Selected macroeconomic challenges windfall-oil revenues pose for the Buxton Proposal - Part 13

Introduction

Today’s column has two broad objectives. The first is to keep the promise I made last week to start today’s column with brief comments on the current situation in regard to global climate action, specifically as manifested in this year’s United Nations Environment Program, UNEP’s, Production Gap Report. Following that, the second objective is to continue my general wrap-up of this rather extended re-visit of the Buxton Proposal. I attend to this latter by addressing: 1) the complications of fiscal management in Guyana [notably rent capture in the face of world class petroleum finds by mainly external-based investors]; and 2) the economic challenges that emerge from the direct distribution of windfall resource rents and their capture to Guyanese households. This week’s column and the next will bring this re-visit of the Buxton Proposal to a close.

UNEP’s Production Gap Report

UNEP was established as long as five decades ago (1972). Located in Nairobi, Kenya, its principal responsibilities include: 1) setting the UN global agenda for cooperative climate action; 2) advocating for the UN commitment to sustainable development; and 3) becoming a leading UN voice on international climate actions. The organization was recently tasked – 2019 — with publishing a global Production Gap Report annually. As a practical matter, this task is undertaken in collaboration with leading research institutions. The group undertakes surveys which measure the percentage deviation between estimated [actual and planned] global fossil fuels production levels and that level of production required to meet the goals of keeping global warming below 1.5 and 2.0 degrees Celsius, respectively. Global planned fossil fuel production is estimated based on a sample of 15 countries; namely, Australia, Brazil, Canada, China, Germany, India, Indonesia, Mexico, Norway. Russia, Saudi Arabia, South Africa, United Arab Emirates, United Kingdom and the United States.

The latest UNEP Production Gap Report has found that “despite increased climate ambitions and net zero commitments, governments still plan to produce more than double the amount of fossil fuels in 2030 than that consistent with the goal of limiting warming to 1.5 degree Celsius. Further, the production gap reveals signs of its widening consistently through to 2030. Indeed, by that date UNEP predicts the gap will be about 110% larger for all fossil fuels as a group. For coal, the gap is projected to be 240%; for oil 57%; and, for gas 73 %.

As indicated the next section addresses the second objective of today’s column.

Macroeconomic challenges

I begin with the observation that economists broadly agree that several endemic features of the extractive sector as a whole, and oil and gas production/exportation as a sub-sector, have historically demonstrated great possibilities, while paradoxically posing huge challenges for successfully managing poverty reduction strategies. In this section, I explore some of these.

First, in small, poor open economies, like Guyana, the size and scale of extractive operations, typically combine with domination by external “ownership & control” to make independent macroeconomic management, exceedingly challenging for the Authorities. As an example, at mid-year 2021, the data reveal that Guyana’s emerging petroleum sector already accounted for 40.8% of its GDP and 64% of total exports. This means oil revenues are not generated by either a micro firm or a macro state-owned enterprise. Instead the industry functions at a meso level, combining features of both

Second, as a rule most standard economic growth accounting models centre real GDP growth in four productive factors; namely, land, or natural resources; labour, including training, skills and expertise; capital, including financing and equipment and technology, innovation & invention, which are rooted in research and development, R&D. In formal applications of economic growth models, technology emerges as the biggest contributor to GDP growth, typically between one half and two thirds. The Guyana emergent petroleum sector is distinguished with its 1) high level of geotechnical uncertainty, 2) technical complexity because of its deep and ultra- deep location offshore, and 3) massive up-front capital (CAPEX) demands to bring onstream.

The CAPEX demands arise at every stage of oil and gas production and export sale. Starting with predrilling upstream exploration and development, CAPEX demands rise at every stage of the oil field development and production cycle, including drilling and mid-stream production.

The emphasis on technology, invention, innovation and R&D is consistent with the stance taken in these columns, which is that the two recommended priorities for public spending of windfall oil revenues are the Buxton Proposal and investment in renewable energy. These are linked to my recommendation for the establishment of a National Oil Company to give the Authorities operational and decision- making roles in the country’s oil and gas sector.

Third, although today the oil and gas services and production sector dominate Guyana’s national economic accounts; in actuality it is one of at least a score of such similar scale or larger industries operating worldwide. Consequently, it faces intense global competition from “state- owned” ,”big-oil”, and other players in the global market place. As a result, the market profile is one of exceptional volatility in oil prices and cut-throat cost competition among highly capitalized enterprises.

Endogenous and exogenous factors precipitate this fluctuation of markets. Frequently, these features further combine synergistically to yield huge swings in crude oil prices, output, sales, and profits. Inevitably, in turn government revenue flows show similar wide swings in their sizes and consistency.

Conclusion

The next two Sundays fall on dates that the Sunday Stabroek is not expected to publish. The next regular Sunday column is expected to be on January 9. On that date I shall conclude this macroeconomic discussion and provide an overall wrap-up of my re-visit of the Buxton Proposal, which would have run for 14 Sundays!