Higher Budget oil price - risky or prudent?

Published: Wednesday October 1, 2008

Trinidad and Tobago's crude oil sold for US$93.51 a barrel during the 2007/2008 financial year, says Energy Minister Conrad Enill.

He made the disclosure in an interview with the Business Express as he defended the Government's decision to base the Budget for the 2008/2009 financial year, which begins today, on an oil price of US$70 a barrel as world oil prices are now hovering at around US$100 a barrel.

He said the US$70 oil price is about "US$23 less than what we actually received."

"So what's the issue?" Enill added.

The Business Express asked Enill if this was not a risky move since the 2007/2008 Budget was based on an oil price of US$50 a barrel which is US$20 less than the price on which the Budget for the new fiscal year is based.

Government expenditure was recorded at $42 billion for the last fiscal year and is estimated to be $49 billion in the 2008/2009 financial year at a time when oil prices are now averaging at around US$100 a barrel after hitting a record high of US145.21 a barrel in July.

"The question is what are you doing for expenditure and whether or not your expenditure programme can in fact continue on the basis of revenue," Enill said.

"We've collected US$93.51 (a barrel), I think the number is, and we put a differential into the Heritage and Stabilisation Fund and we are now saying that based on our current expenditure profile we are going to be using at US$70 which still gives us some, well, just based on current actuals it just means it gives us a US$20 differential in the first instance.

When Prime Minister Patrick Manning delivered the 2007/2008 Budget on August 20, 2007, while he was serving as the Finance Minister, oil prices averaged US$72 a barrel.

The price of natural gas, which is the nation's main revenue earner, however, then averaged at around US$7 per million British thermal units (mmtbu) and has remained at that level as the new fiscal year approaches.

The Budget for the new fiscal year is based on a gas price of US$4 per mmtbu.

"In the second instance, if you look at the gas price, the price that we're using is US$4 net back at the well head that translates I think, into about US$8 and the average has been about US$9, US$10. Now, so it means that on both counts, if you look at the production and you multiply it by the revenue we expect to get as a consequence of that the numbers are very attainable," Enill said.

It was at this point that Enill, the former Minister in the Ministry of Finance who had been responsible for drafting the Budget from 2002 to 2006, said that there are contingencies measures that can be undertaken if revenues fall below what would be required to keep the existing expenditure level going.

Or doing less with less?

"If, at any point in time, there is a variation in revenue, the Minister of Finance has the ability to cut back expenditure in areas where they need to do without doing anything else," Enill said.

He explained that the budgeting programme always has the ability "to restrain expenditure if you believe the revenues are not there."

Enill was asked to give specific examples.

"For example, if you find yourself in a situation where your revenue drops by $1 billion and you are thinking about building an additional facility, you may think that is not the appropriate time to do it and, therefore, you wouldn't do it," Enill said.

"So you have the ability, in those circumstances, to determine exactly where you would want the expenditure to go within the timeframe."

With work on several billion dollars worth of infrastructure projects to continue in the 2008/2009 financial year, including the Interchange, the construction of the International Financial Centre and the implementation of the water taxi service among others, hopes are high that oil prices in particular, will not decline to a level the could make it difficult for the Government to continue with its existing expenditure levels as it seeks to have this country achieve developed country status by 2020 which is less than 12 years away.


Source: Trinidad Express Newspapers
http://www.trinidadexpress.com/index.pl/article_business_mag?id=161382203