Imbert to present 2016/2017 Budget today

This following the surprise announcement on Wednesday that the Organisation of Petroleum Exporting Countries (OPEC) had agreed to a reduction in oil production.

The agreement on production cuts, the first in eight years, was reached at an OPEC meeting in Algiers on Wednesday. Oil prices rose more than five percent in immediate reaction to the news.

Following the announcement, senior economist at the University of the West Indies, Dr. Roger Hosein said yesterday that the government should not go on any wild spending spree in today’s budget but should continue on the path of austerity and any savings from higher than budgeted prices should be channelled into the Heritage and Stabilisation Fund (HSF).

He said there is a phenomena in economics called the “cobweb cycle” and in this cycle a price rise in one period would lead to an increased supply in the next period.

“Personally, I think this is exactly what will happen because as the price level increases, those Shale oil wells in the United States that are at the margin and that will benefit from an increase in price would now bring more Shale oil onto the market and we will end up basically at the original position we were in several years ago. In this regard, I think what the State should do is to be wise and to siphon out all surplus revenues above the budgeted amount into the HSF and this way we would have a larger pool of resources from which to gestate an interest income over time and this interest income can be used for budgetary purposes.” The reports coming out of the OPEC meeting stated that under the agreement, oil production would be reduced to between 32.5 to 33 million barrels of oil per day from 33.4 million. Saudi Arabia, the largest oil producer, was to reduce its output by 350,000 barrels a day. Three countries are exempted: Iran, Nigeria and Libya.

Economic sanctions were lifted on Iran earlier this year, and Libya and Nigeria have had some of their oil facilities damaged by terrorist attacks in recent months. Oil prices were as high as U.S. $100 a barrel in mid-2014, but the global oversupply caused prices to fall to as low as U.S. $26 a barrel in February.

Hosein said there was no reason for over-excitement at the OPEC statement because they have only spoken about reducing production with a decision to be taken in November.

“Suppose in November the decision is reversed or something, then we could end up in a worse situation. Mr Imbert has to be wise to allow things to remain as they were up to this point in time.” He was also not impressed by projections that following the OPEC announcement the price of oil could rise to between US$50 to US$70 per barrel. He said that with the presence of Shale oil in the market it would not be realistic to expect prices over US $70.

“Indeed, I think a price level in the context of production cuts close to US $60 to US $65 a barrel would be more realistic than US $70-$75 per barrel.” A similar view from fellow UWI economist Dr. Anthony Birchwood who predicted that any immediate rise in oil prices would be minimal although he allowed that another wave of cuts could see a further round of price increases. However, he said there could not be any certainty that OPEC would cut production deeply enough to see prices rise to U.S. $70 or $80 or $100 a barrel.

He said all the top OPEC producers are fighting for market share and that it would take a lot of cutting for prices to reach the US$80-$100 levels of the past, adding that the Shale oil producers coming back in the market would keep a lid on oil prices.

Birchwood said the Minister of Finance would probably base the budget on an oil price of US $45 a barrel, adding that he preferred a level of US $30 while admitting that such a price of US$30 would mean serious cutting in several areas.

Advising cautious excitement, Birchwood pointed out that in OPEC, members of the cartel can cheat and renege on agreements.

He also mentioned the presence of Shale oil as a factor to remember.