Raphael John-Lall

The war waged by the Unit­ed States and Is­rael against Iran could neg­a­tive­ly im­pact liv­ing stan­dards in T&T, as it could re­sult in high­er food prices, in­creas­es in the price os gaso­line and pos­si­bly an ero­sion of the coun­try’s for­eign re­serves.

This is the view of econ­o­mists and a for­mer en­er­gy min­is­ter who spoke to the Sun­day Busi­ness Guardian about the war, which is en­gulf­ing the Mid­dle East.

Iran’s Is­lam­ic Rev­o­lu­tion­ary Guard Corps (IRGC) has said it will not al­low “a litre of oil” through the Strait of Hor­muz as the clo­sure of the key Gulf wa­ter­way con­tin­ues to roil glob­al en­er­gy mar­kets, since the war that start­ed on Feb­ru­ary 28.

The IRGC has even threat­ened that oil prices could reach as high as US$200 a bar­rel of oil.

On Fri­day, Brent crude, the glob­al oil bench­mark, closed trad­ing at above US$100 a bar­rel, while West Texas In­ter­me­di­ate Crude, the US bench­mark fell by 2 per cent.

Last Tues­day, the Unit­ed Na­tions warned of “sig­nif­i­cant risks” to glob­al trade in­clud­ing high­er food prices and cost-of-liv­ing pres­sures, if the Strait of Hor­muz re­mains closed amid the on­go­ing Mid­dle East con­flict.

A re­port by the UN Con­fer­ence on Trade and De­vel­op­ment (UNC­TAD) said the mil­i­tary es­ca­la­tion fol­low­ing the US and Is­rael strikes on Iran and Tehran’s re­tal­ia­to­ry at­tacks has al­ready dis­rupt­ed ship­ping through Hor­muz.

“The re­sult­ing rip­ple ef­fects go far be­yond the re­gion, af­fect­ing en­er­gy mar­kets, mar­itime trans­port and glob­al sup­ply chains. High­er en­er­gy, fer­tilis­er and trans­port costs – in­clud­ing freight rates, bunker fu­el prices, and in­sur­ance pre­mi­ums, may in­crease food costs and in­ten­si­fy cost-of-liv­ing pres­sures, par­tic­u­lar­ly among the most vul­ner­a­ble,” the re­port said.

En­er­gy Min­is­ter Dr Roodal Mooni­lal has been op­ti­mistic say­ing ris­ing Liqui­fied Nat­ur­al Gas (LNG) prices could boost ex­port rev­enues and he al­so pro­vid­ed da­ta at a news con­fer­ence last week Thurs­day, which in­di­cat­ed that the coun­try’s rev­enue po­si­tion could in­crease by US$4 mil­lion a month as a re­sult of high­er oil prices.

Some an­a­lysts are not as op­ti­mistic.

Fi­nan­cial an­a­lyst, Mar­i­ano Browne, who is al­so a for­mer min­is­ter in the Min­istry of Fi­nance, said the war will have a glob­al im­pact “some pos­i­tive, but oth­ers may be neg­a­tive.

“T&T is price tak­er with no room to ma­noeu­vre in this sce­nario. Let’s look at the neg­a­tives first. The largest user of forex is the im­por­ta­tion of fu­el. What­ev­er is hap­pen­ing to oil prices will be passed on to T&T by high­er prices. This will drain and re­duce the for­eign re­serves and will lead to high­er prices at the pump or more sub­si­dies. This leaves the T&T Gov­ern­ment ex­pen­di­ture com­pro­mised and in­creas­es the like­li­hood of a forex ad­just­ment.”

He al­so said the longer the war lasts, the greater the im­pact on in­fla­tion.

“En­er­gy is at the root of all pro­duc­tion every­where in the world. This will have a knock on im­pact on all im­ports and will neg­a­tive­ly im­pact pur­chas­ing pow­er through im­port­ed in­fla­tion and will re­duce the forex re­serves. The longer the war con­tin­ues, the greater the prob­a­bil­i­ty that it would lead to a glob­al re­ces­sion cou­pled with ris­ing in­fla­tion.”

He added that un­cer­tain­ty af­fects cap­i­tal mar­kets and there­fore the price of eq­ui­ties.

“The longer the war con­tin­ues, the greater the im­pact on stock mar­kets. Since the Her­itage and Sta­bil­i­sa­tion Fund (HSF) is ‘over­weight’ in hold­ing of eq­ui­ties, this will neg­a­tive­ly im­pact the val­ue of the HSF. The Na­tion­al In­sur­ance (NIB) fund will al­so be im­pact­ed though less than the HSF. High­er in­ter­est rates in these types of mar­ket trans­late in­to high­er debt ser­vice pay­ments which re­duces Gov­ern­ment’s do­mes­tic ex­pen­di­ture and in­creas­es the pos­si­bil­i­ty of high­er bor­row­ing/ loans to stay in the same place.”

