ILO Tripartite Caribbean Conference Promoting Human Prosperity beyond the Global Financial Crisis Kingston Jamaica 1-2 April 2009 Impact of the Global Economic Crisis on the Energy Industries and Economy Gregory McGuire Lecturer Energy Economics and Strategy UWI St. Augustine
Presentation Outline Global Overview Energy and the Economy Commodity Markets : Status and Outlook Economic Impact ;Exporters Economic Impact : Importers Conclusions
The Context
Financial Crisis Economic meltdown Stakeholders Shrinking Demand MYOB Ltd Crash in Commodity Markets and tourism State Intervention/ Stimulation Trade implications/ Protectionism Best bet : recovery in 24 m.
IMF: The Outlook is Bleak WEO Real GDP Growth Projections (In percent change from a year earlier) U.S. Euro Japan China India World 2009 9 (Jan.09) -1.6-2.0-2.6 6.7 5.1 0.5 2009 9 (Nov.08) -0.7-0.5-0.2 8.5 6.3 2.2 Change -0.9-1.5-2.4-1.8-1.2-1.7 2010 (Jan.09) 1.6 0.2 0.6 8.0 6.5 3.0 2010 (Nov.08) 1.5 0.9 1.1 9.5 6.8 3.8 Change 0.1-0.7-0.5-1.5-0.3-0.8 Source: IMF, World Economic Outlook. 1 April 2009 Source: IMF, World Economic ILO Tripartite Outlook. Conference
World Bank confirms(31 st /3/09) THE OUTLOOK IS BLEAK Global economy to shrink by -1.7% Largest contraction in 80 yrs High Income countries = -2.9% Developing countries inc. China and India= 2.1% Without China and India -1.7% Latin America Caribbean -0.6%
Trinidad and Tobago Energy Dependence ITEM 2002 2003 2004 2005 2006 r 2007 p GDP Gov t t Revenues M dise Exports Employment 26.2 27.8 r 75.9 3.4 33.9 42.8 r 83.3 3.2 37.1 42.4 r 85.8 3.6 Notes: p-p provisional, r revised Source: : Annual Economic Survey, 2007: www.central-bank.org.tt 42.9 53.6 r 85.9 3.4 46.8 61.9 91.0 3.3 43.0 56.5 86.7 3.3
Key Energy Based Commodity Exports Petroleum Natural Gas Methanol Ammonia
Crude Oil Prices History 1982-2007 2007 120 Rising Demand; Low Spare Capacity ; Weak Dollear; 100 Nigerian Cut-Offs Nominal Dollars per Barrel 80 60 40 Iraq Invades Kuwait PdVSA Worker's Strike in Venezuela and Iraq War W i OPEC Cuts Quotas; Rising Demand Hurricanes Dennis, Katrina Hurricane Ivan in Gulf of Inventor y 20 0 Saudi Arabia Abandons Swing Asian Economic 9/11 Attacks 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 Refiner Acquisition Cost of Imported Crude Oil (IRAC) Source: EIA
Real Oil Prices 1976-2008 Major Events and Real World Oil Prices, 1970-2008Q1 (Prices adjusted by CPI for all Urban Consumers, 2008) $100 $90 Iran-Iraq War Begins; oil prices peak $80 Constant $2008 per barrel $70 $60 $50 $40 $30 Saudi Light Iranian Revolution; Shah Deposed Saudis abandon "swing producer" role; oil prices collapse Imported Refiner Acquisition Cost Iraq Invades Kuwait Gulf War Ends Prices spike on supply disruptions, rapid demand increases, constrained OPEC capacity, low inventories Prices rise on OPEC cutbacks, increased demand $20 PdVSA workers strike in Venezuela $10 1973 Arab Oil Asian economic crisis; oil Embargo oversupply; prices fall sharply $- 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 Prices fall sharply on 9/11 attacks; economic weakness 2002 2004 2006 2008 Source: EIA
Oil Prices and World Economic Growth (1998-2008) 12 120 10 100 8 80 Months 6 60 4 40 2 20 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 years US EU China India Oil Prices 0
Crude Oil Prices (WTI) (1998-Mar 09) 160 140 120 100 US$/bbl. 80 60 40 20 0 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Months Source: US EIA
Oct-08 Natural Gas Prices 2003-08 ( Henry Hub) 14 12 10 8 6 4 2 0 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 US $/mmbtu
Market Insights Prices have remained depressed in spite of: Extreme cold weather in Europe and North America. OPEC Production cuts amounting to 3.5 million bbls/d 2 week cut off in Russian gas supplies to Europe. Heightened tensions in the Middle East.
