3 Responses

  1. john garnaut
    john garnaut December 30, 2014 at 11:00 am

    Damn scary, and rather different to Julie Bishop’s Dec 15 forecast: “huge revenues are going to be coming into PNG”. May I contact you for further background?
    cheers,
    John

  2. Richard
    Richard December 21, 2014 at 12:25 pm

    Golly Paul, you’re scaring the kids. With good reason I guess.

    Just some reflections on your note …

    Wouldn’t 2015 (and perhaps beyond) LNG export contracts already be in place with prices fixed therefore lessening the short-term impact of the drop in prices? Might be wishful thinking on my part but I’m guessing/hoping the LNG bosses consider these risks somewhat in their forward planning.

    Are you predicting no more external shocks affecting the price of oil one way or the other over the next 5 years? Your price graph looks pretty steady. Looking at the oil price retrospectively over the past five years shows it to be pretty erratic. Will OPEC continue to ply their price war? Will there be no trouble in the middle-east or elsewhere impacting on price, or announcements of “peak oil” – we are still dealing with a non-renewable resource in a world with an exponentially growing middle-class. I believe quality of gas is a price and sales factor, too – with PNG producing high quality. Perhaps production can be bumped up, too. All things that may change the situation. Maybe.

    Although predicted depletion of foreign reserves is dire, I’d be worried about some of the remedies, too. Without really knowing the extent of the country’s loans (except that they are BIG) and their conditions, perhaps a lower kina – against a strengthening US dollar -will cause big problems with loan repayments. And the millions who now rely on store goods will find their pay packet buying less. Hopefully there are other ways.

    This is certainly a(nother) wake-up call to policy makers to do something major by way of diversifying the economy and supporting agriculture, tourism and fisheries industries and the like in PNG to flourish. All of them with just as much potential as extractive industries and employing far more people. Just need the innovation and human capital to get it going. And the infrastructure.

    With the Oz government’s stated aim of engaging more in economic partnerships rather than direct aid, perhaps there are some opportunities for government incentive for agricultural enterprises in Australia to team up with PNG enterprises. There must be a wealth of under-utilised skills/knowledge and equipment down south, with seasonal crops and other seasonal factors. It might make some properties viable if they had a northern partner. The north paddock, so to speak. Just a thought.

    Same could be said for joint tourism and fishery ventures. Not much seems to be happening to develop skills and infrastructure around PNG in these areas, so perhaps this writing on the wall can be heeded. Quickly.

    Thanks Paul. I’m glad we have such analysis. We don’t find it in the newspapers here in PNG.

    1. Paul Flanagan
      Paul Flanagan December 22, 2014 at 9:32 am

      Hi Richard

      Thanks for this thoughtful response. I agree with you entirely hopefully this being a wake-up call to diversifying the economy. Getting more significant improvements in areas such as agriculture and fisheries and tourism are vital. And we know that will take a combination of good macroeconomic, good microeconomic as well as other social, gender and other supporting policies to achieve. There is a chance that some part of the forward contracts were locked in at a price that isn’t subject to spot fluctuations. However, given the extent of the price drop, even some of these contracts are under pressure according to reports (such as reports of Sinopec looking to move out of some of its LNG contracts). There will be fluctuations in prices, but the market now expects that the oil price will only slowly improve from current levels (so around $US66 per barrel by 2019). There are some analysts that predict a price of around $US40 (the long-term average price is around $US50). Other analysts say a return to US$80 per barrel. My general view when it comes to revenue forecasting is that people can make their private predictions. If they wish, they can then use their private money to bet against markets (which are very well informed in such an important market as oil). When it comes to use of public money, it is best to keep with a sound judgement based around market expectations. So that is why I’ve based the analysis on futures market prices (from the New York exchange). On the exchange rate, there are winners and losers, so the adjustment will be difficult. The costs for those with large loans is one factor, but so is the significant loss of incomes for smallholders (see earlier blog about 130,000 coffee growers dropping below the poverty line). Businesses are facing significant delays in getting foreign exchange and this is lifting their cost which will also affect consumers. The current exchange rate policy is deterring investment and making PNG less internationally competitive. PNG was doing well some 18 months ago with a market related exchange rate – time to go back there.

      Thanks for the comments. I do hope the blog will stimulate a healthy debate in PNG, both to deal with the short-term challenges as well as its longer-term challenges such as diversifying the economy.

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