De­spite the threats to the in­ter­na­tion­al and lo­cal econ­o­my, Browne be­lieves that there could be a sil­ver lin­ing.

He point­ed out that oil rev­enue would in­crease as a re­sult of high­er prices.

“How­ev­er, giv­en the low out­put vol­ume this is like­ly to be in­signif­i­cant. The price of LNG ris­es on the spot mar­ket. This is pos­i­tive but the ef­fect is mut­ed be­cause of low­er out­put vol­umes. The same com­ment is true of petro­chem­i­cal ex­ports. Giv­en this two-sided equa­tion, it is not clear that the pos­i­tive im­pacts out­weigh the neg­a­tive. The sen­si­ble ap­proach is to be con­ser­v­a­tive and not count your chick­ens be­fore they hatch.”

Volatile mar­kets

For­mer en­er­gy min­is­ter Stu­art Young told the Sun­day Busi­ness Guardian that giv­en the fluc­tu­a­tions in glob­al en­er­gy mar­kets, fore­cast­ing en­er­gy prices and their im­pact on T&T is not an easy feat.

“It is very dif­fi­cult to pre­dict how long en­er­gy prices will re­main in­flat­ed as things are very flu­id and volatile. We have al­ready seen prices of oil go to US$119 and to­day they are hov­er­ing around $86-89 a bar­rel of oil (Brent). Nat­ur­al gas prices in Eu­rope and Asia have risen and the longer the Qatar LNG fa­cil­i­ty re­mains off line, the longer prices will re­main in­flat­ed as Qatar pro­vides 20 per cent of the world’s LNG sup­ply.”

He spoke about past work done when he was en­er­gy min­is­ter.

“For­tu­nate­ly, the PNM ad­min­is­tra­tion ne­go­ti­at­ed a high­er price for our gas and moved from Hen­ry Hub, which is to­day around US$3, to a for­mu­la that in­cludes an Asian price, a Eu­ro­pean price and a com­po­nent based on Brent (oil price), this for­mu­la that we achieved will lead to much high­er prices/rev­enue for Trinidad and To­ba­go.”

Ad­di­tion­al­ly, he said the pre­vi­ous ad­min­is­tra­tion ne­go­ti­at­ed ad­di­tion­al LNG car­gos as part of the re­struc­tur­ing of AL­NG.

“These two fac­tors alone will lead to sig­nif­i­cant rev­enue for Trinidad and To­ba­go. The flip side of all of this is go­ing to be in­creased fu­el prices that will af­fect the cost of liv­ing as ship­ping and air­line costs will rise which will al­so lead to more ex­pen­sive im­port costs of food and goods.”

High­er con­sumer costs

In­ter­naion­al re­la­tions ex­pert Dr An­tho­ny Gon­za­les said oil and gas prices are ris­ing but ac­com­pa­ny­ing that is the rise in the cost of fer­tilis­ers which will im­pact agri­cul­tur­al goods prices.

“The war against Iran has al­ready re­duced oil pro­duc­tion by 20 per cent and oil ship­ments are al­so se­ri­ous­ly con­strained by block­ing the Strait of Hor­muz. While strate­gic re­serves will be used to re­plen­ish sup­ply some­what these re­serves are not high and can­not off­set the fall for too long. Oil prices will rise as we have been see­ing. Sim­i­lar­ly, gas prices are ris­ing and will be even more af­fect­ed than oil as gas re­serves are at a min­i­mum. So oil and gas prices are climb­ing along with food prices as the sup­ply of fer­tilis­er has been re­duced sig­nif­i­cant­ly by the block­age in the Strait of Hor­muz.”

He said T&T “can­not es­cape these price in­creas­es.”

“High­er en­er­gy prices will in­crease the cost of trans­port and in many in­puts there­by in­creas­ing the costs of most goods. Food prices are ex­pect­ed to surge and T&T as a large im­porter of food has to be pre­pared to deal with high­er im­port prices. In gen­er­al, the ef­fect of this cri­sis will be in­fla­tion­ary in T&T and work­ers will see a de­cline in re­al in­come lead­ing to a fall in their stan­dard of liv­ing.”

He warned that a pro­longed war will have a dev­as­tat­ing im­pact on the stan­dard of liv­ing.

“This would af­fect work­ing peo­ple in par­tic­u­lar who have not seen an ap­pre­cia­ble in­crease in wages in re­cent times. If the war is pro­longed and prices rise sub­stan­tial­ly over the next six months, due con­sid­er­a­tion may have to be giv­en to giv­en to strength­en­ing the so­cial safe­ty net es­pe­cial­ly since the clo­sure of a num­ber of work pro­grammes has left many work­ers on the bread­line.”