Tue | Oct 24, 2017

Oil prices don't add up

Published:Friday | March 20, 2015 | 12:00 AM

Continuous oversupply and weakening demand have resulted in the price of Brent crude oil falling by approximately 50 per cent since mid-2014, yet the cost of gasolene and other related products in Jamaica have not followed suit. Many consumers have complained that they still have not benefited from the reduction in oil prices, since, to date, the prices of consumer goods and services have remained at the same elevated levels experienced in early 2014. These matters resulted in discussions with Energy Minister Phillip Paulwell and various stakeholders on the potential reduction in the cost of energy for the average consumer. The Jamaica Public Service Company (JPS) also engaged in discussions about the cost of energy and the Office of Utilities Regulation has since reduced rates by an average of two per cent.

The primary concern of the Jamaica Institution of Engineers is that, over the years, the relatively high cost of energy has had a debilitating effect on the manufacturing and production sectors in Jamaica. The main contributor to the high cost of production is the high cost of crude oil. It should, therefore, stand to reason that a reduction in the cost of crude oil should see a reduction in the cost of energy and redound to the benefit of the manufacturer and subsequently the consumer.

 

potential beneficiaries

 

Some of the manufacturers who we would have expected to benefit include the manufacturers of: wood and its byproducts, furniture, chemicals and their byproducts, rubber and plastic products, electrical machinery and electronic items, food products and animal feed. This expected benefit is supported by an article published in the IAEE international conference proceedings on Effects of Oil Prices on the Manufacturing Sector in Turkey (2008). C. Emre Alper and Orhan Torul found that increases in the price of oil - and, by extension, the related products - robustly impede production growth of several manufacturing subsectors.

We could, therefore, conclude that the reverse would be true, that is, the lower cost of oil should result in an increase in the growth of production. We must state here that we are not disregarding that Turkey has a different economy from Jamaica and has different geopolitical issues. If the same model were used to conduct a study in Jamaica, it might have to be tweaked to suit our conditions, but in the final analysis, we would expect to see greater benefits accrued to the manufacturer.

 

dissatisfied majority

 

Although the Petroleum Corporation of Jamaica (PCJ) and its subsidiary, Petrojam Limited, recently held press conferences to clarify the small decrease in the price of oil in Jamaica relative to the significant decrease on the world market, they did not seem to achieve this objective, and the participants did not seem satisfied with the explanations given. In fact, there seems to have been dichotomy in the arguments presented by the team from PCJ and Petrojam. In an article published by Nationwide News Network in January 22, 2015, the PCJ states that it was operating at a loss as it absorbs the pressure being built up on it because of falling oil prices.

In the same article, chairman of the PCJ, Christopher Cargill, states that it would be unfair to put a ceiling or a floor on the price of oil and that the PCJ is a commercial entity driven to make a profit and cannot be expected to subsidise oil. This varies from what was said earlier and would tend to suggest what we would have expected, that is, they will do whatever it takes to ensure that they are making a profit regardless of the economic conditions.

In another article published by the JIS on January 22, 2015 titled, 'PCJ Explains Pricing Mechanism'; after explanations for Petrojam's fuel pricing mechanism were given by the PCJ chairman and general manager respectively, the Minister of State in the Ministry of Science, Technology, Energy and Mining, Julian Robinson, stated that: "With the limited understanding of the mechanism, what we hope is to have a dialogue and to close that gap, and bring the public up to date on how the agency works."

The minister further said that while most persons have been anticipating lower fuel prices, due to a rapid fall on the global oil market, a gap also exists where the public needs to understand "how Petrojam decides on the pricing of its various products, and the impact".

However, to date, there is still some confusion on the mechanism and we are not satisfied with the outcome, as the explanations given appear to be inconclusive.

- André White is the president of the Jamaica Institution of Engineers.