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Can Guyana Remedy the Global oil Shortage?

Can Guyana Remedy the Global oil Shortage?

If Guyana can escape the resource course and use the potential of the newfound black gold, it may prove vital in meeting larger global energy needs.

Author

Oil is in a tight spot right now. Prices have hovered around record highs, producers are intending to reduce output, and the movement to pivot the world to green and renewable energy have made the oil and the fossil fuel industries unpopular sectors. This has led to expensive visits to the pump and efforts by governments to combat a crisis.

Various signs point to increasing challenges to the availability of oil as global pressures mount. The difficult state of this vital sector opens the door to the exploration of new sources for oil in places previously undiscovered or too expensive to extract from. Tucked in a small corner of South America, the little-known country of Guyana may be set to be a rare frontier for previously unaccessed oil in a time when the world thirsts for it.

Oil squeeze

There are contradictory opinions on oil at the moment. Some contend that the use of oil is coming to an end and that civilization needs to transition away from it for the sake of the environment and the impacts of climate change before it renders the planet uninhabitable for future generations. Most western developed countries and the international organizations that they lead agree that drastic measures must be taken, with the Paris Agreement aiming to limit global warming increase to below 2 degrees Celsius and some at the COP27 going as far as proposing an international fossil fuel non-proliferation treaty.

Others argue that there is a crisis in the global oil supply and that there is not enough readily available to meet needs and demands. Despite recently stalled economic activity, especially in the U.S., China, and Europe, the pressure on oil prices continues to run high due to factors including low inventories, rising demand, and chronic underinvestment in the industry in recent years. Politics around oil became dramatic in late 2022 as OPEC+ announced that oil production would be cut by 2 million barrels per day to shore up oil prices while the U.S. drew on the American Strategic Petroleum Reserve in order to keep oil prices down.

Both sentiments highlight the great likelihood that the global economy will struggle with oil supplies through the foreseeable future. As countries realign their energy sourcing, Guyana may capture increasing attention on the world stage as a future oil producing powerhouse.

Enormous potential

Guyana’s population exceeds just three-quarters of a million people in a country about half the size of California. Their larger neighbors, Venezuela and Brazil, usually occupy the spotlight in the region and are the major oil producers there. The new oil resources that have just begun to be fully explored may boost the country to prominence.

Guyana’s corruption perception index, ease of doing business, and democracy ranking put it in a middling position, yet close to some other developing countries that have been able to achieve significant growth. Oil supermajor ExxonMobil has been front and center in driving the operations of this new prospect in the country and the company has involved local Guyanese workers, vendors, and companies.

The first deepwater offshore oil in Guyana was produced in December 2019 as part of the Liza Phase 1 Project. Liza Phase 2 started in February 2022 and there is much more that is anticipated. For its size and obscurity, the country will experience colossal changes to its population and economy as its resources are projected to be one of the largest expected global oil sources over the next decade and propel it to be one of the world’s largest per capita producers. By 2027, Guyana expects to pump 1.2 million barrels of oil per day.

The impact of the oil industry in Guyana is set to push the country’s GDP to an average of 25% annual growth for the next half-decade, a staggering rate for any country to grow, but absolutely game-changing for what has been one of Latin America’s most impoverished countries.

Avoiding the resource curse

Despite the windfall that these significant oil finds may bring to Guyana, the budding industry will have to grow in a way that will bypass the ‘resource curse’ that has befallen other developing countries as a consequence of the sudden discovery of a precious raw commodity in their jurisdiction.

In late 2022, the International Monetary Fund (IMF) issued a warning that although such significant resources could help Guyana fill gaps in infrastructure and meet human development needs, the outsized impact of oil on the economy could create resource dependence as well as vulnerability to the global price volatility of oil. The impact on governance could also be negative as large and rapid increases in state revenue from the oil abundance has the tendency to lead to commensurate increases in government spending, which introduces inflationary pressures, reduced competitiveness from exchange rates, and potential concerns with governance.

Under these conditions, institutional frameworks that constrain the political class to reduce the conditions that lead to the emergence of the kind of rentier state that so often drives countries into disaster through resource mismanagement.

For the world

The quality of the oil in Guyana fortuitously fits the needs of Western countries experiencing shortfalls. European sanctions on Russian crude has led to a search for alternatives and Guyanese oil fits the grade needed by European refiners better than those from other Latin American countries. The partially depleted U.S. SPR would also benefit from the medium sour crude that Guyana is producing in order to complement the American-produced light crude.

As the driver of commercial activity and production, energy is the economy. The massive disruption to the world’s energy structure presents an opportunity for Guyana to benefit if it can protect their expected oil income from centralized and parasitic state squandering. While these new oil sources in Guyana will be a challenge to administer for their own sake, the effective management of the industry in this modest Latin American country may prove vital in meeting larger global energy needs.

Author

  • Weimin Chen

    Weimin Chen has been a research assistant and contributor at the Austrian Economics Center. His work has also been featured at the Mises Institute, Antiwar.com, and the Scott Horton Show.

The views expressed on austriancenter.com are not necessarily those of the Austrian Economics Center.

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