This is quite the double-edged sword facing Guyana. The surge in the price of Brent Crude in recent weeks means far greater top-down revenue for state coffers through its share of profit oil and royalties, but it also means higher prices at the pump and for goods. of consumption. The people can therefore feel justified in feeling poor in a land of plenty.
Guyana remains a country vulnerable to external events and at present the global economy is extremely twisted and its outlook highly uncertain as it faces the hangover from Covid-19, the war in Ukraine and the challenge long-term climate change.
Crude prices rose 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 before February of this year was the result of the continued OPEC Plus agreement and discipline among its members, which began with the collapse of oil prices when Covid-19 hit, to drastically cut production and then cautiously increase it as demand returned. The war in Ukraine has now pushed the price up, with some predicting US$135-150 later in the year.
Even though Russian production has fallen in the face of European sanctions, the group has only recently reported a small increase in production which is unlikely to help reduce prices. Added to this are refining capacity problems which have seen diesel prices rise sharply, including in Guyana.
Moreover, US shale is not there to fill a shortfall or act as a swing producer, since US investors were badly burned during a previous boom. Production is currently 1.7 million barrels per day below pre-Covid levels. In the long run, that could increase, but Biden’s policy on climate change and fossil fuels acts as a drag. There also seems to be a position within the oil and gas industry that as alternative energy begins to bite into market share, it should capitalize in the coming decades before its much-talked-about extinction. Another factor that contributed to the limited supply was the lack of investment in the exploration and development of oil and gas fields, partly due to the Covid-19 interruption and because of the restrictions environmental, social and governance (ESG) constraints that limit the financing of new projects even as existing fields see their production decline.
It’s on the supply side. On the demand side, the post-Covid-19 period has seen a robust rebound from a 2020 low of 91 million barrels to over 100 million per day currently. This was due to various central bank measures aimed at stimulating national economies which were successful but not without consequences. There is also growing demand from China whose zero Covid-19 policy has meant it has been slow to return to normal economic activity. UAE Energy Minister Suhail Al-Mazrouei warned on Wednesday that “with the rate of consumption we have, we are far from the peak because China is not back yet.”
But what is happening now is that the current price levels for refined products are contributing to the destruction of demand. For example, in the UK, a gallon of gasoline now equals $10 (Guyana $4.77; US average price $4.97 up 62% year-on-year).
This can take the form of consumers avoiding private cars for public transport, turning down the heating in their homes or opting for renewable solutions. General consumer weakness is starting to show in developed countries, which some see as the start of an impending recession and possibly a period of stagflation – little to no growth but still with rising prices. Major US retail chain Target has warned profits will be lower as it sees both weak demand and rising transportation costs. Netflix has also seen subscriptions drop, possibly due to lower monthly consumer spending.
Guyana occupies a somewhat unique place as a new oil producer in that it benefits from higher crude prices but cannot escape the inflation that these higher prices bring.
We can expect government revenues from oil production to increase significantly over the next two years, due to higher prices helping to amortize project costs more quickly, and increased production as more FPSOs come online.
However, the government will need to do more to use some of this revenue to cushion the cost of living for all Guyanese. Donations to certain demographics so far suggest there is no cohesive, fair and just plan. 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 covenant between 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 that can be done about petrol and diesel prices since all excise duties were removed, there is always the possibility of a subsidy as the current Mexican government is currently doing. This should reduce its current inflation rate of 9% by 2%. With the general upward trend in prices, the government would do well to explore the use of what would be a fraction of its windfall oil revenues for petrol, diesel, cooking gas and especially for kerosene which remains for many working-class people the main fuel for cooking. This could also apply to flour imports, as the world is also facing a shortage of wheat due to the war in Ukraine.
Ultimately, more can and should be done to counter what is a cost of living crisis.
Finally, note the recent IMF report warning: “IMF staff urges caution in determining the pace of acceleration of public investment. Although the country still faces pressing development challenges, a sharp increase in public investment could add inflationary pressure, affect the competitiveness of the non-oil economy, lead to a possible loss of foreign exchange reserves and may not be sustainable in the medium term. Although Guyana is no longer under IMF control, their advice is still worth heeding.
Anecdotally, finding labor and materials for construction projects is already becoming more difficult and the Demerara Harbor Bridge and Diamond-Ogle Bypass will further strain labor markets. If foreign labor is brought in, it could drive up food and housing costs. Finance Minister Ashni Singh acknowledged the caution of the IMF, but said Guyana has been waiting too long for these transformative projects. True, but many Guyanese may respond that now is also the time to have a decent salary and a more comfortable life.