The Minister of Finance based the 2010 Budget on US$55/bbl for oil and US$2.75/mcf for gas. This is expected to earn in taxes TT$8.9 billion, down from TT$25.7 billion in 2007-2008 and TT$11.7 billion in 2008-2009. The Government will run a deficit of TT$7.7 billion in fiscal 2009-2010. The intention is to continue on-shore spending on transfers, subsidies and other infrastructure, and encouraging FDI in the energy sector to build smelters etc.

T&T earned substantial revenues when energy prices were high. The collapse of the world economy and the demand and prices of petroleum are normally laid at the feet of the sub-prime mortgage issue. The large and rapidly increasing demand for oil and other commodities by, say, China and India coupled with the supply constraints (economic, geological and political-Peak Oil) drove the price of oil rapidly to US$147/bbl and gas US$7/mmcf. This forced countries to look towards renewables and with ethanol-driven land use the prices of food rose considerably. The world economy began to contract, destroying demand for fossil fuels while the financial crisis hastened the global economic collapse.

The world’s economies seem to be emerging from the recession but the problem of constrained oil supply remains if the demand for energy restores itself. What is supporting the current price of oil though, demand is weak and countries hold high inventories, is the the expectation that the global economies will grow as before with this choke on supply. Thus, the risk is that if the global economies return to normal, as we expect in T&T, we could again see a spike in oil prices and demand destruction again with an economic dip.

The price of gas has de-linked from oil’s because of an over supply of gas in the world from Qatar, Indonesia and loss of demand. Also the US is exploiting its large shale-gas deposits. The future of global economic development is uncertain given the fundamental problem of constrained oil supply. The hope is that natural gas will bridge the demand for oil with renewables playing a role in the longer term. Experts see the combined supply of oil and gas peaking by 2025 if the economies cycle back to pre-recession times.

The Ryder Scott report and the need for FDI to invest in more risky and expensive exploration imply that T&T is near to Peak Gas. The Government interprets this decline in proved reserves as the need to encourage FDI to explore new blocks at higher risk and expense and sees success as a sure thing. UK North Sea, New Zealand and bpTT show us that exploration is not a sure thing.

Hence the Government has to give more concessions implying less income to T&T in these times of low energy prices. We have to create other economic platforms-diversify the economy to reduce uncertainty in economic development. This has been the Government’s problem-it cannot operate in economic uncertainty. It can easily build smelters and finance centres but not an Experimentally Organised Economy that is driven by innovation and exploitation of knowledge.

Prof Jeffrey Sachs says that governments are directly responsible for economic development in small countries. The private sector did not pick up the challenge to go downstream in Pt Lisas. Hence the present stimulus to manufacturers to retool to encourage diversification is still-born. The Government has to drive the diversification and in creating global competitiveness has to continually improve the economic factors of production-building our people and sophisticated infrastructure.

Also, our Government has to directly invest in the reconstruction of the on-shore sector. The construction of a turn-key aluminium industry does not contribute to such factors-its comparative advantage is cheap gas. Some claim that the large amounts spent in education/training will create a knowledge-based society. Minister Mariano Browne tells us that with time these people and the private sector will diversify the economy.

We are not producing the fourth level people and the other systems (finance, marketing/ market development, centres of excellence and the innovative entrepreneurs) do not exist. Also, the production of the knowledge that allows competitive exploitation of our natural advantages, our business systems and research and development is non-existent.

The Government’s funding (from energy sector income) and overseas investment of the Heritage Fund are meant to provide resources for our progeny, a hedge for when the oil/gas is done. This investment may provide the Government’s income but it does not build a competitive economy, nor advanced factors of production. The Heritage Fund should be invested in creating the innovation system-a more relevant legacy for our children. It is axiomatic that investing in a turn-key smelter has no relationship to T&T’s real economic development. A smelter does not enhance our economic factors of production.

maryking@tstt.net.tt