The crash of the US oil market and with it the price of West Texas Intermediate (WTI) came as no surprise to close observers of the global commodity markets as demand remains weak and supply strong leading to a massive over-supply of the market. It was, however, still spectacular and would have sent shock-waves throughout all oil producing countries.
How did we get to this point and what are the implications for T&T and the future of oil?
As we are all aware, price is a factor of supply and demand. In the case of crude it is also a factor of speculation among traders that is driven by market fundamentals but also issues of geopolitics and, in the case of recent developments, technology and how it is applied.
What we have seen this week is as much a story of the science not yet providing a solution as it is about the use of science in solving long held challenges. In other words, it is as much the impact of COVID-19 and the shutting down of the global economy as it is a case of the use of technology to find and produce more crude oil.
We are aware by now that the search is on for a vaccine that will hopefully protect us from the coronavirus. When this is found it will allow us to be able to return to life as “normal” in the context of less rigid social distancing but with the knowledge that our lives have forever been changed.
This science of finding a vaccine will allow us to once again carry out economic activity at the rate we are accustomed to and lead to a significant pick up in global demand for crude oil. There is after all a billion cars that will require gasoline and diesel to run on and planes needing aviation fuel. So the demand side of the price equation will improve.
On the supply side, it has only been in the last 20 years that technology has allowed for improved imaging of the subsurface ensuring more accurate pinpointing of oil reserves, the drilling of those reserves in the deep water and the successful production of those massive oil finds. The success of Guyana is a prime example of this. Without technology Guyana’s massive reserves would have remained in the ground.
Similarly in the United States, the shale revolution that moved the country from being oil dependent to being the largest producer of crude has been driven by science and technology that both allowed oil production to occur and reduced the average cost to allow former high-cost producers to remain in business.
What has happened however in the US market is that most of the refineries to take the oil and refine it into finished products are located in the south-western part of the USA and that has meant that increasingly it has had to handle large amounts of oil from far away and transport it across the country because of a lack of sufficient pipeline. The impact has been that WTI prices are discounted and a major differential existing between the price of WTI and Brent which is a European marker.
Added to that with demand so low, companies have been buying oil at record prices and storing it. When, as in the case on Monday, your production remains high and you have no where to store it and demand has hit the floor you have a perfect storm and the kind of crash we witnessed.
For T&T, oil prices matter in many ways. The first is that oil revenue accounts for close to 35 per cent of total energy revenue or, put another way, depending on price and production it could put in government’s hands close to $5 billion annually. So when the Minister of Energy smiles and says this is a gas-based economy he is, to a large measure, right but he is not giving a true reflection of the gravity of the situation.
In addition, Heritage Petroleum is an oil company and its survival depends on its ability to find, develop and sell oil at a price that allows it to be profitable. With these prices, Heritage cannot continue in the long term. Luckily, I am confident that oil prices will rebound to US $40-$45 range by the spring of next year, going on the average closer to US $60 a barrel in 2022.
The precipitous fall in oil prices and the economic challenge caused by the COVID-19 has also forced Prime Minister Dr Keith Rowley to appoint a team to look at the way forward for the economy.
In his address to the team Rowley talked about the need for diversification and for food security. I am heartened to hear the Prime Minister speak in these terms but Dr Rowley needs to point his team first to the significant work done on this very issue by his own economic development board.
This talk of diversification is something we have bandied about as a country for decades and will limited success.
It is true that we have diversified our energy mix from oil and refining to oil, natural gas and petrochemicals. We also have some semblance of a fabrication industry, while we have formed local companies and developed some expertise. We have not linked energy with manufacturing but we have tried.
More than that there are those who suggest that diversification means moving away from oil and gas. To me that is a flawed approach. What is needed is an approach that allows us to maximise revenue and benefits from the energy sector while at the same time developing all other viable sectors with private capital leading the way.
A look at the vision 2020 document shows us what the thoughts were of some of the best minds in the country on energy but we never followed the recommendations as governments changed and the country did not take the advice of the late Lloyd Best that politics does not stop at the ballot box. We failed to insist that the incoming government follow the vision 2020 plan, even if they wanted to make adjustments, and just like that the hard work of some of the country’s best minds died on the alter of political expediency and bad-mind.
It is this same approach to politics which allowed us to leave a hospital vacant for almost five years while citizens waited in the corridors and on benches, sometimes for days, hoping to get a bed and now that there is a crisis we boasts of a parallel health system that allowed us to bring on stream hundreds of beds.
I hope this time the government takes the advice of the team seriously and it is interesting that the Finance Minister was left out of the committee.
Regardless of what happens in the coming months, the world has changed. Unless we diversify both our approach to the economic management of the country and what passes as politics we will not build a resilient economy and society.