Saturday | February 28, 2015

Cheaper energy sources needed to safeguard Ja's economic future

Published:Sunday | March 4, 2012
Dennis Morrison

Dennis Morrison, Contributor

While Middle East experts are casting doubts on threats that Iran could close the vital oil sea lanes where up to a quarter of the world's oil supply is transported, the fear persists that an Israeli attack on Iran's nuclear facilities would send oil prices skyrocketing.

This uncertainty has pushed oil prices up by as much as 20 per cent to well over US$100 per barrel since the heightening of tensions in the last two to three months. The economic consequences of this are obvious.

In Jamaica, prices at the gas pumps have been escalating and are almost at a high. And in the United States (US), they are at their highest for winter months. As the US summer driving season approaches, the fear is that they could shoot beyond US$5 per gallon.

This is tempered by optimism that if tensions were to ease in the Middle East, oil prices could fall to as low as US$80 per barrel later this year, relieving the pressure on gas prices. The odds of this are slim!!

Oil prices are, however, responding not just to tensions in the Middle East, but to rising demand from developing countries where expanding economies are fuelling increased consumption of oil. Take, for example, China.

As its economy has galloped along even in the great recession, its daily consumption of oil has gone up a whopping 30 per cent over the past five years. China has overtaken the United States in the number of new vehicles on the road, and this is a major source of demand for petroleum products.

Tight balance

Indeed, a quick look at global petroleum demand in the last five years shows that developing countries are responsible for almost the entire increase in the consumption of petroleum. On the other hand, nearly all developed countries have decreased their consumption, reflecting the continuing recessionary conditions. The US, still the leading consumer, has seen a near 10 per cent decrease in petroleum consumption.

The overall effect is that pushed mainly by China's increased demand, world oil consumption was nearly 2.7 million barrels per day more last year than the pre-recession high reached in 2007. But at the same time, world oil output increased by three million barrels per day, barely enough to match the growth in demand. This tight balance between supply and demand means that any threat of supply disruption is bound to set off a spike in oil prices.

With sabre-rattling from both sides in the conflict over Iran's nuclear programme continuing, speculative demand for oil is bound to increase price volatility. Already, the impact of the upswing in oil prices is being seen in the widening of Jamaica's trade deficit. Is this pressure likely to push Jamaican businesses or households to invest in energy-saving measures? Or are we going to do nothing and hope for a drop in prices?

reduce reliance on oil

For nearly 30 years, Jamaica has sidestepped the issue of diversification away from a total dependence on oil and done nothing about energy conservation. Meanwhile, even some energy-rich countries have cut their per capita consumption significantly. In the last decade, our indecision about whether to introduce coal or natural gas for electricity generation has left us fully exposed to this current round of oil price volatility.

More than any other economic policy measure, a decision on energy source has the potential for improving the competitiveness of the local economy and, perhaps, the profitability of major sectors. Since the decision does not rest on the usually risky task of finding a market - we already have customers - it should not be complicated. It is also the kind of long-term investment, for which Jamaica Public Service or other power suppliers should be able to mobilise the capital - pension funds, etc.

If Government is the main stumbling block to decisions on the choice of energy sources, this is a matter that should be a top priority in the economic programme of the new administration. Given all the studies that have been done over the years, we ought not to have to wait more than six months to make the choice. This could be a defining choice for Jamaica's economic future.

Dennis Morrison is an economist. Email feedback to