Oil and gas sector on balance of payments of brunei darussalam

The justification for combining oil and gas LNG price into a single measure is LNG exports are larger than crude oil exports of Brunei in recent years, and on average, crude oil export i

Oil and Gas Sector on Balance of Payments of Brunei

Darussalam

Saiful Islam

Universiti Teknologi Brunei, Brunei

Abstract

Empirical studies show that oil price is an important determinant of trade balance of oil exporting and

importing countries In this study we examine the relationship for Brunei Darussalam, using

combined oil and

gas price, instead of oil price only The justification for combining oil and gas (LNG) price into a single measure

is LNG exports are larger than crude oil exports of Brunei in recent years, and on average, crude oil export is

50 percent and LNG export is also 50 percent since 1991 Using a combined oil and gas price a single equation

regression model is tested with Brunei data for the period 1991 to 2017 Specifically, we

regress trade balance

on the combined oil and gas price variable The results show that combined oil and gas price has a sizeable

impact on the trade balance of Brunei A one percent increase in the oil and gas price causes the trade surplus

to rise by more than 1 percent (1.3332%) These results suggest some policy implications for policy makers of

Brunei to reduce effects of lower oil and gas prices

Keywords: Trade balance; oil price; LNG price; combined oil and LNG price; Brunei

Darussalam JEL Codes: F14, F32, Q43

1 Introduction

From national income accounting, the gross domestic product is equal to the sum of consumption, investment, government spending and net exports, or GDP = C + I+ G +NX Net exports (NX) are one key measure of transactions of a nation with other countries, a principal link between GDP of a country and development in the rest of the world (Boyes and Melvin,

2016, p 103) Trade in goods, services, and financial assets give the balance of payments statistics of a country Through these international transactions, a country affects and is affected by the economies of other nations

Brunei Darussalam (hereafter Brunei) is a net exporter of oil and gas The prices of these two commodities are an important factor of trade balance and current account developments Prices of exported oil and gas are very closely linked to those of world oil and gas The importance of this trend on the trade balance has strengthened in recent years due to the oil price fluctuations in global markets

Empirical studies (see for example, Huntington, 2015) find that net oil exports are a significant factor in explaining current account surpluses The objectives of this study are: 1) to see how has oil and gas trade functioned in the balance of payments of Brunei; and 2) to assess the impact of the fluctuations in oil and gas price on the trade balance of Brunei

The motivation of this study comes from the virtual neglect of Brunei from most published economic studies For example, the studies undertaken on the effect of oil price fluctuations on oil exporting countries by Kitous et al (2016) and Rafiq et al (2016) neglected Brunei, due to apparent data unavailability Therefore, it is hoped that this study will contribute towards filling some of the gaps in the economic literature concerning economic impact of oil and gas prices

on Brunei

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Brunei, as the small oil-exporting country of less than half a million people, is frequently among the wealthiest nations in the world, with a GDP per capita of international dollar 79,508 (see Table 1) This table also shows that export of mineral products (mostly oil and gas) of Brunei is 93 percent of its total exports The corresponding figures for other major exporters of mineral products are 25 percent for Indonesia and 17 percent for Malaysia (see Table 1)

Table 1: Basic Data for Brunei and Other ASEAN Countries in 2015

Brunei

Cambodia

Indonesia

Lao PDR

Malaysia

Myanmar

Philippines

Singapore

Thailand

Vietnam

Source: OECD (2017), Economic Outlook for Southeast Asia, China and India 2017: Addressing Energy Challenges,

OECD Publishing, Paris http://dx.doi.org/10.1787/saeo

http://dx.doi.org/10.1787/saeo-2017-en

2017-en

Citizens of Brunei also enjoy no sales or personal income tax, as well as high social welfare

on par with many developed countries However, record low oil prices since 2014 have exposed the weaknesses of a resource-dependent economy GDP of Brunei contracted both in 2014 and

2015, despite the best efforts of the government to mitigate the impact of falling oil revenues (OECD, 2017, p 203)

Brunei with a dominant share of oil and gas (93%) in its export revenues is also highly dependent on oil and gas regarding government revenues and GDP Contributions of oil and gas are 53 percent to gross domestic product (GDP) and 70 percent to government revenue of Brunei As Brunei is very dependent upon trade the country is likely to be affected by the fluctuations in oil and gas prices

2 Resource Base of the Brunei Economy

Resource base of the Brunei economy is dominated by its large oil and natural gas reserves, both onshore and offshore in the South China Sea There are few other known resources, with primary and secondary rainforest covering approximately 80 percent of landmass of Brunei The country also has small resources of carbonate rocks, coal, kaolin, sand and gravel, and silica sand (Tse, 2015)

Since the discovery of the first oil field in 1929, oil and gas are the backbone of the Brunei economy Despite the decline over the years, its contribution to GDP was 48.8 percent in 2017 While in the latter half of 1980s, oil production was pegged at around 150,000 barrels per day, production of oil has often fluctuated with price of oil in the international markets It peaked at 219 thousand barrels per day in 2006 and stood at 121 thousand barrels per day in 2016 (Brunei Government 2017) The country is also rich in natural gas production In 2016, it produced 243 thousand barrel of oil equivalent per day Including the manufacture of LNG and methanol of 14.8 percent, the contribution of oil and gas sector in GDP was 63.6 percent in 2017 (see Table 2)

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Table 2: Share of Production of Resource Products, 2005 to 2016 (Percent of GDP)

Year

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Sources: Brunei Government, Brunei Darussalam Statistical Yearbook 2008, 2011 and 2016 editions Data for

2017 are obtained from Department of Economic Planning and Development, Prime Minister’s Office, Brunei Darussalam.

