LETTER: Lack of basic financial literacy, rationality can be detrimental

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Dear Editor,

Recently on a Globespan Forum, the thematic discussion was centred on “Diaspora Engagement and Participation”, where the Foreign Secretary was an invited speaker on the said forum. To this end, the Ministry of Foreign Affairs and International Cooperation under the new regime has embarked upon a renewed and aggressive approach to engage the Guyanese Diaspora to be part of, and, advance Guyana’s long-term national development – in a comprehensive fashion. In so doing, the Ministry is currently crafting a Diaspora Engagement Strategy and Plan of Action with support from the International Organisation for Migration (IOM), which will be launched in December 2020.

The Globespan forum was intended to discuss this strategy in a meaningful and constructive manner by engaging the Foreign Secretary, who is leading this effort, but instead, the moderator went a bit off tangent and sought to ambush the Foreign Secretary on the Canjie oil block and went on to reference a series of propagandic articles published in the Kaieteur News on a daily basis.

If one were to review the recording of the discussion on Globespan, one would observe that the Foreign Secretary offered pellucid responses to the questions posed, though they were irrelevant to the thematic discussion on the programme. Yet, the moderator went on to push what seemed to be a pre-planned agenda for whatever reason.

Now, let’s cut to the chase and address an important dimension of the campaign being peddled on a daily basis by the said media house – that is, Guyana has billions of (US dollars) in oil resources which it implies that the people of Guyana are being deprived of. In this regard, and as far as the campaign that the media house is driving is concerned, I would personally be happy to lobby to the President of the Cooperative Republic of Guyana to give to the owner of that media house an oil block. This will allow the media house owner as a local investor to take his own money and raise more capital if necessary; so as to invest in and to extract the resources worth billions offshore and distribute to the people of Guyana – a better deal as the case may be.

Let us understand the nature, the magnitude and the risk factors of the investment offshore that everyone is getting excited about and somehow think oil is the saviour and Guyana will somehow become rich overnight. The Liza phase one development alone is a US$5 billion capital investment. This sum is greater than Guyana’s GDP which is a mere US$4 billion or less. This means that if you take all the money available in the banking sector locally and all the money of the State combined, it would not be enough for this single investment which is just a fraction of the oil finds. Further, the investment recovery period for that sum at a production capacity of 120,000 barrels per day and at an average price of US$50 per barrel, would be about eight years at a discount rate of 20 per cent, and this is a best-case scenario. In a worst-case scenario with oil price at US$35 per barrel and same production level, the recovery period will be about 12 years – while noting that oil will no longer be sustainable below US$35 dollars.

The reality before us is such that Guyana found oil at a bad time when the global industry is changing – global demand for oil will crumble as climate change policies and renewable energy are on the rise globally. Therefore, the global oil industry is rapidly coming to an end and the oil companies are well aware of this. It is for this reason; oil companies will not agree to any substantial changes in the oil contracts.

I wrote more than two years ago that the life of Guyana’s oil industry will be 20 years and the oil companies and Guyana have a safe window of 10 years to milk the maximum benefit from the resource – after which, oil price will become extremely volatile. Only now other international analysts like those for Bloomberg, for example, have recognised this and are now publishing similar analyses. Further, coupled with the COVID-19 pandemic, this will only exacerbate the already high uncertainties of the industry in the future. Those who are interested can read my analyses at the links below as I wish not to regurgitate these extensive pieces here:

https://guyanatimesgy.com/the-changing-dynamics-of-global-oil-economics-part-3/https://guyanatimesgy.com/oil-economics-changing-global-trends-demand-supply-dynamics/https://guyanatimesgy.com/the-changing-dynamics-of-global-oil-economics-part-1/https://guyanatimesgy.com/the-changing-dynamics-of-global-oil-economics-part-2/

Having said that, one would recognise that if the publisher of a certain media house and a few so-called experts who know nothing about finance much less the economics of the industry; were to take their own savings in the bank and invest in oil companies offshore or buy their own companies, will they wait for 8-12 years to collect dividend/return on their investment? More so, for an industry that is extremely volatile. Will they even invest in stocks for the long term? In fact, strictly speaking, the US$5 billion investment offshore is not the people of Guyana’s money, it is investors’ money and students of finance would know that the greater the risk, higher the reward and the higher the risk premium. Of course, greater the loss if the risks manifest – which can sometimes be suicidal.

The purpose of this essay is in the interest of public debate and is for the people to understand the realities of the oil industry globally – the specific context as put forward herein and that it is not an industry to be excited about or even to be upset about the oil contract. The focus needs to be diverted instead to stronger local content development, and, how to best invest the earnings from the industry and not how much we can earn per se; that really does not exist, but rather, is a superficial notion at best. Let’s focus, henceforth, on the bigger picture and don’t get distracted with trivial and trashy propaganda.

Yours faithfully,

JC Bhagwandin