Once upon a time the price of sugar on the world market was keenly watched by Guyana’s biggest industry. Now with the dollar value of oil exports equalling in a couple of days what Guysuco’s exports amount to annually, attention has diverted to the price of Brent Crude to which Guyana’s Liza Crude is roughly pegged.
While the 2022 Budget sets the estimated oil price at $65 per barrel at the time of writing Brent is heading towards $90. But first a warning: Given the complex and fluid political and economic variables, predicting the price of oil can be a fool’s game. That said, it is instructive to discuss the various short and long term factors that may determine oil’s price in the coming years because ultimately it will impact the economic welfare of Guyana. For example a pro-longed period of low prices -under $40 per barrel – would severely harm the development plans of the current government. However, the mid to long term outlook actually looks more promising.
One cannot talk about global oil markets without discussing OPEC, the Organisation of Petroleum Exporting Countries founded in 1960 by its first five members, Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela who wanted to get more for their oil reserves, which at the time were being extracted by Western oil companies, known as the Seven Sisters. The original group looked therefore to coordinate supplies so as to keep world prices stable. It has done this with varying degrees of success, and currently controls about 40% of world production.
In 2020 and with the devastating impact of Covid-19, OPEC Plus stepped up to aggressively cut production and stabilise prices and since then its members have shown remarkable cooperation and discipline in restraining output, and acuity in forecasting returning demand amidst the twists and turns of the pandemic. Key to this, has been Russia, (the Plus in OPEC Plus) with 12% of world production, following the bruising and ill-timed race to the bottom instituted between itself and Saudi Arabia in late 2019.
The economic impacts of Covid-19 remain a key variable in the short term. While Omicron might be the variant that turns the virus endemic – similar to the flu – there is also the possibility a more severe variant emerges resulting in further lockdowns and economic disruption. Meanwhile the mid-term effects of the pandemic, inflation and massive government debts incurred in the past two years, may result in financial crises which suppress oil demand, similar to the 2007 recession. And then there is China which has navigated the pandemic well but also has some ominous debt issues related to real estate developers, most notably Evergrande. As the second largest consumer (13%), any decline in China’s growth rate will impact oil prices signifi-cantly.
Within the overarching geopolitical risk of the West/China/Russia tensions there are: USA-Iran nuclear talks that if resolved would bring more crude onto the world market; unrest in the western oil fields of Libya; and the possible easing of sanctions on our neighbour Venezuela, although like Iran they have infrastructure problems that would limit increases in exports. The Russia factor is multidimensional as was seen recently with the shortage of gas supplies to Europe that saw energy prices spike six-fold and rippled into stronger demand for oil and even increased use of coal. Some of this shortfall was simply technical, some attributed to Russia’s demands for German approval of a new gas pipeline, Nord Stream 2, and some about tensions over Ukraine. Europe’s dependence on Russian gas (35%) means President Putin has tremendous leverage that he may be willing to use.
Long term the primary factor is the speed of the energy transition to renewables. Even with the massive efforts of governments and energy companies it will be messy. It is also worth noting petroleum products have a multitude of uses other than combustion from our phones to medical equipment. There is simply no activity in our modern lives that is not dependent on oil, and for the foreseeable future this will continue. Meanwhile alternatives to fossil fuels for electricity production such as solar, hydro and wind energy, while expected to grow rapidly through 2030, currently have drawbacks to do with portability, scalability and reliability. For example, overcast and windless days in Europe late in 2021 (what Germans call Dunkel-flaute) meant wind energy was off the grid and contributed to the spike in energy prices.
The climate change movement and Covid-19 have also had a dampening effect on investments in exploration with 2021 the lowest for discoveries since 1946, only 4.7B barrels. If this trend, including limited access to financing and government restrictions on drilling, continues, the effects on prices could be acute in five to ten years. On the flipside the emergence of a breakthrough and disruptive new technology could see a rapid decline in fossil fuel demand, even as it is the energy companies themselves leading much of the research.
This brings us back to OPEC and how it might react to lowered demand. There is the argument that as long as its members see their days as numbered they will look to extract as much value out of each barrel for the next 20 years and will do all they can not to allow prices to decline as previously happened. This will depend on how well it can maintain current discipline among their members and solidify Russian cooperation.
What does this all mean for Guyana? As a relatively low cost producer, $25-$35 per barrel, it probably won’t mean much for now. The nature of the offshore projects with massive upfront capital expenditures and relatively low operating costs means the operators will be loath to pause production even if prices were to drop significantly. Globally most forecasts see oil demand growing at least up to 2030. Also the quality of the basin’s oil means it will continue to be in demand long term. That said, there is a big difference between getting $1B per year in revenue compared to $3B.
Current forecasts for Brent are that it will stay in the upper range of $70 to $80 per barrel for 2022 and that there will be more surprises to the upside than down, including possibly US$100 oil, as the world economy emerges somewhat distorted from the pandemic. Longer term the difficulties related to energy transition are as likely to result in upward pressure on prices than the downside. However it would behoove this government to adopt caution in its expenditure, ensure adequate reserves and use the revenues to truly diversify the economy so as to withstand any crisis and ultimately the energy transition.
