FROM energy to wheat, the impact of the invasion of Russia into Ukraine is vast.
For Trinidad and Tobago, an energy-producing country, what domino effect will this have on energy producing companies as well as the average consumer at a supermarket?
Economist and lecturer at the University of the West Indies, Dr Vaalmikki Arjoon shared his perspective with AZPNews.com and why Trinidad and Tobago should be concerned about this invasion that is threatening to cripple the entire continent of Europe.
Following is his statement:
Now that Russia has invaded Ukraine and the US, UK, the EU and Japan are placing sanctions against Russia, and as energy fundamentals continue to be tight with struggling global supply, escalating demand and increased uncertainty, it is likely that oil prices will remain high and hover close to US$100.
The crisis could prolong difficulties for access to energy commodities by European countries – Europe gets nearly 40% of its natural gas from Russia. There is a gas shortage in Europe which was supposed to be relieved by the Nord Stream 2 project pipeline from Russia to increase the supply of gas, but this has been sanctioned by the US which suggests a death knell for this pipeline and therefore inhibiting progress in gas supply. This will compound gas prices further.
One also has to consider that the supply of oil and gas to Europe can also be jeopardized if Russia retaliates to the sanctions and lowers their supply of energy to Europe, or some of the pipelines passing through Ukraine are damaged in the ground or some pipelines that run through Ukraine are damaged in the conflict. This can make prices even more exorbitant.
What does this means for Trinidad and Tobago?
Higher oil and gas prices will act as a double-edged sword for our economy. Naturally, we will benefit from higher oil and gas revenues due to the surge in prices, but maximising this benefit requires healthy production levels.
While the budget projects oil and natural gas production to increase to 86,163 bp/d and 3.37 bcf/d respectively, it is very likely that this may not materialise – for instance, recent reports suggest a shortfall in gas supply by BpTT this year, while declining reservoirs could counteract some gains in production from Cassia, Matapal and Colibri, and therefore our ability to duly take advantage of these price surges will not be optimal as we would hope.
Otherwise, if our gas production levels were more encouraging and we had surplus amounts beyond our contractual sales agreements, at some point in the future, the sanctions might have presented an opportunity for us to access additional market space among those who may have previously sourced energy commodities from Russia, such as Europe, which will not benefit from increased gas that could have potentially been provided from the Nord Stream 2 pipeline. There is a possibility that Europe may turn to more LNG, but our production capacity has been lowered with the closure of Train 1. Nonetheless, the higher prices may present higher energy revenues relative to 2021.
However, increased oil prices mean that shipping costs will rise further, which is dangerous for the private sector given that shipping costs from Asia have increased by over 500% since last year.
Further, the suppliers who we import from will face an increased cost of production, which could worsen the already existing supply chain issues, causing them to charge higher prices for the goods when we import from them.
Already we are paying higher prices for imports – inflation in the US has risen to over 7% and this will further increase with higher oil prices. Therefore, prices locally will increase further from the hike in shipping costs and higher prices from our suppliers. This could be further compounded given that the central banks such as the Fed as set to raise interest rates, which will increase the cost of production and prices even further. Moreover, we import our refined fuel, and will therefore end up having to pay a higher price for it. This means that the state will face higher expenditure from the fuel subsidy, or run the risk of charging higher prices at the pump.
We also have to be cognisant of the possibility of wheat prices increasing, as countries may limit their purchases of wheat from Russia due to the uncertainty of the conflict and confidence issues against the Russian economy, and look to alternative sources of wheat like the US.
We purchase all our wheat from the US and a higher demand for their wheat will push up its prices, translating into a higher cost of flour-based food items locally.