Market Insights Prices for natural gas have trended downward over last eight months. In 2008 prices averaged $9.13 per Mcf. For fiscal yr. to date natural gas spot prices have averaged US 5.70/per mmbtu.
Today s Prices PRICE*($/bbl) Nymex Crude Future WTI Cushing Spot Natural Gas Henry Hub Spot 48.58 49.66 3.59
Outlook Oil prices are likely to weaken in the summer months. Gas prices will also weaken in most markets Recovery now hinges mainly on resumption of economic growth in major economies.
Ammonia and Methanol Prices Petrochemical prices 2006-2008 1000 900 800 700 600 500 400 300 200 100 0 Ammonia (fob Caribbean, US $/MT) Methanol (US $/MT) Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Us$/MT
Ammonia as of March 2009 The average ammonia price for January 2009 (fob Caribbean) averaged $102/tonne. Prices have recovered to US$185/Tonne in March
Methanol as of March 2009 Supply continues to appear sufficient higher-cost players choosing to curtail production Market continues to be depressed Prices lingering around US$140-150/tonne
Outlook for 2009 The storyline from the past few months will continue High stocks for commodities Lower demand. Impact of global recession. Markets likely to remain weak over the next 12-18months.
Trinidad and Tobago Energy Dependence ITEM 2002 2003 2004 2005 2006 r 2007 p GDP Gov t t Revenues M dise Exports Employment 26.2 27.8 r 75.9 3.4 33.9 42.8 r 83.3 3.2 37.1 42.4 r 85.8 3.6 Notes: p-p provisional, r revised Source: : Annual Economic Survey, 2007: www.central-bank.org.tt 42.9 53.6 r 85.9 3.4 46.8 61.9 91.0 3.3 43.0 56.5 86.7 3.3
Measuring Economic Impact Government Revenue and Expenditure GDP Balance of Payments and Exchange Rate
Gov t Rev. and Expenditure Government Revenue vs. Government Expenditure 50.0 40.0 TT$Bn 30.0 20.0 10.0 0.0 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 Total Gov't Revenue Total Gov't Expenditure 2004-08 : Revenue increase 126%; Expenditure increase+134%
Recent Production Trends Natural Gas Utilization 2000-08 250 MMCFD 4500.0 4000.0 3500.0 3000.0 2500.0 2000.0 1500.0 1000.0 500.0 "000 bbls/day 200 150 100 50 0.0 2000 2001 2002 2003 2004 2005 Years 2006 2007 2008 0 Source Table A8 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 Years Gas Growth Rate has Plateau: Oil is in long Term Decline
Petrochemical Output Will remain flat in 2008-9 No new plants coming on-stream. Planned plants delayed. Gas supply overhang will impact NGC cash flow and revenue base. -
Implications Government estimates an oil revenue shortfall relative to Budget of $ 8 billion dollars, Non energy revenue is estimated to fall by another 8-8 9 billion
Implications Total Revenue Loss ( Energy and Non Energy ) estimated at $15 to $18 billion, about1/3 of national Budget.
Real GDP Growth 2002-08 35 30 25 20 15 LNG2 LNG3 Petroleum Sector - Total LNG 4 10 5 0 2002 2003 2004 2005 2006 2007 2008
Downstream Expansion 2009-11 Three gas based projects currently under construction. Six planned projects have been either postponed or delayed as a result of financing difficulties or reduced risks appetite.
