Updated: Sep 15, 2020
As of today, Monday 20th April 2020, the fall in the West Texas Intermediate (WTI) oil price has been precipitous. Don’t understand the extent?
Take a look at the graph below.
This graph from Bloomberg shows the WTI price between 31 December 2019 to 20 April 2020, plotting Time (x axis) vs Price in US$ per barrel (y axis). We can see the STEEP drop to the right end of the graph.
We can also see that there has been a steady decline in the price from December to now.
THE PRICE OF OIL:
WHY IS THIS HAPPENING:
LAW OF DEMAND:
A DECREASE IN DEMAND = A DECREASE IN PRICE = AN INCREASE IN SUPPLY
LAW OF SUPPLY:
AN INCREASE IN SUPPLY WITHOUT AN DEMAND TO SUSTAIN IT = THE MARKETS BEING FLOODED/OVERSUPPLY = A DECREASE IN PRICE
Due to the COVID-19 pandemic, global operations have halted. This means the demand for energy commodities would have decreased. This would then cause an increase in market supply.
Since the demand for oil has decreased. US oil producers now have to consider storage which can be very limited and will eventually run out. As storage capacity is running out, it will result in a drop which occurred today. The US is in a rush to get rid of their stored supply.
THINGS TO NOTE FOR TRINIDAD AND TOBAGO:
Different prices in oil:
The two which are mostly discussed are WTI and Brent Crude. The price which crashed today was WTI which is mostly part of the US oil market. Most of the world transitioned to Brent Crude during the Shale Revolution, where the US became an exporter of energy commodities, instead of an importer. Most of the oil in T&T is sold in accordance with the Brent Crude prices. Though Brent Crude prices are higher than WTI (US$ 25.95 as of the current date and time), both prices are the lowest the world has seen in about (rough estimate) 20 years. This means that even though we deal in Brent Crude prices and not WTI, we will still be affected negatively.
The latest budget of Trinidad and Tobago was based off an oil price of US$60 per barrel, in March 2020 it was then amended to US$40 per barrel.
The price of natural gas:
While T&T depends on oil revenue, it must be noted that we have a natural-gas based economy. This means that most of our energy revenue comes from the sale of natural gas. The price of natural gas is closely related to the price of oil. The Henry Hub gas price (as of right now) is roughly US$ 1.90. In T&T, however, we utilize the wellhead price of gas.
According to the American Gas Association (AGA):
“The wellhead price is the wholesale price of natural gas at its point of production. It is not regulated and the most important factor affecting natural gas wellhead prices is the competitive marketplace. Factors that affect wellhead gas prices include the available supply of natural gas, weather, overall gas demand, the prices of competing fuels (primarily coal and oil) and competition between gas companies for the supplies.”
The latest budget of Trinidad and Tobago was based off a gas price of US$3.00 per mmbtu, in March 2020 it was then amended to US$1.80 per mmbtu.
Production of oil and gas:
Locally, we have seen a decline in the average production of both oil and gas between 2019 and 2020.
Oil production in October 2019 – January 2020 stood at roughly 60 000 barrels per day.
Oil production in March 2020 stood at 55 120 barrels per day.
A decrease in oil and gas production = A decrease in energy revenue = A decline in the economy
In early March 2020, the Minister of Finance announced that we are expecting a revenue loss of $5 billion for the year 2020. A figure of $3.5 billion was then added to that as time progressed and markets worsened, resulting in a projected loss of $8 billion for 2020.
IMPACTS ON T&T:
Potential loss of jobs
Regional instability (particular attention must be paid to Venezuela.
WHAT IS BEING DONE?
The Organization of Petroleum Exporting Countries (OPEC) has strike a deal where OPEC producers and allies have agreed to cut global oil output by 10%. This is the equivalent of roughly 9.7 million barrels of oil per day. This is the largest cut in oil production to have ever been agreed. The deal is scheduled to begin on 1st May 2020.
In early March 2020, the Minister of Finance announced the following steps to deal with the energy issue at hand:
Tapping into the Heritage and Stabilization Fund (HSF)
The HSF was established with the purpose of saving and investing surplus petroleum revenues. It is considered as our “rainy day” stash. According to the Office of the Prime Minister, the purpose of the HSF is to:
(a) Cushion the impact on or sustain public expenditure capacity during periods of revenue downturn whether caused by a fall in prices of crude oil or natural gas;
(b) Generate an alternate stream of income so as to support public expenditure capacity as a result of revenue downturn caused by the depletion of non-renewable petroleum resources; and
(c) Provide a heritage for future generations of citizens of Trinidad and Tobago from savings and investment income derived from the excess petroleum revenues.
The fund can only be accessed after the fiscal year has concluded, so this is a long-term solution. In order to access the HSF earlier, withdrawal can take place under the Disaster Measures Act…the Disaster being COVID-19. For this to occur, the HSF Act needs to be amended to include global pandemics.
Sale of assets