Trinidad and Tobago is a small country. It has a population of 1.2 million and the islands cover an area of just 1,900 square miles. Yet Trinidad is an energy giant. It is a major player in the global natural gas and gas-based product markets and is one of the world’s top producers and exporters of liquefied natural gas (LNG). The energy sector will continue to drive the economy and its promising outlook. Steady foreign direct investment flows should underpin economic expansion, expected to average 5.4% through 2007. The country’s official reserves position is healthy, and annual inflation should average 4.3% through 2007. This should give the government enough flexibility to use monetary policy instruments to sterilize heavy inflows from foreign investment and the trade surplus, and so contain inflationary pressures. Key economic indicators such as unemployment, real GDP growth and foreign reserves should all continue to move in positive directions.
The economy grew almost 3% last year, but the energy sector grew 8%. By contrast, the non-energy sector grew a mere 1%, mainly thanks to a strong performance by the construction and retail industries. In 2001, the energy sector contributed 24% of total GDP and 70% of export earnings. Royalties and taxes on the oil and gas industry generate one-quarter of government revenues. It attracts over 40% of total investment. Business growth will be mainly in the energy sector, manufacturing, downstream and upstream support services to the energy sector and mega-construction projects.
Although the energy industry is the principal source of Trinidad’s wealth, it also represents a major risk for the country because growth depends so heavily on volatile oil and gas prices. A war in the Middle East might initially benefit Trinidad’s economy, but a prolonged conflict and resulting global recession and deepening risk aversion would eventually have a counterproductive effect. The unemployment rate of 10% is also a matter for concern. The capital-intensive energy industry generates few jobs, accounting for only 3% of direct employment in Trinidad. The country also faces some important longer-term challenges. Distributing gains from the energy windfall equitably is probably the most complex and most important problem facing Trinidad. The government and society together need to find a mechanism to spread the growing energy wealth and determine how these resources can best be invested to create a sustainable economic base for current and future generations. These are issues with roadmaps, but no easy solutions.
First, local companies need to increase the amount of goods and services used in the energy sector. This simultaneously creates jobs and recycles capital from the oil and gas industry throughout society. Machinery and capital often are imported. The biggest purchaser of energy-related products and services in the country, BP Trinidad and Tobago, has bought into the idea of buying local. British Gas and other large investors are not far behind. The goal of increasing local content requires more spending to improve the quality and availability of training for industry.
Second, local capital must have a greater role in developing industry. Equity investment in the energy sector directly increases local participation in the industry and enables Trinidadians to play a major part in wealth distribution strategies. Although planned investments in the energy sector could exceed $5 billion in the next five years, the local financial sector is not playing a central role in this process. There is sufficient capacity in the local and Caribbean financial system and capital markets to finance the volume of planned investments in LNG, ammonia and methanol plants as well as in power generation, aluminum production and pipelines. Local banks point to the requirement that contractors place performance bonds with AAA-rated banks as discrimination against indigenous banks. But some businessmen also say local financial institutions are not interested in backing small local firms in the energy services sector.
The rewards can be encouraging for those local companies willing to take the risk. Clico Energy, starting with an initial investment in 1994, has built Methanol Holding Trinidad into a top player in the global market. It is also venturing into the ammonia market. The lesson is that local financial institutions must consider backing more manageable sub-components of large projects.
Public and private savings should be invested in equities, even if this means buying shares in foreign-owned companies listed on international stock markets. The government must extend its equity interest significantly in major LNG projects in order to share in their profits, and collect taxes and royalties. This would allow Trinidadians to participate in these companies’ decision-making process and give them a measure of control over the strategic direction of a project, company or industry. The government should also review the energy tax, as it has promised, since the state must preserve its ability to execute policies that ensure that present and future generations of citizens benefit from the oil and gas boom.
Fourth, much remains to be done to improve the quality of life and alleviate poverty. The best way to achieve this is by creating well-paying, economically sustainable jobs. The government also has a duty to ensure good education, proper health care, modern telecommunication systems and adequate transportation networks. The government must also design policies to diversify the economy. Traditional downstream investments in the energy sector provide only short-term employment and few opportunities for useful technology transfer.
Finally, helping to meet the energy needs of its Caribbean neighbors would foster regional economic stability. A proposed pipeline would deliver Trinidadian gas to the Eastern Caribbean. Trinidad could also supply LNG and compressed gas to Jamaica and the Dominican Republic. However, creating a regional natural gas market is a major challenge, particularly since this involves contentious pricing issues. In sum, the economic future of Trinidad and Tobago seems bright, although there are risks and the energy sector is vulnerable to competition in the long term. A national debate is beginning on how to invest the energy windfall wisely for the long-term benefit of its citizens and the economic stability of its Caribbean neighbors.
*Trinidadian-born Anthony T. Bryan is professor of international relations and director of the Caribbean Studies Program at the Dante B. Fascell North South Center, University of Miami. He is also a business and trade consultant.