on the non-energy sector revenues. This is critical as we navigate decreasing production levels from a mature petroleum industry and as we try to halt the momentum of years of wasteful expenditures on general fronts. It also has tremendous psychological advantages that are in a new normal."
Dr Hosein noted that over the next 12 month the country's balance of payments is likely to "be further compromised, especially the current account balance."
In October 2015, the Government pitched its budgeted oil price for the 2016 fiscal year at US$45 per barrel for oil and US$2.75 per mmbtu for natural gas. In the mid-term review the budgeted price of oil was reduced to US$35 per barrel and gas was US$2 per mmbtu. While the average daily price of oil since the mid-term review has been a bit higher, Hosein noted that in determining revenues one also has to take into consideration production and since the mid-term review, production of crude oil fell from 2.3mm barrels in March to 2.01mm barrels in July with the production of natural gas in the same time period falling from 3.499 bcfld to 3.214 bcfld in July.
Only on Monday oil prices fell nearly two per cent, snapping two consecutive days of gains, on caution over galloping Middle East crude output and a stronger US dollar that was boosted by speculation of a US rate hike by the year-end.
Reports show that Iraq, which has exported more crude from its southern ports in August, continued ramping up output while Saudi Arabia kept output around record levels last month.
The US dollar hit a three-week high against the yen after Federal Reserve chair Janet Yellen bolstered expectations that the Federal Reserve would raise interest rates soon. A stronger dollar makes commodities denominated in the greenback less affordable for holders of other currencies.
Dr Hosein explained that the blow to the current account balance would come from two main sources: dormant or depressed energy prices and declining natural gas production and crude oil production levels.
"The economy's stock of foreign reserves has started to show distinct signs of decreasing from US$11.3 billion at the end of 2014 to around US$9 billion today, a decline of almost 24 per cent. The consequence of this is that the number of months of import cover has fallen from 13.5 months in 2011 to 10.1 months in 2016."
The university lecturer noted that from January 2, 2015 to August 29, 2016, the TT dollar slid from TT$6.33 to the US dollar to TT$6.76 to the US.
"We are in an ugly situation and short-run cosmetic redress will not correct the structural flaws. What is needed is structural adjustment. Unfortunately, I cannot say that a depreciation of the currency will not happen. Using purchasing power priority as a guide I expect it has some way to go still.
"As I have said many times before, in the good times we all benefitted from the economic rents in various ways. In these trying times we need to work together; all hands on deck are required. It is not, and cannot be, business as usual."
He noted that already there are signs that things did not go according to the Finance Minister's directive. For example, the buying rate of a US$ is TT$6.76 whilst the minister announced a cap of TT$6.72.
"The invisible hand seems to be guiding a sharper depreciation."
T&T is a price taker and cannot impact global energy prices and, therefore, Dr Hosein said, the aim is to increase production. To do this, he suggested the farm-out/ lease-out programme. This represents one avenue through which marginal and mature fields could be brought into productive use.
"By bringing more marginal and mature fields into productive use, there will be an increase in the amount of crude oil supplied to the market. While wage freezes may not be popular at this time, but in an adjustment period, attempts have to be made to strengthen the lease-out/farm-out or incremental production sharing programme.
"For the last decade this has been one of the emergent niche sectors in the mature petroleum economy of T&T. Production from farm out/lease out grew to around 68 per cent between 2005 and 2015 even whilst national production was on the decline. Consultations should be scheduled with these small-scale, marginal-well producers to see how their production levels can be enhanced."
With the global powers continuing to fight for market share and–projections that even at US$60 shale oil can be competitive–it appears there will be a long period of low prices. Dr Hosein said what is needed is a fundamental shift in thinking.
"I think the Government should adopt a formula where it funds the budget using non-energy sector revenues, but some proportion of the returns from the resources accumulated in the Heritage and Stabilisation Fund ought to be factored in, especially to fund education and health needs.
"Already we have made the tremendous error of consuming large chunks of the natural gas windfall via transfers and subsidies with a range of long-term consequences. Even more, there seems to be hesitation on the part of the State to meet the type of long-term adjustments required and certainly some of the stated adjustments seem to lack scientific substance."
The budget is expected to be presented early in October.