Senior lecturer in economics at the University of the West Indies (UWI) Roger Hosein believes that the price of oil against which the 2017 budget is pegged was "misleading."
"In the reading of a national budget in a petroleum-producing economy, the budgeted oil and gas prices send a signal as to the expected revenue streams that the state will collect and can therefore act as a yardstick for the demands by unions for higher wages and for the relaxed worker ethic by workers. It also creates an impression of the tolerable amount of transfers and subsidies lobby groups can push towards. I am a little concerned that the budgeted price of crude oil in the reading of the T&T 2017 budget was a little misleading and may send the wrong signal to the population of T&T," he told the Business Guardian by email on Tuesday.
The budgeted oil price announced during last Friday's budget presentation was US$48 to US$50 and gas was at US$2.25 per mmbtu of gas.
Giving a review of both oil and gas prices over the last two years, Hosein said since June 2014 the market prices for both oil and gas have been depressed and a clear understanding of this was reflected in the budgeted price of crude oil in 2016 which was originally posted at US$45 per barrel of oil and US$2.75 per mmbtu of gas.
"Indeed as the intensity of the situation dawned on the government in the mid-term review, it recalibrated and used revised budgeted numbers of US$35 per barrel of crude oil and US$2 per mmbtu of gas. With these numbers, the Government was able to cut total government expenditures' down to TT$52.2 billion with the unemployment rate changing only marginally to 4.1 per cent. In other words, the right signal was able to see the economy ride an important part of the economic storm without major disruptions from the unions or other type of civil unrest. The right signals dampened people's expectations," he said.
According to Hosein: "The question that arises is what changed between the mid-year review in April and the present to warrant a 37 per cent increase in the budgeted price of crude oil and a 12.5 percent increase in the budgeted price of natural gas?
"Would it not have made sense to use the signals in the mid-term review to wean the population off unrealistic expectations from the energy sector and at the same time initiate a process of running the economy, using mainly the proceeds from the non-energy sector as done in a similar way in places like Botswana?"
Hosein expressed scepticism at the verbal agreement last week, where Organisation of the Petroleum Exporting Countries (OPEC) members agreed in principle to a cut in oil production among member states and possible non-member states like Russia.
"One cannot reasonably say that the expected OPEC decision to cut production is a motivating factor as that came about only the day before the budget was read. Even more there is a reasonable chance that working through the logic of the cobweb model that OPEC decision may not last at all and if it lasts, it will be short-lived as shale oil produces would pump more oil onto the market."
Hosein argues that high budgeted price of oil is a strategy of sort to reduce the likelihood that the State would have to put money into the Heritage and Stabilisation Fund (HSF) next year, should oil prices turn favourable.
"The HSF can initiate both savings and withdrawals. Savings is triggered when actual energy revenues exceed forecasted energy revenues, by 10 per cent. Further, if actual energy revenues occur are more than 10 per cent of forecasted energy revenue, then 60 percent of this excess revenues at a minimum goes into the HSF," he said.
Economist Dr Ronald Ramkissoon told the Business Guardian on Tuesday that the Government should have used a more conservative figure of US$40 for the price of oil.
"I think the oil price used is a bit on the high side and it will not allow for any contribution to the HSF. Bear in mind that the energy sector is going to contribute very little to the revenue. Although in these times every little bit counts," he said.
He said the Minister of Finance would have to look at ways in which to cut waste.
"The Minister of Finance has not exhausted the revenue side. He has widened the base for tax collection in the case of VAT. He has said the right things like BIR and what needs to be done. There needs to be action in implementing the legislation and raiding taxes from the areas he has identified such as the gambling bill," he said.
Former Energy Minister
In agreement is former Energy Minister, Kevin Ramnarine, who also believe the price of US$48 to US$50 the Government used is way too high.
"The world is over supplied with oil by one million barrels per day and there is a building of global inventory. It will take 18 months to two years to see prices recover," he said.
Ramnarine added that US$43 to US$45 would have been a better price.
He also gave his view on OPEC's meeting last week.
"It signals a return to supply caps by OPEC. The view is that they are doing this knowing winter is in six weeks. They seem to want higher prices but are wary that higher prices will resuscitate some shale oil production."
OPEC
Two days before the budget was presented in T&T, OPEC held a meeting in Algeria and announced its first planned output cut in eight years.
OPEC reached a "historical" agreement to cap oil output from 33.24 million barrels a day to 32.5 or 33 million barrels a day, President of OPEC Mohammed Bin Saleh Al-Sada told a press conference after a six-hour extraordinary meeting of the cartel's members.
Al-Sada noted that the participants agreed to set up a committee to consider the output share of each member nation, and then file a report to the next OPEC meeting due in Vienna in November.
Since last week's meeting oil prices have trended upwards.
Markets also reacted positively after a phone conversation on Monday, when Iran's President Hassan Rouhani told his Venezuelan counterpart Nicol�s Maduro in a phone call that it was essential for oil producing countries to take a decision to raise the price of oil and stabilise the market.
According to Newsweek, oil prices jumped more than five per cent last week as many traders said they were impressed OPEC had managed to reach a compromise after years of wrangling.