In terms of its impact on the T&T economy, there is no doubt that the collapse of global oil prices following the refusal of Organization of Petroleum Exporting Countries (OPEC) at a meeting on November 27 in Vienna to curtail the 12-nation group's oil production quota was the year's biggest story.
On the Thursday the decision was taken, which was the Thanksgiving public holiday in the US, West Texas Intermediate, the benchmark American price for crude oil, plunged 6.3 per cent from about US$73 a barrel to $69.05 a barrel in electronic trading.The next day, Friday November 28, the WTI price plummeted again to US$66.15, its lowest price in more than four years. and the price has continued declining, closing on Friday at US$55.27.
Government based its projections for expenditure in the 2015 financial year, which runs from October 1, 2014 to September 30 2015, on an oil price of US$80 per barrel and a natural gas netback price of US$2.75 per unit.Speaking in Parliament on November 28, Finance Minister Larry Howai said the Government "own expectation" is that the price of oil for the 2015 fiscal year would average between US$65 and US$70 per barrel.
Howai said: "We expect that the price of natural gas will come down in tandem with this decline in the price of oil but we expect that it will remain above the US$2.75 reference price used in the budget.Howai said: "While this does not pose an immediate risk to the 2015 Budget, prudence would suggest that appropriate action be taken to maintain a level of fiscal balance, given the medium-term trajectory of oil and gas prices.
"Ministries will therefore be required to review their budgets to determine areas where expenditure can be suppressed to make up the shortfall."Based on a US$65 per barrel oil price and a natural gas netback of US$2.75 per unit, the expenditure review by ministries, according to the finance minister, is expected to increase the 2015 budget deficit by $1.3 billion.
The only problem with Howai's diagnosis is that on December 26, WTI for February delivery fell $1.11, or 2 per cent, to US$54.73 on the New York Mercantile Exchange and the amount of revenue T&T receives for its natural gas exports has also declined with the minister admitting in a December 18 interview that the netback price had fallen to US$2.90.
In an address on December 1, Central Bank Governor Jwala Rambarran sharply revised downward the growth of the T&T economy to 0.5 per cent from an earlier projection of 2.5 per cent.Rambarran said: "The unexpected slowdown in the economy was caused by a dismal performance in the energy sector, with declines most pronounced in natural gas and LNG production." The energy sector, he added, is expected to decline by a little over 2 per cent in 2014.
The Minister of Energy, Kevin Ramnarine, has been quoted as saying that T&T's gas curtailment issues are not likely to be behind the country before 2017, which means that the T&T economy is likely to face a double-whammy for all of the 2014 calendar year:
�2 A 2 per cent decline in overall energy production for the year and
�2 A sharp decline in energy prices for the first quarter of the 2015 financial year (from October 1 to December 31, 2014).
As about 67 per cent of T&T's energy revenue comes from the sale of LNG and natural gas-based exports, the impact on T&T's revenues may not be immediate.
But, as the Central Bank Governor pointed out in his December 1 presentation: "In some regions, such as Asia and Europe, natural gas prices are indexed to oil and can move in tandem with movements in oil prices. Even so, Central Bank estimates the netback price for LNG at Point Fortin would have to fall by 50 per cent for an extended period of time to significantly compress energy revenues."
In a statement exclusively to the Business Guardian on November 25, Point Fortin-based LNG producer, Atlantic, disclosed that from January to the end of October, 60 per cent of the production from LNG Trains I, II and III went to five Latin American markets: Argentina, Chile, Brazil, Puerto Rico and Mexico. In none of those markets is the LNG price transparent, as it is in the US, UK and parts of Asia.
While T&T's revenue-generating energy sector contracted in 2014, the non-energy sector–which uses tax revenues in the form of foreign exchange reserves–experienced a growth rate of around 3 per cent, according to the Central Bank Governor.
Rambarran said: "Much of the growth in the non-energy sector has been concentrated in three areas–construction, distribution and finance. In the construction sector, local sales of cement have been expanding strongly, reaching almost 8.5 per cent in the first nine months of 2014.
"New car sales, a main indicator of distribution activity - are still hitting double-digit rates. Dealers sold just under 14,000 new cars in the first nine months of 2014. At the end of November, we had already reached near the 4,500 marker on the PDE series. For the first time in five years, new car sales have surpassed 18,000 units on an annual basis."
The expansion in consumption was driven by a 4.5 per cent increase in business lending between January and September, compared with an average decline of nearly 4 per cent over the same period of 2013. For the first nine months of 2014, the expansion in loans to consumers averaged 7.5 per cent, up from 5 per cent in the same period in 2013.
Said Rambarran: "A disaggregation of consumer credit showed strong growth of loans for the purchase of vehicles, home renovation and debt consolidation," with the first two mentioned involving significant expenditure of foreign exchange.Strong growth in consumer loans that are being used to purchase new cars and home appliances has translated into stronger demand for foreign exchange in 2014 than in previous years.
But if energy companies earn less for their exports of LNG, methanol, ammonia, urea, melamine and other petrochemicals because of lower prices and less of the gas-related commodities are being produced because of the curtailment issues, that is likely to translate into reduced quarterly taxes by the energy companies.
Reduced quarterly taxes by the energy companies means a decline in the supply of foreign exchange. This, in turn, is likely to mean that the "shortages" of foreign exchange experienced by importers in 2014 will spill over into next year, with obvious consequences for the country's foreign reserves.
Business Guardian readers would have received a preview of the decline in commodity prices when the publication quoted from a speech delivered by Prof Nouriel Roubini, one of the most respected economic commentators in the world, who spoke about the end of the commodity super cycle.
Speaking at an International Monetary Fund conference in Montego Bay, Jamaica on October 24, Roubini said: "Some people debate whether we are truly at the end of the commodity super cycle or whether it is the end for the super cycle in industrial metals as opposed to energy or other types of soft commodities.
"But certainly commodity prices are going down and not just because China is slowing down, but also because there has been significant new capacity investment by many countries after many years of high prices. This is leading to a glut of new supply and new capacity.
Roubini said an initial analysis of the decline in commodity prices may lead to thinking that this would be good for commodity importers and bad for exporters"That first approximation might be correct, but I think there are a number of caveats worth keeping in mind.
�2 The first one is that some commodity importers also export commodities. A country like Jamaica produces and exports alumina, as well as coffee, rum and sugar. The softness in commodity prices could impact countries that are net importers of oil;
�2 Secondly, while the fall in the price of oil is positive for the oil and energy importers, it puts a huge strain on a country like Venezuela that is economically and financially fragile. The PetroCaribe scheme effectively subsidizes the price of oil in the Caribbean and this could be threatened or Venezuela could reduce its oil subsidies to the region. If that were to occur, the falling oil prices would be less of a benefit to the region, because the explicit or implicit subsidy from Venezuela is going to be reduced."