Implications Energy Sector which accounts for 45% of GDP will remain flat or decline in 2009. Oil decline. Petrochemicals output reduction Steel closure
Implications Non energy sector which depends on energy will also decline sharply. Service companies Hotels and Guesthouses Rest of economy will also decline sharply. Financial services-clico Government expenditure cuts Economy likely to experience first contraction in 20 years.
Summary Balance of Payments (US$ million) 2003 2004 2005 2006 2007 Current Account 1,081.60 1,6470 3594 4808 5380.9 Exports 5,958.00 6,363.20 9672 12100 131391 of which: Non Energy Exports 827.8 1260 1076.0 1085 1009 Imports (3912) (4,894) (5725) (6843) (7670) Overall Surplus 334.2 531 1475.9 1118.8 1541.1 Gross Official Reserves 2257.8 2993.0 4885.7 6530.8 6673.5 Import Cover ( months) 5.4 6.9 8.9 9.9 9.4
Foreign Exchange Net Official Foreign Reserves 8.0 6.0 US$Bn 4.0 2.0 0.0 2.0 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 Net Official Foreign Reserves
Implications Imports growth likely to continue for a while although foreign exchange earnings have fallen sharply Hedging by importers Speculation and Asset switching Pressure on exchange rate as supply of FX dwindles.
Short-Medium Term Outlook The global recession is having a pervasive impact on the international economy. Oil gas and commodity prices have all fallen sharply and likely to remain at lower levels T&T Gov t IS likely to be in fiscal deficit for 2008-9 9 and beyond. Global slowdown may have a mitigating impact on domestic inflation
Medium Term Outlook At best energy sector growth will be flat less than 1%. Non energy sector growth will wind down because of reduction in Gov t injections and Significant fall in private sector investment as confidence wanes Foreign exchange availability will tighten with possible depreciation of Exchange rate.
Medium Term Outlook Economy likely to experience its first contraction in GDP in 20 years. Unemployment likely to increase 8-10% 8 Rise in Industrial tensions
Policy Imperatives. Align expenditure with revenue based on long term prices. Develop a people based vision. Give priority to basic needs before grand projects.
Policy Imperatives Economic Transformation Build Build the onshore economy, with emphasis on cultural industries. Maximize Maximize value added from energy upstream and downstream.
Policy Imperatives DISCARD EMBRACE
A Look at the Oil Importers
Context Caricom countries consume 900 trillion BTU of energy per annum Petroleum products constitute over 90% of energy consumption T&T only net exporter of oil in the region
Market Characteristics Power generation dominates total energy demand. Haiti Country Suriname Guyana Dominica StLucia Bdos J ca % share of Power 20% 37% 25% 40% 31% 41% 13%
Market Characteristics Energy imports absorbs a significant % of foreign exchange earnings. OECS <10% Larger economies>20%
Market Characteristics Petroleum products are heavily taxed 11 members of Caricom participate in PetroCaribe accord. Varying levels of debt accumulated across the regional economies. Deterioration in the quality of life.
OECS Retail Gasoline Prices (EC$)
Impact of Economic Meltdown Typically economies run counter cyclical to the T&T economy when the external shock is only about energy. However global recession has also hit the tourism product hard, therefore affecting entire region.
Impact of Economic Meltdown Lower energy prices will bring welcomed relief But, the decline in Tourism and Travel likely to nullify that benefit. Recovery is possible in the Travel and Tourism industry within two years.
Policy Imperatives Must avoid the complacency usually associated with lower oil prices. Implement Regional Energy Policy : Promote Renewable energy technologies Seize opportunities for use of Carbon trading and the CDM. Energy conservation initiatives
Policy Imperatives Economic Transformation Develop People based vision Greening of Tourism Promote agri-tourism and cultural/heritage tourism in general Regional Cooperation
Policy Imperatives DISCARD EMBRACE
Thank You. Contact Info: Phone 1-868-682-4348 mcguire.gregory@gmail.com Gregory.mcguire@sta.uwi.edu