By contrast, the contribution of agricultural products to GDP is insignificant (between 0.4 and 0.6%) over the period from 2005 to 2017 The country has to import 80 percent of its food requirements Although land, finance and irrigation are all available and the government has established model farms to train potential farmers, the scarcity of labor has failed to increase agricultural output and achieve even a very modest target for rice production, 18 percent of the total requirement (Siddiqui and Al Athmay 2012)

Also seen in Table 2, share of forests to GDP is very negligible Forests are considered most permanent assets of Brunei About 81 percent of total land area of 5765 square kilometers is covered with diverse forest Unlike the other neighboring countries, forests have not been fully exploited for timber and other commercial uses due to the availability of revenue from oil and gas resources

Share of fishery production is also insignificant (0.2 to 0.5 percent) Although Brunei has one

of the highest consumption of sea food, and a sizeable potential, its total annual see food production was only 1,726 tones which is short of its local needs (Siddiqui and Al Athmay 2012)

3 Balance of Payments Performance of Brunei

Brunei is an open economy that depends heavily on the outside world This is evident from the following facts: The percentage of exports to GDP is currently 45 percent Oil and gas exports contribute 90 percent of total exports Imports constitute 25 percent of GDP Brunei imports most of its needs of consumer goods from Malaysia (21.3%), Singapore (14.3%), and China (11.6%) The labor force in Brunei consists mainly of expatriate labor Most economic activities in Brunei revolve around the oil and gas sector Prices of oil and gas have fluctuated sharply since 2001 with significant impact on the balance of payments of Brunei

3.1 Fluctuations in Oil and Gas Export Prices for Brunei

The trend in oil and LNG export prices for Brunei during the period 2000-2017 is presented

in Figure 1 Production of oil in Brunei has often fluctuated with price of oil in the international market We will find the impact of fluctuations in oil prices on the main components of balance

of payments of Brunei For this reason, it is important to see the trends in oil prices for Brunei

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Figure 1: Export prices of oil and LNG for Brunei, 2000 to 2017

(Index 2000=100) 450

400

350

I 300

n

250

d

x 150

100

50

0

20002001 20022003200420052006 2007200820092010201120122013 2014201520162017

Oil price LNG price

From Figure 1, in 2001, a barrel of crude oil sold for US$24.70 per barrel (index 83.2) It increased to $69.59 per barrel in 2006 (index 234.3), then skyrocketed to $100.99 per barrel in

2008 It increased to $117.45 in 2012, then decreased to $43.63 in 2016 Export price of oil for Brunei was US$55.93 per barrel in 2017 The export price of LNG for Brunei also shows similar pattern The sharp drop in oil and LNG prices poses many challenges for Brunei including reduced export revenues

Monthly fluctuations of export prices of oil for Brunei are shown in Figure 2 for June 2014 to April 2017

Source: Based on data from Department of Economic Planning and Development, Prime Minister’s Office, Brunei Darussalam

The decrease in oil prices affected the economy of oil exporting countries in terms of reduced export revenues This is bad news for oil exporters, including Brunei In contrast, falling oil prices is good news for oil importing countries, in terms of reducing transport and other business costs Fluctuations in oil prices have

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significant effect on balance of payments for oil exporters and oil importers Oil importers usually benefit from a falling oil price because the value of their oil imports drop This reduces the current account deficit of oil importers However, for oil exporters, a falling oil price will do the opposite reducing the value of their exports and causing lower trade surplus Brunei is a major exporter of oil and gas, so will have a significant impact on current account of Brunei

3.2 Balance of Payments Performance

The balance of payments statistics of Brunei are presented in Table 3

Table 3: Balance of Payments of Brunei, 2008 to 2017 (in millions of U.S dollars)

Export of goods

Oil & gas exports

Import of goods

Trade balance

Services balance

Income balance

Current account balance

Net direct investment flows

Net portfolio investment flows

Net other investment

Change in international reserves

GDP

Economic Indicators (%)

Oil & gas exports to export of goods

Export of goods to GDP

Import of goods to GDP

Import of goods to exports of goods

Trade balance to GDP

Current account balance to GDP

n.a = not available.

