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Mary K King (c) 19th February 2009 In order to do justice to these topics it is important to understand the business structure of T&T. There are really 3 types: The off-shore energy sector that is mainly driven by foreign direct investment The on-shore sector that consists of commerce, banking, and non-tradable goods and services that support the population. Small business/craftsman sector (mechanics, appliance repair) One industry, petroleum based, generates the bulk of foreign exchange (>90% in T&T) that is necessary for sustaining the rest of the economy. Traditionally the plantation gave most of the employment but in T&T employs 4% of the labour force. Technology, innovation and investment capital comes from abroad GOTT is a large earner of F.E. via taxes from the off-shore sector (50% of its income). The on-shore sector is low risk and produces little tradable goods and services (small manufacturing) with little local inputsdepends on the energy sector and mirrors the boom-bust fortunes of the plantation. Such a system is prone to the Dutch disease resulting in the reduction of what little tradable goods the on-shore sector had. The small business/craftsman sector is part of the on-shore but attracts little low risk capital so stymieing its growth. The Energy Sector is a production node of the global petroleum sector. Before the financial meltdown there were signs of global economic slowdown. Because of rapidly emerging countries, China etc. demand for energy, oil, was rapidly exceeding capacity of world to supply- high oil prices. Resulting in a move to alternative sources of energy, and so driving high food, copper, steel etc prices. Global economic growth depends on cheap energy. Hence economic collapse because of Peak Oil was inevitable. Financial collapse simply made the economic meltdown more spectacular. Local energy sector went to bust mode as oil/gas prices collapsed from US$147/bbl and US$13/mmBtu respectively. Pt Lisas’ plants shut down, electricity and gas demand dropped, people laid off, income to GOTT dropped, reducing support for on-shore. GDP trebled in the last five years with increasing oil/gas price. Expect GDP to drop similarly with these price and consequent income reductions. The Energy Sector business is driven by FDI and global demand for petroleum and its products. Traditional bust-response of the petroleum plantation is to freeze investment, lay off staff, mothball plants that are uneconomic and wait out the downturn while innovative activities are carried on abroad. Local service companies go into survival mode- layoffs, closures and some live off the fat accumulated during the boom. Repsol told us, our PM and the King of Spain that the global economy will turn back up (when?) and that the emerging economies, China, India and the rest of the world will continue their voracious demand for oil and gas and the good times will be here again – music to the ears of our Government. What we must heed is that the petroleum producers could not supply this demand before the recession, forcing the world to turn to alternative fuels. Nothing has happened to really change this situation re oil production . Further, no energy source besides nuclear energy (France depends on this for its major energy) can supply electricity as cheaply and with the same capacity factor as petroleum driven generators. Now the US is looking at the recycling of nuclear waste (it is not really waste) into fuel for the next generation of very safe nuclear plants as opposed to storing it in a mountain. Nuclear energy can give us all the clean water the world needs, all the traditional fuel for our transportation if only it is not seen as a bomb! Repsol may be looking back to the future. New response of GOTT is to look to tar sands (more expensive source) and alternative energy. Tar sands exploitation pollutes the environment. Choice of solar and wind is not a result of foresighting, just feasibility and may not be the way to go re: economic development. All the hard info. we have suggests gas reserves limited (Ryder-Scott). Energy security and efficiency are the more important requirements. Modern local energy sector should engage in R&D on new exportable products and services for the sector instead of GOTT’s current industrial policy. Business model of T&T is the exploitation of petroleum resources mainly by FDI (except for CL Financial) and the rest of the economy lives off the rents and utilities’ payments etc. In boom times with plenty of rents, on-shore activity also booms- commerce, imports and distribution, banking, construction accompanied by high GOTT spending, high liquidity, high interest rates and inflation. Global depression will sharply reduce rents and, with little local savings, mirrors itself in T&T. Expect unemployment to increase, non-tradable goods and services activity, as construction, will collapse. General incomes will drop so general drop in prices will not benefit many. But the on-shore sector business is accustomed to boom-bust and with little sunk capital investments, can afford to live off fat accumulated by high prices during the boom. This is in part why on-shore business has remained low risk- it understands how to prosper in the plantation. No-capital small business also joins the ranks of unemployed unless innovative- support of agric. It is expected that the global economy will turn up again. Also many of the world’s economies will be restructured - to be more energy efficient conscious of climate change, with new business models that look to global poverty reduction & with the free financial and economic markets more vigorously regulated. On-shore sector has another opportunity to start the reconstruction of its economy into a knowledge based one, sustainable and able to support itself, after the petroleum is done. The biggest constraint to so doing is the lack of high risk capital. This has to be local (Porter, Demas), however the on-shore sector is low risk. Some mechanism has to be provided to alleviate this risk and allow the low risk savings and investment to be used in the required high risk ventures. This was done before by GOTT in the construction of Pt Lisas: GOTT accepted the risk and spread it across all of us. CL Financial also attempted classic risk alleviation by spreading its activities across many industries and markets, a venture that was brought down by the global recession, and compounded by poor local regulation. For the reconstruction of the on-shore we need a risk alleviation mechanism that will allow our low risk savings (insurance, pension funds etc.) to be used in high risk economic development. CL Financial has experimented with one approach. Another is for GOTT to underwrite this risk via for example raising low risk Treasury Bonds and funnelling the proceeds into the creation of a knowledge economy. Also use part of the HSF for economic development. The details of this and the knowledge economy is for another talk. Mary K King