Russia/Ukraine war… Use oil money to cushion blow from global economic crisis – Economist

Mar 12, 2022 News

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Kaieteur News – As the war between Russia and Ukraine continue into its third week, countries around the world have been grappling with dire economic impacts. In Guyana however, the situation may be bitter/sweet.
This is so, given that the country stands to benefit from the increase in oil prices on a macro level. Budget 2022 had predicted for example that the Natural Resource Fund (NRF) would collect close to US$1B this year. The PPP/C Government had estimated in February that oil prices would hover around US$70.4 per barrel.
However, on account of the Russia-Ukraine crisis, oil prices have soared to US$139 a barrel. Up to press time, Brent oil price stood at US$109.3 following a week of fluctuating prices.
With respect to the reverse impacts, Economist Elson Low, who holds a Bachelor’s Degree in political Science and Economics from a United States College, Amherst, opined that these are being felt by the ordinary folk tasked with getting to work via vehicles powered by fuel, or even buying themselves a meal, as the trickle down effects for global transport and manufacturing costs have and will continue to spike in the coming days.
In an exclusive interview with this newspaper on Friday, Low explained, “On the macro level for Guyana, as a producer, that will be very good news because we are likely to exceed our GDP (Gross Domestic Product) estimate substantially because oil will obviously be worth much more, so we will have higher earnings than anticipated at the beginning of the year. On the other end, this higher fuel price will have two negative effects primarily on the average consumer. The first will be a direct effect, which is at the fuel pump, we have already seen gas move from $203 to $245 at some gas stations (per liter) which is about a 20 percent increase. The other thing that we are going to see is a further increase to the already high inflation rate”.
The Economist was keen to note that these impacts are likely to persist even after the conflict between the two European countries is resolved as the international community has made strong statements against the war, which indicates that sanctions will remain in place even after a cease fire or an agreement.
“That will mean for consumer goods, anything where transportation is involved, where energy consumption that relies on fossil fuels is involved, production that relies on fossil fuels that will see higher prices during the course of the year. This is also likely to affect the food prices because a lot of that type of industrial production affects the cost of fertilizer, transportation of food products around the world. We might also see the price of wheat going up because Ukraine and Russia are wheat producing countries…so we should anticipate further food price increases over the course of the year as well as higher prices for many other goods across the spectrum as transportation and other productions costs will be much higher,” Low cautioned.
However, he said that because Guyana is an oil producer, the country will rake in much more revenue than previously anticipated, “so that means that the coffers will be full even as much as our people are suffering from higher fuel prices,” Low elucidated.
MEASURES TO CUSHION INFLATION
In the same breath, the Economist said government should ensure that its citizens benefit from the higher oil prices by ensuring efforts are made to mitigate costs associated with transportation and food.
He said when Guyana originally found oil, the price per barrel was around $50 and most of the planning was centered on this figure.
“Obviously we are much much higher than that so there should be additional focus on mitigating these high cost of living expenses, which should have been included in the Budget, at least anticipating that Guyana will have a real ‘boom year’, in terms of production,” he reasoned.
Low, who is also a member of the People’s National Congress Reform (PNC/R), on this note said that his party has been pushing for a minimum livable income to be paid to workers in addition to a salary top-up to help cushion the impacts of inflation rates.
In fact, he encouraged the administration to implement such policies to relieve some of the financial burdens.
According to him, “A lot of the policies that the PNC/R has put forward, targets those at the lower end of the income scale, rather than the big companies or individuals who are doing great business in Guyana due to the expanding economy, and the reason for that is, we can see that wages are not rising as quickly as the cost of living and as a result, people’s standard of living is declining as we go forward”.
He said that the government’s $25,000 cash grant during the pandemic was never a satisfactory stimulus for the economy on an individual level and as such, a more substantial stimulus would be necessary to compensate the people.
The Economist said, “This year we are likely to see Guyana outperform the GDP estimate and it may outperform it by a large margin because last year the oil price, the highest was at maybe US$85 per barrel but this year we are seeing a high of US$139 a barrel and consistently above that US$80 mark which means that the difference between let’s say $80 and $120, that’s a $40 difference or 50 percent higher oil price, so you may see a very substantial peak in GDP. The country is getting much wealthier. We should ensure that as much as Guyana gets wealthier, its most vulnerable citizens do not get poorer as we move forward.”
GPL
The Guyana Power and Light (GPL) Incorporated recently said that customers may see a reflection of the fuel price increase in their monthly bills as the company grapples with its soaring expenses.
GPL complained that fuel prices have reached US$140 per barrel, thus driving up the company’s operating expense to a whopping $4.5 billion monthly, while electricity sales merely account for $3 billion.
The power company’s Chief Executive Officer (CEO), Mr. Bharat Dindyal, during an exclusive interview with this publication on Tuesday, told this newspaper that while this increase is not presently being reflected on customers’ bills, it may very well be an option if the electricity consumption is not reduced.
This increase would however have to be first approved by the Power Utilities Commission (PUC) before imposed.
To this end, the Economist said that while GPL may be forced to take this step to compensate for the $1.5 billion shortfall, the government can alternatively step in to ensure that Guyanese do not suffer further due to the present circumstances.
He said, “Guyana is currently benefiting from an extraordinarily high oil price, while GPL is suffering from an extraordinarily high oil price, so a measure that can be taken is to use some of the oil revenue to keep the electricity rates stable rather than allowing it to rise, and when oil prices fall we can then reduce any subsidies to GPL”.
Low added, “What we are trying to do is cushion the impact of higher prices so in this case, regarding GPL where their costs is specifically related to oil prices, you can take some of the revenue that is earned and put it towards GPL.
“If they are saying they have a $1.5 billion shortfall, one billion local currency is equivalent to about US$7.5 million so it is very possible that Guyana’s oil lift, if we look at the average price over the past week or so, we would get about $120 million. So it is not difficult to take US$7.5 million of that to keep electricity rates stable.”
The economist said citizens should bear in mind that these things are temporary because “we are seeking to switch to cheaper forms of electricity, so a policy to help GPL will only be a temporary policy because we are moving away to other forms of electricity”.

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