Once upon a time, the price of sugar on the world market was closely watched by Guyana’s largest industry. Now that the dollar value of oil exports is equivalent in days to what Guysuco’s exports represent annually, attention has shifted to the price of Brent Crude to which Guyana’s Liza Crude is roughly pegged.

While the 2022 budget pegs the estimated price of oil at $65 per barrel at the time of writing, Brent is heading towards $90. But first a warning: given the complex and fluid political and economic variables, forecasting the price of oil can be a fool’s game. That said, it is instructive to discuss the various short-term and long-term factors that could determine the price of oil in the years to come as, ultimately, this will impact Guyana’s economic well-being. For example, a prolonged period of low prices – below $40 a barrel – would seriously damage the current government’s development plans. However, the medium to long term outlook actually looks more promising.

We cannot talk about world oil markets without mentioning OPEC, the Organization of the Petroleum Exporting Countries founded in 1960 by its first five members, Iran, Iraq, Kuwait, Saudi Arabia and Venezuela who wanted to get more for their oil reserves, which at the time were being extracted by Western oil companies, known as the Seven Sisters. The original group therefore sought to coordinate supplies in order to maintain world price stability. It has done this with varying degrees of success and currently controls around 40% of global production.

In 2020 and with the devastating impact of Covid-19, OPEC Plus intensified its efforts to aggressively cut production and stabilize prices and since then its members have shown remarkable cooperation and discipline to limit production, and with an acumen to predict the return of demand amid the twists and turns of the pandemic. Key to this has been Russia (OPEC’s Plus) with 12% of global production, following the deadly and untimely race to the bottom instituted between itself and Saudi Arabia in late 2019.

The economic impacts of Covid-19 remain a key variable in the short term. While Omicron could be the variant that makes the virus endemic – similar to the flu – it’s also possible that a more severe variant will emerge, causing further lockdowns and economic disruption. Meanwhile, the medium-term effects of the pandemic, inflation and massive government debt incurred over the past two years, could lead to financial crises that suppress demand for oil, such as the 2007 recession. And then there is China, which has come through the pandemic well but also has worrying debt problems linked to real estate developers, notably Evergrande. As the second largest consumer (13%), any decline in China’s growth rate will have a significant impact on oil prices.

Within the overall geopolitical risk of West/China/Russia tensions are: nuclear talks between the United States and Iran which, if resolved, would bring more crude to the world market; unrest in the oil fields of western Libya; and the possible easing of sanctions against our neighbor Venezuela, even though, like Iran, they have infrastructure problems that would limit increased exports. The Russian factor is multi-dimensional, as seen recently with the shortage of gas supplies to Europe which has seen energy prices rise six-fold and translated into higher demand for oil and even a increased use of coal. Part of that shortfall was purely technical, part attributed to Russian demands for Germany’s approval of a new gas pipeline, Nord Stream 2, and part to tensions over Ukraine. Europe’s dependence on Russian gas (35%) means that President Putin has enormous leverage that he could be ready to use.

In the long term, the main factor is the speed of the energy transition towards renewable energies. Even with the massive efforts of governments and energy companies, it will be messy. It should also be noted that petroleum products have a multitude of uses other than burning our phones to medical equipment. There is simply no activity in our modern lives that is not dependent on oil, and it will continue for the foreseeable future. Meanwhile, alternatives to fossil fuels for power generation such as solar, hydro and wind, although expected to grow rapidly through 2030, currently have drawbacks related to portability, scalability and reliability. For example, overcast, windless days in Europe at the end of 2021 (what the Germans call Dunkel-flaute) meant that wind power was off the grid and contributed to soaring energy prices.

The climate change movement and Covid-19 have also had a dampening effect on exploration investment with 2021 the lowest for discoveries since 1946, just 4.7 billion barrels. If this trend, including limited access to financing and government restrictions on drilling, continues, the effects on prices could be acute in five to ten years. On the other hand, the emergence of revolutionary and disruptive new technology could lead to a rapid decline in the demand for fossil fuels, even if it is the energy companies themselves that lead much of the research.

This brings us back to OPEC and how it might react to a drop in demand. There’s the argument that as long as its members see their days numbered, they’ll be looking to squeeze as much value out of every barrel over the next 20 years and will do everything possible not to let prices go down like this. is produced before. This will depend on its ability to maintain the current discipline among its members and consolidate Russian cooperation.

What does all this mean for Guyana? As a relatively low cost producer, $25-$35 a barrel, that probably won’t mean much right now. The nature of offshore projects with massive upfront capital outlays and relatively low operating costs means operators will be reluctant to halt production even if prices were to fall significantly. Overall, most forecasts call for growth in oil demand at least until 2030. Additionally, the quality of the basin’s oil means it will continue to be in demand over the long term. That said, there is a big difference between getting $1 billion in revenue per year and $3 billion.

Current forecasts for Brent indicate that it will remain in the upper range of $70-80 a barrel for 2022 and there will be more surprises on the upside than on the downside, including perhaps $100 of oil, as the global economy emerges somewhat deformed from the pandemic. . In the longer term, the difficulties associated with the energy transition are as likely to translate into upward pressure on prices as downward. However, it would be up to this government to be prudent in its spending, to ensure sufficient reserves and to use the revenues to truly diversify the economy in order to withstand any crisis and, ultimately, the energy transition.