Introduction
Today’s column continues my evaluation of the impact of the 2020 global crisis on Guyana’s “infant petroleum sector”. Last week I had characterized this impact, as a most unwelcome “baptism of fire and brimstone”, Further, I had also catalogued this brutal baptism under five broad drivers. These are revealed in Schedule 1; namely, a financial crisis; the corona virus (covid 19) pandemic; the crude oil market collapse; the consequential threat of collapse for “swing-oil” production; and finally, the consequential structural challenges these pose for all sources of high-carbon energy.
Construction.
Last week, I referred to a few aspects of the first driver, (the financial crisis). These included the unprecedented stock market swings of recent weeks; the occurrence of successive Black Mondays, and Black Thursdays; and, most significantly, the ominous signs of a global economic recession, or worse. The threats these pose to Guyana’s infant oil sector are enormous. And. they are not confined to weaker global demand for petroleum products and lower crude prices but in all likelihood to huge cutbacks in capex for risky offshore oil and gas!
The 2020 global recession has been fore-shadowed by rapidly growing signs of large-scale unemployment worldwide; in developed, emerging and developing areas. And, as we shall observe later, increasing unemployment is occurring due to both the collapse of private markets and public responses to the associated public health decrees, as the global pandemic worsens. Globally, the fall in employment rivals that of the Great Depression.
A rough desk-top survey reveals significant employment declines across a wide swathe of sectors and businesses. The following dozen sectors/subsectors seem due for significant declines: travel (air, sea (boats), rail, road); entertainment (cinemas, concerts, theatres, shows); retailing (from department stores to “mom and pop” shops); education (from Universities and higher learning to trade schools); personal care providers (barbershops, beauty shops, gyms); sightseeing (parks and places of interest); leisure (adventure, beaches, swimming pools); sports (all commercial functions); public markets (food, apparel, goods, antiques).
The description above gives an insight into the range and depth of the employment collapse. This job loss is therefore, at the heart of the financial crisis. And, efforts to address it successfully must be directed at both the forced “public health shutdown and finding jobs” across the range of sectors indicated. Ultimately, this presumes a rise in demand specifically for the goods and services in the sectors identified above. Here energy is key.
However, consumer spending is largely a function of consumer incomes and their willingness to spend. I mention this since if consumers’ income rises but their demand for a service is constrained, due to a public health shutdown, there is no stimulus to the economy. This can be the sequence if the public health crisis persists.
Public Policy Responses: Monetary
Worldwide public policy responses to the crisis have focused on 1) Central banking stimulus 2) fiscal stimulus and 3) calls for more radical reforms, which go beyond the first two. Their broad aim is to boost demand and employment. Of course, such an outcome would support the energy market and crude oil demand.
Globally, traditional monetary measures have focused on quantitative easing; lower interest rates; and the coordination of these measures across global Central Banks. Thus, the US Federal Reserve has reduced interest rates by 100 basis points, in a band of zero percent and 0.25 percent; which effectively reduces these rates to zero. Additionally, it has set in train unprecedented large-scale asset purchases as well as joined G 20 calls for global coordination of responses.
Global monetary authorities have conceded though that, their tool-box of measures is far too limited to cope with the deep impending recession. They therefore, urge that public economic policies lead with fiscal stimuli.
Fiscal Stimuli
Fiscal stimulus works best when there is broad political consensus on government spending beyond revenue intake and the creation thereby of increased national debt. Fiscal stimulus always requires, at a minimum, fiscal transfers from the central government to 1) subsidiary bodies (states, cities and territories) 2) businesses (large, medium and small) 3) targeted groups and individuals; as well as 5) specially identified service and productive industries. Thus, in the United States the stimulus package arrived at last week is about US$2 trillion or 10 percent of GDP.
As a general rule during a financial crisis some or all of the following occur: 1) asset prices decline 2) consumer and business debt increase 3) unemployment and labour lay-offs occur 4) government revenue declines, due to decreased economic activity and job losses 5) government debt increases and grows if public spending is not reduced 6) GDP declines because of the cumulative impacts of the above 7) “bank runs” become a real possibility as asset bubbles burst; and 8) trade declines spreading negative national effects across a world, which has no dedicated global monetary or fiscal Authority. Invariably the demand for energy declines relative to supply.
US analysts are projecting declines of 20 to 30 percent of GDP for Q1 and Q2. Current jobless claims exceed 3 million; and are about five times its previous peak. Given the severity of the 2020 financial crisis, public policy proposals to contend with it, have grown far more radical than the traditional monetary and fiscal policy approaches. Even established political organizations, like the United States Democratic Party have had its Presidential Candidates during the current primary campaign call for far- reaching structural reforms to Wall Street and the utilization of large direct public cash transfers to individuals.
Conclusion
The financial driver weakening global energy demand is very potent. And, as we shall see this conflates with the other drivers to pose severe challenges to Guyana’s infant oil and gas sector. The outcome depends on the depth as well as the duration of the 2020 general crisis.
Next week I continue the discussion.
