By David Jessop
In normal times a sudden drop in the price of oil would elicit a collective sigh of relief among Caribbean governments and Central Bankers. However, these are not normal times.
The ill-judged decision by Crown Prince Mohammed bin Salman, the de facto ruler of Saudi Arabia, to pump more oil at just the moment the global economy is reeling from the impact of the Coronavirus, COVID-19, has created a global shock that will touch the Caribbean in ways that may suppress growth for years to come.
In essence, what the Saudi Prince decided to do, just as international markets were going into free fall and global demand for oil was in decline as a result of the Coronavirus, was to flood an oversupplied world energy market with 12.5m barrels a day of crude. His aim was to try to take market share away from OPEC rivals and particularly Russia, which has little spare capacity to compete.
His decision at such a critical juncture for the world economy stemmed from fear that a virus-led recession would damage his ambition to modernise the Kingdom, and in the longer term to obtain greater strategic advantage in the Middle East and globally, in a world in which he believes he should be a major player.
Unusually, and despite the uncritical support he continues to receive from President Trump and in particular his son-in-law, Jared Kushner, even the US Department of Energy was moved to issue a statement suggesting that the Saudi-created price war amounted to an attempt ‘by state actors to manipulate and shock oil markets’.
The consequence was that the benchmark price of Brent Crude fell by as much as thirty per cent to US$30 per barrel before recovering slightly at the time of writing to US$32.55, but with the markets expecting the price to remain below US$40 for some time to come.
Far from having the more normal effect of stimulating the global economy, analysts suggest the effect will be the opposite. They say that because the induced oversupply is occurring at just the moment that COVID-19 continues to spread globally reducing demand, the two together will cause a recession of unpredictable dimensions and duration. They believe the consequence will be to further suppress energy consumption, delay investment, and cause the retrenchment of workers in both the manufacturing and services sectors.
For oil and gas producers, the loss of revenue is likely to be substantial. In a clear indication of what it will mean if energy prices stay at their present level, Trinidad’s Finance Minister Colm Imbert believes that the collapse in oil prices and lower projected revenue from natural gas will lead to the Republic experiencing a further budget shortfall of US$560m, increasing significantly the Republic’s existing budget deficit.
If the Saudi decision is sustained and no accommodation can be reached with OPEC members, it is also likely that upstream growth in Guyana, Suriname and hoped for investment in exploration elsewhere in the region may decelerate. A much lower oil price and demand will also see Guyana’s hoped for revenues fall, even though, according to the CEO of the Hess corporation, John Hess, the current break-even price for Guyana’s oil at US$35 per barrel is low by world standard
Another potentially dire consequence is the impact on Venezuela. Although it is reportedly selling oil at a heavy discounted price to overcome US sanctions and a falloff in demand from its principal remaining markets including China, a collapse in oil revenue coinciding with COVID-19, and a severely weakened healthcare system, could result in an even worse humanitarian crisis and refugee outflow should the virus take hold.
While Caribbean nations that import energy are likely to benefit from lower prices, this is unlikely to offset the fall in visitor arrivals and taxes now widely anticipated as a result of the Coronavirus.
Caribbean governments have agreed a common response to COVID-19, but a growing reported incidence of imported cases of the virus in the Dominican Republic, Cuba, French Guiana, Guyana, Jamaica, Martinique, Puerto Rico, St. Barths, St. Martin and St. Vincent, suggest that the region may be unable to avoid the broader public health consequences.
The US Government has already suggested that its citizens should avoid all cruises and overseas travel, and the airlines and the cruise companies have begun to dramatically reduce their services. In the last week, the US President announced unilaterally that the “foreign virus” meant that air travel from the EU Schengen zone by “most foreign nationals” will be halted. It is a decision that will not only impact directly on the tens of thousands of European visitors who daily transit the US to Caribbean destinations and ignores the evidence of how rapidly the virus is spreading in the US, but bodes ill for any other nations that he regards as posing a risk.
In an indication of how serious COVID-19 could be for Caribbean tourism, St. Lucia’s Prime Minister Allen Chastenet recently said that his government is modelling various scenarios, including a potential fall in arrivals of between 50 to 80 per cent. In addition, Jamaica’s Prime Minister Andrew Holness has indicated that some thought has been given to halting flights from the UK, given the rapidly rising incidence of cases in Britain: a politically complex decision if taken, given the regular travel ‘home’ by the island’s large older diasporic community, and the country’s growing British tourist market.
At the same time, Barbados’ Prime Minister Mia Mottley has warned that the economic consequences will be difficult to contain and may affect the positive progress the island has been making with its IMF programme.
The Caribbean is in dialogue with the major International Financial Institutions including the World Bank and the IMF about possible responses and support, but it is hard to avoid the conclusion that between the Saudi-induced oil price collapse, the impact of COVID-19 on tourism, and the probability, in a world rapidly moving towards a recession and a loss of global confidence, the Caribbean is about to experience an economic shock that will require significant economic adjustments.
(David Jessop is a consultant to the Caribbean Council and can be contacted at firstname.lastname@example.org)