The need for economic diversification has been a standard policy prescription since the mid-1970s when the second international oil shock sent the T&T economy into a major tailspin.
Led by the International Monetary Fund and supported by local stake-holders, the call has become more strident in recent years because of structural changes taking place in global energy markets and new uncertainties about remaining oil and gas reserves.
Last month, in explaining its downgrade of Government bond rating, Moody's, the global rating agency, cited among other factors the country's "limited economic diversification, which weighs heavily on economic growth prospects".
In a series of four articles, two retired bankers, examine the urgent need for meaningful economic diversification and make a case for an intensified exploitation of our comparative advantage in financial services and tourism.
The Background.
To any casual observer, Trinidad and Tobago is a striking example of a developing country that has made good use of its natural resource endowment, oil and gas, to increase its level of development and raise the living standards of its population. However, notwithstanding various attempts over the past few decades, "to sow the oil", the development of a competitive, dynamic and innovative non-energy export sector has been illusive.
Trinidad and Tobago is, by international standards, a very small oil producer. At its peak in 1978, oil production averaged 230,000 barrels per day. Oil gave way to natural gas in the 1990s and in 2006, oil and gas output reached 800,000 barrels per day oil equivalent.
While the new gas discoveries, combined with the surge in international oil prices, resulted in a major economic boom from the late 1990s, these factors also significantly increased the economy's dependence on oil and gas.
Heavy dependence of an economy on one sector has always been recognized as a major source of economic vulnerability. The risk is compounded if the dominant sector is mineral resource-based. In such circumstances, the case for diversification rests on several grounds:
�2 Diversification provides some insurance against the inherent volatility of mineral resource prices.
�2 Mineral resources are not large employers of labour and create few sectoral linkages.
�2 Perhaps the most compelling reason, is that, at some stage, the natural resources will be fully depleted and the economy will need to have alternative growth engines.
Point Lisas: Expanding energy frontiers
As far back as in 1969, stated strategy of the First Comprehensive Five-year Development Plan was "to convert the rents from the offshore economy to build a vibrant, internationally competitive onshore economy."
Following failed attempts to establish a viable, globally�competitive light manufacturing sector, around the middle of the 1970s, the Government of the day embarked on a strategy which essentially involved using the new discoveries of natural gas to expand the frontiers of the energy sector. This strategy, which gave rise to the creation of the Point Lisas Industrial Estate, has come to be considered as a model of downstream energy sector development for small countries.
As a result of this strategy, Trinidad and Tobago is now a major exporter of methanol, ammonia and urea. With our four Liquified Natural Gas (LNG) plants, Trinidad and Tobago was up to recently, the major supplier of LNG to the East Coast of the US. For many, the Point Lisas complex remains our most visionary economic decision since Independence.
Unfortunately, however, this impressive petrochemical complex has made our a economy even more dependent on oil and gas. Moreover, the vulnerability of the economy has remained, given the dependence of the petrochemical sector on gas and the high degree of price correlation between oil and gas.
Running Out of Time
The uncertain outlook facing our energy sector, because of both external and domestic factors, now makes the need for the diversification of the economy both urgent and critical.
Global energy markets have recently undergone major structural changes, which have contributed to a decline of about fifty per cent in world prices over the past nine months or so. While not as dramatic, gas prices have also seen an appreciable decline.
As regards domestic supply, oil production is now a mere 85,000 barrels per day and natural gas output has also been on the decline. In fact, the current shortage of natural gas supplies has raised questions about the future viability of the petrochemical sector.
To compound the situation, since 2002, there has been a steady fall in the level of proven oil and gas reserves. The 2014 Scott-Ryder report puts the level of proven gas reserves at the equivalent of 8.5 years, and for oil 12 years .
Admittedly, interest in oil and gas exploration has been on the increase.
Even if ongoing exploration activities are successful, however, the changing global supply situation, reflecting the boom in shale gas production could seriously alter the global supply/demand balance with negative consequences for long-term oil and gas prices and the profitability of the domestic petroleum industry.
It is worth noting that T&T is a high cost oil and gas producer and that deepwater exploration is a high-cost business. If oil prices plateau at around US$ 60 per barrel, as many analysts expect companies, would certainly need to re-assess their exploration plans and some will certainly shift investment to lower-cost producers � the newly-emerging oil and gas producers. The future is indeed stacked against our energy sector.
At the very least, an intensification of the diversification effort is urgently needed to protect against the downside risk of imminent oil and gas depletion and/or the radical changes that are likely to be faced by the domestic petroleum sector.
A reasonable conclusion is that while oil and gas have been mainly responsible for the high living standards enjoyed by Trinidad and Tobago, it would take a more diversified economy to ensure that these living standards are maintained or enhanced. In the jargon of the economists, economic diversification has now become a precondition for medium-term sustainability.
The next article will discuss the role of an International Financial Center as one pillar of a feasible diversification strategy.
Disclosure: The authors, Ewart S Williams and Richard P Young, are part-time consultants who are working on a project that explores the deepening of T&T's International Financial Centre
