As crude oil prices fall to lows not seen since 2011, dangerously close to the US$80 per barrel on which the national budget is based, the government of T&T does not foresee a shortfall in revenue as higher-than-budgeted gas prices are offsetting the lower crude oil prices, Finance and Economy Minister Larry Howai has said.
"We continue to follow closely the price of oil but note that our action will depend on two factors - firstly, whether the reduction in price is for an extended period and secondly, what is happening with gas prices. Gas prices make a bigger contribution to budgeted revenues than oil and have been a little bit better than budgeted and are so far partially offsetting the effects of lower oil prices," he said in an e-mailed response to questions last week Monday.
The budget is based on a gas price of US$2.75 per million British thermal units (mmBtu) and up to press time natural gas was trading on the New York Mercantile Exchange (NYMEX) for US$3.84 per mmBtu. The news gets even better when considering that T&T gas has been commanding even higher, often double digit prices, by selling mostly to South America.
T&T's budget uses the US oil price known as the West Texas Intermediate (WTI).WTI for November delivery closed last week at US$82.75 a barrel on the New York Mercantile Exchange, after plummeting to below US$80 on Thursday for the first time since 2012. WTI futures were down 3.6 per cent last week and 16 per cent in 2014. The International Energy Agency (IEA) said that demand growth is at its lowest since 2009 and cut its forecast for 2014 and 2015 demand.
Albeit small, the government still has some breathing space as the country needs the WTI to stay above US$75/bbl. In his 2013 budget statement (delivered October 1, 2012) Howai had explained: "It should be noted that an average oil price of US$80 per barrel for T&T basket of crudes equates to a WTI oil price of US$75 per barrel."
Demand down, supply up
That notwithstanding, oil demand is still undeniably down and did not just fall on the IEA news. "The forecast of global oil demand for 2014 has been revised 0.2 million barrels per day (mb/d) lower since last month's report, to 92.4 mb/d, on reduced expectations of economic growth and the weak recent trend. Annual demand growth is now projected at 0.7 mb/d in 2014, rising tentatively to 1.1 mb/d in 2015, as the macroeconomic backdrop improves," the IEA said.
Oil fell for a third month straight in September with Brent (the usually higher UK price) breaking through the US$90 per barrel (bbl) floor level in October, because of "abundant supply, slowing demand growth and a strong US dollar," the IEA said.
Brent for December settlement increased 34 cents to end Friday at US$86.16 on the London-based ICE Futures Europe exchange. Prices, which touched a four-year low of US$82.60 on Thursday, were down 4.5 per cent last week and 22 per cent this year.
Global supply rose by almost 910,000 barrels per day (kb/d) in September to 93.8 mb/d, on higher output from both Organization of Petroleum Exporting Countries (OPEC) and non-OPEC countries, the IEA said. "Compared with a year earlier, total supply stood 2.8 mb/d higher, as OPEC supply swung back to growth and amplified robust non-OPEC supply gains of 2.1 mb/d. Non-OPEC supply growth is expected to average 1.3 mb/d 2015," said the IEA.
Howai said government established US$80 per barrel as the benchmark for oil for "a number of reasons" and gave two:
�2 The first is that Saudi Arabia, the main swing producer in OPEC, needs oil at US$92 per barrel to balance its budget, he said. "In addition most shale oil producers require prices at US$85 per barrel to break even. Prices much below this level result in curtailment of investment and output. This would result in prices moving back up in the short term," Howai said.
He said government sees these as "two important barriers for our price and therefore we budget at US$80 which we think is a reasonably safe price. I should also point out that our information is that international lenders have been using a price of US$90 to evaluate investments. This doesn't mean that they are correct or that they would not adjust that number but it suggests that the available information points to a price of US$90 as being, on average, a reasonable one for the long term at the moment."
He said if the price comes down below the US$80 per barrel level, government would have to determine whether the effect is temporary or likely to be prolonged. "For the time being, there are two issues that we are monitoring. The first is the Russian situation.
We believe that the Saudis have reduced prices based on the overall global situation of supply and demand but we also note that Russia needs oil at US$100 per barrel and we believe that the US is comfortable with a price of US$88 which will bring pressure to bear until the recently imposed sanctions on Russia over the Ukrainian situation begin to take effect," Howai said.
�2 The second issue, he said, is the OPEC meeting on November 27 and this move may be important for establishing output and price when trying to bring the more "recalcitrant" members in line. Howai said a price of US$90 keeps oil investments going, does not price US shale oil out of the equation, addresses certain geo-political issues and does not significantly impact the global economic situation in a negative way.
Howai: Low oil price likely temporary
"We believe that given the foregoing that a price at close to US$80 - if it does get to that point - is unlikely to be prolonged but we continue to monitor the situation, as markets can continue to surprise," he said.
Asked about government's plan to cope with a sub-US$80/bbl price, Howai said: "Regarding measures to address a price below US$80, based on the foregoing analysis we do not see this as likely to be a prolonged situation and, in any event, unless the price of gas and related derivative commodities also show a significant decline, it is unlikely that we would have to do anything."
In the run up to the 2015 election, Howai was also asked if it is conceivable that instead of cutting spending in the face of a reduced oil price, government would instead issue more local currency debt (bonds) to finance the potentially wider deficit. He said government would do no such thing.
On the same day of the reading of the 2014/2015 budget, the Central Bank of T&T announced the issue of a $2.5 billion bond to finance the 2013/2014 budget deficit. However, the issue was under-subscribed by $1.1 billion, or as industry analysts would put it, "failed."
No plan to borrow to make up shortfall in election year
Government also considers the worst case scenario, Howai said, and "in such a situation, the short answer is that we would not borrow to make up the shortfall. We have already begun an exercise to address expenditure and that process will be accelerated if prices do fall below US$80 for an extended period and if gas prices also follow suit."
In the 2015 overview of its World Oil Market Forecast released in September, the PIRA Energy group predicted Brent prices will average US$91.65/bbl, down almost US$12 from 2014, while WTI declines US$13 to US$83.60/bbl.
What the IMF said
The International Monetary Fund 2013 Article IV report on T&T had said: "Although a sharp decline in international energy prices would likely have little short-term effect on output, the fiscal position and external reserves would suffer, although the budget is based on quite conservative assumptions about energy prices."
IMF staff estimated that a gradual decline in energy prices of 30 per cent from their 2012 level until 2015 would result in "a fiscal deterioration of 3.8 per cent of gross domestic product (GDP) during the period vis-�-vis the passive scenario, while net international reserves (NIR) would fall by more than US$0.6 billion by 2015 compared to the baseline."
The IMF said a modified, more extended shock scenario that prolongs the lower 2015 prices until 2018 would further weaken the fiscal stance, leading to higher public debt by about 10 percentage points of GDP, while the current account surplus would be about half that of the baseline in 2018.
"There is an urgent need to re-engineer the composition of spending. Subsidies and transfers are on an unsustainable path, eating up a rapidly growing share of total spending, from 45 per cent in fiscal year (FY) 2007/2008 to 53 per cent in FY 2012/2013," the IMF said.
"While some subsidies and transfers can be justified as improving equity or fostering positive externalities, others are poorly targeted at rich and poor alike and some may impose negative externalities. Of particular concern are costly fuel subsidies, which disproportionately benefit the wealthy and contribute to severe road congestion that is materially harming productivity," said the IMF.
The IMF noted that the fuel subsidy is partially covered by a special levy of four per cent on the value of crude oil produced by large producers but in FY 2011/2012, less than one fifth of the total bill was paid for with proceeds from that special levy.