He said the government should prepare itself for oil prices which are less than half of what they are today, pointing out that the price of natural gas is also at a low level.
“I think they should think of it as being US$20-something a barrel.” He said if the country prepares for the worst case then it means that whatever price it gets above that will be a bonus.
Finance Minister Colm Imbert plans to present the budget on September 28, 2015. It must be completed and approved by the end of October.
Professor Birchwood said the country faces a drastic decline in energy revenues and one of the immediate challenges is that no one knows how long the current period of low energy revenues will last, pointing out that the price of natural gas is also low.
“But we could suspect it would be for the long term because we are unlikely to see oil prices reaching US$100 a barrel in the near future and we could expect that with the new developments happening where we have Iran coming back onto the market and shale gas remaining a threat that oil prices will be depressed because there will be a fall in demand for oil and also the threat of shale gas will cause a further collapse in oil prices.” He said the problem is compounded because at the same time that energy prices are falling, oil production in Trinidad and Tobago is also on the decline.
Birchwood said a regime of extended low energy prices would suggest that the government needs to respond with austerity measures but added that the good thing about the country voluntarily taking austerity measures is that the country still has its savings in the Heritage and Stabilisation Fund, and it still has its reserves intact, “also we are not forced to retrench workers immediately and the government is not forced to actually implement austerity measures, what they are doing instead is a voluntary restraint of their expenditure. And I think that is what they have to do now — voluntary restraint of public expenditure in preparation for the worst case scenario.” He explained, in this scenario, Trinidad and Tobago could choose how fast it falls into these voluntary restraint measures and in rightsising industries.
“We have a chance of doing that because of the fact that we still have money, we still have cash reserves, so what we have to do now is choose our downward adjustment. We have to choose our own downward adjustment which means that the government should not try to do everything too fast by trying to rightsize industries immediately but it has to start moving toward that.” Responding to the suggestion that the Government will have no choice but to present a deficit budget, Professor Birchwood said “running a deficit budget might be all right for the short term but if you try to continue it for the long term then you will have a further downgrade of Trinidad and Tobago’s economy — you are already being downgraded — so you have to be cautious as to whether you will want to borrow to spend your way out of this economic depression.
I am saying that what we will have to inevitably do is have a cutback in government expenditure.
The kind of projects that should be invested in are those that you could secure funding for - IDB funding.” Another of UWI’s economics lecturers, Martin Franklin, said that given the “new normal” in oil prices, some of the imperatives for the government should include revisiting of the Natural Gas Marketing Policy to ensure that it is still appropriate for the changes in the global market consequent on the pending completion of the expansion of the Panama Canal and the terminals for gas export within the US. He said the government also needs to maximise rents from the energy sector; sustain deep water exploration; intensify secondary oil recovery; advance the Cross Border Gas Initiative with Venezuela; facilitate greater local content and revisit the Oil and Gas Fiscal Regime to intensify the development of small marine oil & gas fields.
Franklin said government should also advance the Diversification Thrust by supporting the positive initiatives currently in progress; enhancing the environment for facilitating international joint ventures, Public Private partnerships and increased investment by local businesses. He said it should further improve the country’s Ease of Doing Business index and other key international indicators; provide increased support and facilitation for entrepreneurship; and implement strategies for engaging the Diaspora.
He suggested the need for rationalisation of the Social Services programmes, and addressing labour shortages, low labour productivity and the country’s “migration policy.” He said the government should revise downward the targets for subsidies and transfers, including reducing the petroleum subsidy and improving the targeting of the GATE programme.