Dear Editor,
The government, and perhaps the population at large, seems to rest all of the country’s hopes and aspirations for wealth creation and national development on oil (and gas) that is expected to come on stream three years hence. Guyana will suffer the same fate as Trinidad if the government places all its economic eggs in one basket. Government must diversify the economy and not become too heavily dependent on oil or gas as in Trinidad.
Government seems to have a tunnel vision on oil, believing oil will do wonders for the economy making Guyana a developed state as happened in some Middle Eastern countries that do not have other natural resources. Developed status on the basis of oil dependency is not likely to happen. Oil will only be profitable if the price stays above $50 a barrel and that is not guaranteed; and even if it is around $55, sufficient revenues will not be generated to significantly transform Guyana.
Based on a near current price of $45 a barrel, with 100K bpd, Guyana stands to collect about 10K a day in royalties which works out to about $35M a year. Even if oil hits $50, royalty at best would be around $50 annually, which is not sufficient to boost a development plan. It is possible that much of the royalties will end up in the deep pockets of corrupt politicians and their partners. The population will hardly see any of it as has happened over the last fifty years with our national revenues. Thus, other sectors of the economy like agriculture, mining and lumber, should not be neglected. It is counter-productive to close down the sugar industry and put people out of a job thereby restricting the potential to earn foreign exchange from exports. The same holds true in the rice industry; it provides employment and scarce foreign exchange.
Government needs to understand that if the oil price sinks significantly below US$45 a barrel, ExxonMobil may not want to drill because the cost of drilling would not be economical. And continued production will add to the projected surplus which will further undermine the price of crude. We cannot tie our economy just to oil as T&T did for decades, with growth and jobs tied to the fluctuation of price of oil ‒ when the oil price is high, the economy grows and when the price dips, the economy contracts.
At the dawn of this new century the price hit around $150 a barrel and then went all the way down to less than $30 a few years back, before moving northward again to around $50 now. Although OPEC has cut production to boost the price, there is no guarantee it will work as in the past. Some OPEC members cheat in their commitments causing a glut in the market and a declining price. And alternative energy ‒ solar, wind, thermal, nuclear, etc ‒ is competing with oil. Alternative forms of energy are being encouraged which results in surplus energy with less demand for oil. Europe and India are producing massive amounts of solar and wind energy with the price approaching that of oil per unit. And despite OPEC’s production cutbacks, US shale oil has increased its production after relaxing on drilling for a brief period because of low prices. Above $50, frackers will return to shale production. Shale drilling is becoming more cost efficient. And once the oil price crosses US$50 a barrel, there will be more production of shale oil as frackers can make a profit. This will pull prices back down hurting Guyana’s revenue collection from the 2% royalties.
It is projected that by 2039, oil prices will no longer be competitive with alternative energy prices and countries will gradually shift to cleaner energy rather than carbon. This is not good news for a new energy producer like Guyana.
So given this projected outcome, what do we do? Guyana cannot base its development exclusively on oil. We have to continue to produce food and pursue other forms of energy. We also have to encourage light manufacturing. And at any rate, not enough Guyanese have the requisite skills to engage in oil; this will take years. The government is advised to continue to support and encourage diversification.
Yours faithfully,
Vishnu Bisram
