Lower oil revenues

Sep 16, 2023 Editorial

Kaieteur News – We had repeatedly warned President Ali, Vice President Jagdeo, and Minister Dr. Singh.  Each of them laughed and mocked when there were the insistent cautions to be careful with the rush of loans being taken out from here, there, and everywhere.  Now, the midyear report from the Bank of Guyana has given the first signal that all will not be upside with oil revenues anticipated to flow in an ever upward trajectory.

It is a small decline in the oil revenue projection, relatively speaking.  But GY$480 million is a big deal for Guyana.  For the sake of the longsuffering people of this country, it is hoped that this is not the beginning of one of those oil cycles where the price of this global commodity goes into a prolonged slump.  At this time, the indicators are not helpful, while oil prices are getting hit with a double fisted blow.  Prices are declining with an unnerving slowness, but steadiness.  While demand is not keeping apace of expectations, meaning that demand is not strong and in a fading pattern.

Still, the Saudis and their OPEC+ partners seem determined to hold supplies in a tight rein, so as to apply pressure to prices to be in the range that works in the interests of the members of the cartel.  The problem is that if the Saudis push too hard (cut supplies too much) and keep up this pressure for too long, it could backfire and lead to withering away of demand.  In the simplest elaboration, when prices stay stiff, as induced, tensions result in many national economies, which curtail demand.

When demand slows, the unity and disciplined rigidity of the oil producing countries in OPEC+ begin to crack.  No country wants to be last in line and left holding the bag, meaning that in the scramble for a slice of diminishing global demand, that country is left to pick up whatever demand crumbs are left.  In the haste to capture some demand for themselves, ranks are broken, and a supply glut could come about in efforts to compete for, and grab, a share of whatever demand is around.  Where supply was constricted before, the race would be on in going the other way, with every country) for itself, and hustling for some of the dropping demand.  In short, the supply spigot is opened.

This could be a problem for Guyana, where the plans and projections are for a steady flow of more and more oil revenues to fund a flurry of expensive projects, and to serve as the backbone for significant borrowings.  If and when the oil revenues start to slow down, then everything looks different.  The monies borrowed so excitedly and recklessly for numerous costly projects suddenly take on the appearance of a burden, and as stresses deepen from possibly less oil revenue over a protracted period of time, then economic hardships are usually what results.  It goes without saying that the less fortunate, the already struggling, are faced with even grimmer conditions.  Through all this, it should not be forgotten that the American billions in debt still have to be serviced, but with one major difference.  It is with less money in hand, and no one knows for how long.

The horizon does not give cause for comfort where oil revenues are concerned.  For a look at the current state of the Chinese economy indicates that the demand from this source (one of the top tier guzzlers of oil) is not where it should be.  The Chinese are not coming clean, as is their system, but there can be no concealing that this massive country’s economy is limping.  When China’s economy limps, it means that demand for oil is forced to hobble along, and with the effects powerfully felt by oil producing countries.  Guyana now falls into this exclusive club, and some early lessons are in the making.

The government should put the brakes on all borrowing, pause some projects, and revisit all their projections in efforts to cater for all contingencies.  These, of necessity, would include varying supply and demand scenarios, and with prices to match.  One thing for sure is that serious thought must be given to borrowing less.

• Dr. Singh, Jagdeo, Minister, President Ali, Vice President