Guyana’s best use of its oil wealth is strategic spending through a Ministry of Renewable Energy

Introduction

Last week’s column had raised an outside-the-box consideration, which is that Guyana’s best use of its coming petroleum benefits/revenues might well lie in their utilization as strategic spending on renewable energy. This was phrased as Decision Rule 4, following on the previous rules one to three presented earlier. As an extension of Decision Rule 4, I had also recommended that this rule should be operationalized through the creation of a dedicated Ministry of Renewable Energy.

As advanced, this recommendation has, to this point, rested on two foundations. The first is that nothing less than a dedicated ministry would be in a position to capture the high importance of this Decision rule. Further, nothing less than the stature of a government ministry would be capable of fulfilling the expectations that guide this proposal. Such a ministry could be counted on to be both in fierce competition and cooperation in the search for the best use of Guyana’s oil wealth.

The second foundation offered has been the sheer complexity of 1) the prevailing organisational structure that is responsible for renewable energy, and 2) the legislative framework under which these several bodies function. For readers’ convenience this complexity is captured in the two Schedules shown in the last week’s column.

Today’s column develops further arguments in support of the recommended dedicated Ministry of Renewable Energy.

Drivers

Global experience reveals that, in environments like Guyana, several drivers support the role of a government ministry leading renewable energy advancement, as a national priority. One of these is developmental. And, indeed this driver applies to all forms of energy. Readers recognize, Guyana is a small, weak, poor, open economy, and expect, therefore, it would have a weak private sector and small domestic markets for energy. If Guyana seeks to rely principally on export markets without government taking a lead, it is highly likely foreign investors would control such operations, if they are to be commercially successful.

This circumstance is reinforced by the additional consideration that even in large developed economies with strong private sectors, like the United States, government leadership is observed:

“Over time, virtually all sources of energy have received some form of US government support. As far back as 1916 the government introduced tax incentives to encourage companies and individuals to drill for oil. In the 1930’s, the government focus shifted to federal finance for dam and hydroelectric power. From the 1950’s onward the government financed research in nuclear power and in recent years the government has provided finance for alternative and renewable energy.” (Bedzek and Wendling (2007), International Journal of Global Energy Issues).

A second driver is the sheer relative size of the potential abundance of Guyana’s energy resource endowment, recognized at this early stage. Given the high probability of significant potential, the country needs the state with its multi-generational long-term perspective to pursue its realization. Private gain (profit) cannot be reasonably expected to incentivize investments in such externalities, since ongoing private profitability is the only sure way for private firms to survive.

A third driver is an admixture of historical/political/cultural elements. Given Guyana’s geo-strategic imperatives and its development predicament, goals such as energy security; energy affordability; the strategic positioning of Guyana in the region and hemisphere (given its border challenges); environmental vulnerabilities; and, ultimately, its aspirational option to develop a “green state” cannot be reasonably left to market outcomes, given the woefully weak markets the country possesses.

To re-emphasize, it is also worth bearing in mind that, research and analysis across the world, supports the observation: “renewable energy policy highlights how important government’s policy structure and growth measures are for the renewable energy industry as a whole”. (Hill, 2015). This statement acknowledges the success of Europe’s renewable energy policies, (see Global/Data Report on Renewable Energy Policy, 2015).

Economic theory

Widely tested economic theories/theorems, also give strong support to my recommendations. I refer to two of these. First, economists generally acknowledge the price of energy (like several other major products traded in world markets), does not capture environmental (for example, pollution) and social costs. These costs are defined as ‘externalities’. Readers should be aware from public debates, that fossil fuels are ‘dirty’ and generate such costs (negative externalities), for which the sellers of fossil fuels do not have to pay. Typically, government and/or citizens, take up those costs. In similar vein, renewable energy is considered as ‘clean/green’, because it does not generate such negative externalities. To the contrary, their use generates savings/ benefits (positive externalities). Where there are positive externalities, economists encourage government intervention, in order to secure these for the broader national economy. And, perhaps, the most commonly agreed reason for this (across all political persuasions) is that government can take the longer-term view referred to above.

A second economic theory/ theorem is that, in the most widely used economic growth (development) models, increases in per person real value added GDP are almost entirely dependent on the growth of the productive factors (like labour, capital) plus the growth of what is termed technology. Here technology refers to all increases in per person real GDP that cannot be adduced to the productive factors. This residual is overwhelmingly generated by improvements in techniques, spending on research and development in the fields of science, and innovation over all areas of systematic human endeavour.

Any successful development of renewable energy in Guyana would have to draw heavily on science and technology (S&T), as well as research and development (R&D). Indeed, as observed in passing last week, just being able to accurately inventorize, let alone monitor, oversee and develop renewable energy in Guyana, would necessitate being very S&T and R&D intensive.

It would be important also, to note that globally, more “money is invested in renewable energy than ever before”. (Science In The News (SITN), Harvard University, 2012.) The report reveals such investment focuses on projects that “need finance to develop and commercialize”, with the emphasis placed on job creation.

Conclusion

Next week I turn to address the final topic in both this series of articles on Guyana’s coming petroleum sector (started in September 2016) and the wider survey of Guyana’s extractive industries (started in December 2015). That topic will be the revenue and other financial/ economic aspects of the operationalization of the recent oil finds.

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