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Will he still be smiling a few years
from now? |
What’s the background?
In July the price of oil hit US$ 147.00 a barrel. Less than six months later it has tumbled to around US$ 40 a barrel and futures contracts are trading at around US$ 35 a barrel. In a country that has developed an economy where 70% of the GDP is directly or indirectly reliant on revenues generated in this sector, such wild fluctuations are calamitous and have a huge impact on people’s lives. It is difficult to pursue a fully developed nation status based on such a model. However, oil and gas revenues will have to continue playing a major role in the country’s economic future until greater diversification can be achieved - as in Dubai, Denmark, and Abu Dhabi. There are two pricing scenarios that need to be considered.
The ‘Why worry?’ scenario
This is a scenario where everyone uses a highly projective historically-based approach to estimating what the future oil revenue streams might be. If you look back in history, there have been these boom and bust cycles occurring on a regular basis. The world has gone into an economic slump short-term and prices for oil and gas have plummeted. But, once we get through this rough patch in the next year or so, rapid growth economies such as India and China will once again need substantially more oil and gas imports and so the global prices will rise again to much higher levels, maybe even to the US$ 200 a barrel that was being talked about earlier in 2008! All we need to do is batten down the hatches during this downturn and wait it out until the boom returns. Then everything will be fine. So why worry and do anything to make our economy less vulnerable to global oil and gas price fluctuations by becoming more diversified?
The ‘I didn’t see that coming!’ scenario
In this scenario we really didn’t realise just how much the world has changed. A number of countries have backed renewable energy and energy self-sufficiency and now no longer need to import so much oil and gas. This includes previously big importers such as China and the USA. Within five years of Barack Obama coming into power, the dependency level of the US on foreign oil and gas imports has declined by 20%. In China, huge investments in clean and renewable energy have substantially reduced that country’s energy import needs. Many European countries are moving towards self-sufficiency in energy and are reducing their import needs. The old combustion engine vehicle stock in most developed countries has largely been converted to clip-on hybrid technologies and this has reduced their fuel needs by over 30%.Continuing concerns about climate change have also impacted negatively on the oil and gas sector as disincentives that discourage their use have increased dramatically in recent years. There was a temporary increase in oil prices to around US$ 80 a barrel in 2010 but it was short-lived and the long-term prognosis is not good - a price level of about US$ 40 - 50 a barrel for the ten years up to 2020. Many potential sources of oil and gas are not being exploited because of the low prices. The oil and gas sector faces possible extinction within the next 50 years.
What does this mean for T&T?
The future of T&T depends heavily upon which scenario plays out because it has invested so heavily in this one sector. It is unlikely either will play out in its entirety. What is more likely is that parts of both will play out. There is no question that the global energy scene is changing at a rate never seen before in history. There are many signs that indicate using projective thinking (such as the government did for its last budget) may create a false basis for moving forward. Having real foresight has never been more important.
Useful link:The Obama strategy Fading fossil fuel futures
Key question: Are either of these scenarios likely to help T&T become a fully developed nation?
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