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Energy security: oil volatility & its implications for PNG

Francis HualupmomiFRANCIS HUALUPMOMI | Edited Extracts

THE global economy, especially the energy market, is increasingly complex and unpredictable.

After the 1970s oil crisis until 2007, the oil price enjoyed steady growth. In more recent times, it has plummeted and contributed to what seems to be a growing world economic and financial crisis.

Despite the emergence of new producers such as Papua New Guinea and it liquefied natural gas, and pressure applied by the United States as a result of large scale fracking, it seems the Middle East economies (especially Saudi Arabia) will continue to dominate the global energy market.

PNG is highly susceptible to energy price volatility, and the PNG economy experienced a slowdown in the last quarter of 2015 after a decade of impressive growth which ahd been forecast to continue.

But, as global energy prices dropped (oil plunging from US$100 to about US$30 per barrel as of first week of January), the PNG economy was affected and the high expectation on LNG as a main source of revenue to cushion economic turbulence looked incapable of being met.

While several political and economic doomsayers were too negative about the economic fallout, the PNG government has responded with tight fiscal and monetary interventions to retain the economy at a manageable level, a situation quite different from Greece.

Against this backdrop, what are the policy implications for PNG as a resource-rich oil importer and export dependent economy?

First, the government must develop a complex adaptive system, one able to read signals from the economic environment and respond to surprises by patching the structural potholes such as developing a robust energy governance regime to regulate oil prices and correct market distortions.

It should also establish an oil stockpile, subsidise alternative energy producers and invest in public transport given the increasing urban population.

Furthermore, it should establish downstream oil and gas processing and refining facilities through installing petrochemical plants in strategic economic zones and build strategic partnerships with regional governance regimes such as APEC.

Not the least, the government must support research and development in energy to diversify alternative sources and build energy specialisation. Finally, it must learn the art of effective fiscal spending and borrowing.

To conclude, PNG - as a high oil importing and export dependent resource-rich economy - is highly vulnerable to oil price volatility due to governance, geographical and capacity issues.

It is also clear that, although oil volatility has affected most developing and developed economies, PNG is able to withstand its effects at a moderate level.

The massive investment in the PNG economy is positive, however the government should be cautious in its spending and borrowing behaviour even as it builds a resilient energy system.


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Paul Oates

The financial factors are in fact very similar to the Greek situation.

The Greek government was deluded into taking out loans to pay for all the benefits of a handout society. They were allowed to take out loans greater than their country could repay due to their being an EU country.

The Greek people were happy to go along with this situation as it was great not to have to pay for the lifestyle they had become accustomed to. Inevitably, the crunch had to come and it did on the very people who allowed it to happen. That's the Greek people who allowed their government to make bad decisions while they enjoyed the benefits of a false economy.

I see yesterday that the Opposition leader Don Polye has issued a stern warning about the PNG economy. Mt Polye is trying to warn the PNG people about just such a problem as occurred in Greece and some other EU countries.

PNG has put many of their national budgetary revenue eggs into one basket called LNG. When the person holding that basket trips and the price goes down, as it has, you end up with an inevitable financial problem.

The real difference as many have pointed out, is that the vast majority of rural PNG people have not had their lifestyles artificially inflated but only their expectations.

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