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Oil: The Marketplace

Eye on the Issues by GHK Lall

It is a strange world of futures, swaps, hedges, currencies, spot prices, tankers, and an array of terms that is a language of its own, and alien to the layman.  It is also a world of stupendous booms, and the bottom falling out of once soaring prices, thus bringing nations to their knees.

What is a viable meaningful price for this wondrous liquid rising out of the ground?  What is a level that rewards producing nations and corporate partners, balances supply and demand, and fosters global economic growth; thereby further enhancing supply and demand?

The answers to these questions depend upon who is asked.  The recent low of $30 (US) a barrel, while good for the Guyanese consumer, is financially disastrous for drillers, explorers, investors, and producers.  It drives many of the smaller players out of a ferociously competitive marketplace, and sometimes even into bankruptcy.  It has hurt and hurt badly.

At the current $50 (US) a barrel, prices are creeping slowly towards the break-even point, but they are not quite there as yet.  The position of some of the major participants (nations and multinationals) is that somewhere upwards of $60 a barrel and closer to $70 is beneficial all around.  That is, for producing nations’ budgets and standards, corporate profits, while still stimulating growth along a worldwide swath.

In Guyana, at this time, rising oil prices convert to increasing energy bills, costlier gasoline, and the heavy wash of the so-called trickle-down effects; except that for the numb public, it is anything but the drip of a trickle, and more akin to the pooling of pain from multiple sources simultaneously.  The expert consensus of industry watchers is that oil prices will remain stagnated at lower levels in a narrow band for the foreseeable future; the recent OPEC meeting in Algiers and supply restriction notwithstanding.  Of course, wars and other national conflagrations in pivotal producing places can throw all projections out the window, and with spiraling prices being the undesired unpalatable replacement.

This can be good for a future producing country like Guyana when its own wells go live and on line.  The Exxon(s) of the world are poised to proceed and do business.  At this point, however, a word of caution is appropriate.  When oil is in the $60-$70 a barrel range, marginal producers and venture capitalists are incentivized back into the mix, which can influence downward the delicate pricing mechanism, through the fear or reality of oversupply.  Additionally, both the producing and consuming worlds are well aware of the existence of new fracking technologies and methodologies, and their contributions to the supply side of the equation.  Why, after a decades long absence, the U.S. was back in the midst of the oil exporting crowd, compliments of these developments.  As if this is not enough, due acknowledgement must be given to the shale oil and tar sands sectors, and the increasing likelihood of overproduction, glut, and downward pressure on prices.  None of this could be encouraging for a newcomer like Guyana seeking to get the best return for its product.

It is why Guyanese leaders, planners, and protectors of this vital natural resource must be cognizant of all of these contributory and competitive forces.  It is why it is imperative that that every effort be expended to husband the oil patch through constant vigilance, careful decision making, and impeccable stewardship.  Any conduct and practice that deviates from such rigid oversight will squander not only the riches, potentials, and opportunities, but also sabotage the already shaky existence of this society as a state.  Great discipline is called for; even greater prudence can usher in the greatest returns.