It is quite the double-edged sword Guyana is facing. The surging price of Brent Crude in recent weeks means far greater top down revenues to the state’s coffers from its share of profit oil and royalties, but it also means higher prices at the pumps and for consumer goods. The people may therefore feel justified in feeling that they remain poor in a land of plenty.
Guyana remains a country vulnerable to external events and right now the world economy is most extraordinarily twisted, and its outlook highly uncertain as it deals with the hangovers of Covid-19, the war in Ukraine and the long term challenge of climate change.
Crude prices have increased from a low of US$18.38 (Brent Spot Price) in April 2020 to US$125.33 as of May 31, 2022. Much of the increase prior to February of this year was a result of OPEC Plus’ continued agreement and discipline among its members, that began with the oil price collapse when Covid-19 hit, to radically cut production and then carefully increase it as demand returned. The war in Ukraine has now propelled the price higher with some forecasting US$135-$150 later in the year.
Even as Russian production has declined in the face of European sanctions, the grouping has only recently signalled a small increase in output that will likely not help reduce prices. Added to that are refinery capacity issues that have seen diesel prices rise sharply including in Guyana.
Moreover US shale is not there to make up any shortfall or act as a swing producer, since US investors were burnt badly in a previous boom. Production is currently 1.7M barrels per day below pre-Covid levels. Long term this may increase but the Biden policy on climate change and fossil fuels is acting as a brake. There also does seem to be a position among the oil and gas industry that as alternative energies begin to nibble away at market share, it should capitalise in the coming decades before its much talked about extinction. Another contributory factor to tight supplies has been the lack of investment in exploration and development of oil and gas fields in part because of the interruption of Covid-19 and because of Environmental, Social, and Governance (ESG) strictures that are limiting the financing of new projects even as existing fields see production declines.
That’s the supply side. On the demand side, the post-Covid-19 period has seen a robust rebound from a low in 2020 of 91M barrels to over 100M per day currently. This was due to various central bank measures to stimulate national economies which were successful but are not without consequences. There is also growing demand from China whose zero Covid-19 policy has meant it has been late in returning to normal economic activity. UAE Energy Minister Suhail Al-Mazrouei warned Wednesday that “With the pace of consumption we have, we are nowhere near the peak because China is not back yet.”
But what is now happening is that the current price levels for refined products are contributing to demand destruction. For example in the UK a gallon of gas is now the equivalent of US$10 (Guyana US$4.77; US average price US$4.97 up 62% year on year).
This can take the forms of consumers eschewing private cars for public transportation, turning down the heating in their homes or moving to renewable solutions. General consumer weakness is beginning to appear in developed countries which some see as the beginning of a looming recession and possibly a period of stagflation – low to zero growth but still with prices increasing. The large American chain store Target warned that profits would be lower as it sees both soft demand and increased costs related to transportation. Netflix has also seen subscriptions fall, perhaps as a result of consumers trimming monthly expenses.
Guyana is in a somewhat unique place as a new oil producer in that it is benefitting from higher crude prices but cannot escape the inflation that those higher prices bring.
We can expect government revenues from oil production will increase significantly over the next two years, due to the higher price helping to pay off project costs more quickly, and from increased production as more FPSOs come on line.
However the government will need to do more to use some of those revenues to cushion the cost of living for all Guyanese. So far the handouts to certain demographics suggest that there is no coherent plan that is equitable and just. The tax breaks given to importers and miners are also unlikely to help the average Guyanese and send a dangerous signal that taxes are optional when they are the bedrock of the compact between the citizens and the state. Again, when a government does not need your money it is no longer accountable to you.
While Vice President Jagdeo has said there is not much more that can be done on gas and diesel prices since all excise duties have been removed, there is always the option for a subsidy as the current Mexican government is currently doing. This is expected to cut 2% off its current inflation rate of 9%. With the general direction of prices going higher the government would do well to explore using what would be a fraction of its windfall oil revenues for gasoline, diesel, cooking gas and especially for kerosene that remains for many working class people the primary fuel for cooking. This might also apply to flour imports as the world also faces a shortfall in wheat due to the War in Ukraine.
The bottom line is more can and must be done to counter what is a cost of living crisis.
Finally one takes note of the recent IMF report warning: “Staff urge caution in determining the pace of ramping up public investment. While pressing development challenges still face the country, a large surge in public investment could add inflationary pressure, affect competitiveness of the non-oil economy, lead to an eventual loss in FX reserves, and might not be sustainable over the medium-term.” While Guyana is no longer under the cosh of the IMF their advice is still worth considering.
Anecdotally, finding labour and materials for construction projects is already getting harder and the Demerara Harbour Bridge and Diamond-Ogle bypass will strain labour markets further. If foreign labour is brought in it could drive up food and housing costs. Finance Minister Ashni Singh acknowledged the IMF’s caution but said Guyana had been waiting too long for these transformative projects. That is true but many Guyanese may respond that the time has also come for a living wage and a more comfortable life.