Sources: International Monetary Fund (2016), Brunei Darussalam: Statistical Appendix, IMF Country Report No 16/310, September 2016 International Monetary Fund, International Financial Statistics Yearbook 2018 Data for

2017 are obtained from Department of Economic Planning and Development, Prime Minister’s Office, Brunei Darussalam.

The data in Table 3 suggests the following:

 The proportion of oil and gas exports out of goods exports has declined gradually This ratio has declined to 86.1 percent in 2014 from 97.7 percent in 2008 The decline in this ratio is mainly due to the downturn in oil prices in 2014

 The proportion of goods export out of GDP has also declined from 65.3 percent in

2008 to 45 percent in 2017 The decline in this ratio was also a direct result of the decline

in oil and gas revenues

 The ratio of goods imports to GDP has increased during the period from 16 percent in 2008 to 25 percent in 2017

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 The ratio of goods import to exports increased sharply to reach 56 percent in

2017

 The ratio of trade balance to GDP has also declined from 49.3 percent in 2008 to 20

percent in 2017

 The decline in oil exports combined with deficit in services balance and net

income depleted the gains from trade surplus in Brunei This resulted in a continuous

decline in the surplus on the current account The ratio of current account to GDP

declined sharply from 43.4 percent in 2008 to 16.6 percent in 2017

4 Determinant of Trade Balance of Brunei

This section analyses the effect of oil and gas (LNG) price on trade balance of Brunei for the

period 1991 to 2017 A single equation regression model is used for this purpose Previous empirical

studies use regression of trade balance to oil price (see for example, Rafiq, Sgro and Apergis, 2016;

Nguyen, 2014) In this study we use combined oil and gas price, instead of oil price only The

justifications for using combined oil and gas price are: (1) LNG exports are larger than crude oil

exports of Brunei, and (2) on average, oil export is 50 percent and LNG export is also 50 percent to

total oil and gas export in barrels of oil equivalent (see Table 4)

Table 4: Export volume of oil and LNG for Brunei, 1991 to 2017

Year 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Average

Source: Based on the data for export of oil and LNG in barrels of oil equivalent per day (as calculated by the author).

This indicates that the price of oil and the price of natural gas should be combined into a single measure as independent variable in the regression model Therefore using a combined oil and gas price a single equation regression model is specified as follows:

TBt = a0 + a1OGPt + ut

where,

TB is trade balance (exports of goods minus imports of goods) for Brunei in millions of US dollars

OGP is combined oil and gas price for Brunei (U.S dollars per barrel of oil equivalent)

u is the error term

TB (Trade balance) is defined as goods exports minus goods imports (measured in millions of US dollars)

Data for this variable are obtained from the publications of International Monetary Fund:

 International Financial Statistics Yearbook 2018

 International Financial Statistics Yearbook 2009

 Brunei Darussalam: Statistical Appendix, IMF Staff Country Report No.97/113, November 1997

 Brunei Darussalam: Recent Economic Developments, IMF Staff Country Reports

No 99/19, April 1999

 IMF Concludes 2003 Article IV Consultation with Brunei Darussalam, Public Information No 04/2, January 2004

Data for the year 2017 are obtained from Department of Statistics, Department of Economic Planning and Development, Prime Minister’s Office, Brunei Darussalam

OGP is combined oil and gas price, measured as a barrel of oil equivalent in US dollars Price of oil export is available in US dollars per barrel, and the price of LNG (liquefied natural gas) export is

in US dollar per million BTU (British thermal unit) As a way of combining oil and gas prices into a single measure, we use the “barrel of oil equivalent”, BOE (see Wikipedia, the free encyclopedia) OGP is calculated as follows:

 Barrel of oil equivalent (BOE) = 5.8 million BTU

 Gas price per million BTU x 5.8 = Gas price per barrel of oil equivalent

 Gas export in million BTU ÷ 5.8 = Gas export per barrel of oil equivalent

 Oil and gas price combined per barrel = (oil export %) x oil price + (gas export

%) x gas price

 Example for the year 2017:

 Gas price per barrel = US$8.18 x 5.8 per barrel = US$47.44 per barrel

Oil and gas price combined per barrel = 40.1÷100 x US$55.93 + 59.9 ÷ 100 x US$47.44 = US$50.84

per barrel

Data for price of oil export (US$ per barrel) and the price of LNG export (US$ per million BTU) are obtained from:

 Brunei Economic Bulletin, Vol 7-Issue 2, December 2010 Department of Economic Planning and

Development, Prime Minister’s Office, Brunei Darussalam

 Brunei Darussalam Statistical Yearbook 2011 and 2015 editions Department of

Economic Planning and Development, Prime Minister’s Office, Brunei Darussalam.

Data for export of oil (US$ per barrel) and export LNG (US$ per million BTU) are from Brunei

Darussalam Statistical Yearbook 2006, 2008, 2011, 2016 editions

 Brunei Darussalam: Recent Economic Developments, IMF Country Report No 99/19, April 1999

 Brunei Darussalam: Statistical Appendix, IMF Country Report No 08/165, May 2008