Over the last week, international oil prices have plummeted to nine-month lows, dipping below US$80 for the first time since October last year.
The drop comes on the heels of less than stellar economic outlooks for the United States and other worldwide economies, particularly among European nations.
Last Friday, two global price indices, West Texas Intermediate closed at just under US$79 per barrel of crude, and British-based Brent crude prices were just under US$91, after hitting 18-month lows of US$88.49.
"What is really driving the drop in oil price is market speculation that the euro crisis will drive demand down. There are (still) many countries growing pretty fast. It's really that market participants, including the speculators, think the euro demand for oil is going to slow, so prices will come down— that's the driver. In the US we are seeing some economic slowdown even though we thought it would be faster. There is a dampening of optimism," says group economist for RBC Financial (Caribbean) Ltd Marla Dukharan.
When oil prices fall, panic can ensue, especially in an energy-based economy like Trinidad and Tobago.
The 2011/2012 Budget, for example, is predicated on an oil price of US$75.
Energy Minister Kevin Ramnarine is not too worried, however, that the country's revenues will be too affected by the fall in prices.
"The information I have gotten from the ministry (last Friday) morning is the basket of Trinidad crude for the first eight months of this fiscal year up to May 2012 has averaged well above West Texas Intermediate.
"About 50 per cent of our crude gets a price slightly above or below West Texas and the other 50-light crude from the East coast-gets closer to the Brent price right now. We have averaged better prices than the West Texas prices and I would advise people not fixate too much on the West Texas price but look at both prices," Ramnarine told the Business Express last Friday after the Senate sitting in Port of Spain.
The situation can become even more pressing, though, when one considers that domestically, oil production has been dropping steadily over the last ten years. Latest data from Ministry of Energy and Energy Affairs show that Trinidad and Tobago's oil production for the year up to April averages 82,490 barrels per day (bpd). This is an almost 56 per cent reduction from peak production in 2006, where the country produced an average of 148,213 bpd.
Ramnarine has said on several occasions since assuming his portfolio almost a year ago that his mission is to increase oil production, especially since oil prices have, until recently, remained fairly buoyant, hovering around US$100.
"There is no indication that these falling prices will affect oil production or the level of activity in the sector," he said.
Energy Chamber president Roger Packer feels differently.
"It would be of concern. We were really hoping that the price would have stayed in the US$90-US$100/ barrel range. Our oilfields are older fields, so a lot of our production comes from lower producing wells. We would need good prices for these wells to remain feasible- especially for small producers.
"I would not like to see it get lower than US$70 because if it does, I can see many people postponing their drilling programmes because they may not find the returns as good. If the price falls below US$70, we can probably see activity slowing down," Packer told the Business Express during a telephone interview last Friday.
He said most producers might base their budget on a specific oil price average, and if prices go below that, it would affect their activity. He notes, nonetheless, that regardless of price, oil production should remain a priority.
State-owned oil company Petrotrin sees no slowing down, regardless of global oil prices.
"Oil prices are flexible and it may have hit its nine-month low but I have no doubt that it will go back up. There's a great demand for oil now, so although it's dropped I have no worry that in the near future it should go back up. Oil is a very volatile thing on the world market," says Petrotrin chairman Lindsay Gillette.
Speaking to the Business Express via telephone last Friday, Gillette said Petrotrin will continue its exploration plans and will continue to try and increase production as soon as possible, especially from the recent "Jubilee Discovery" in the Soldado fields off the southwest coast.
"Even if it's a low price you still get a value for it. Oil not produced is oil lost. You have to get the oil out to get your dollar's worth," said Gillette.
RBC Financial's Dukharan notes, however, that falling production, as has been the local trend, coupled now with falling global prices, would imply a fall in fiscal revenue.
"When prices were US$100 and above, even though we had declining production, at that time we ended up with healthy revenues based on the price, which offset declining production. We haven't reached the budget limit yet. The fact that we had an extended period during which the price was in excess of the budgeted price would suggest that the surplus revenue that may have been generated would compensate for any shortfall if it falls below the budgeted price between now and the fiscal year," she says.
She also notes that most of Trinidad and Tobago's fiscal revenue comes mainly from natural gas than oil, and even then, the predicated price in the Budget is US$2.75 on the Henry Hub pricing point.
"We have significantly diversified our gas markets to Asia and Latin America and other markets not benchmarked on Henry Hub prices, and so get higher prices. Eighty-two per cent of our natural gas exports are not Henry Hub benchmarks, so to me that might offset the shortfall we would experience on the crude oil side," she said.
In an interview last month, LNG producer Atlantic's CEO Nigel Darlow, told the Business Express that a major market for Trinidad and Tobago's natural gas was Japan, fetching prices as high as US$17/mmbtu.
Dukharan says there should not be too much concern just yet.
"I personally am not terribly worried about falling oil prices. Looking at our balance sheet and fiscal figures, we have significant buffers, a healthy Heritage and Stabilisation Fund balance and low debt levels that provide us with the ability to borrow if we need to prop expenditure. We have adequate reserves at this point in time that if there is need we can draw on," she said.