Editorial | Reform Petrojam’s pricing system

An indirect plea for relief from high gas prices has come from no less a person than Minister of Transport and Mining Robert Montague, during his contribution to the 2021 Sectoral Debate earlier this week.

The wily minister, unable to deliver a price increase to satisfy the clamour of anxious transport operators, did the next best thing when he appealed to colleague Minister of Science, Energy and Technology Daryl Vaz to ease up on gas prices. Taxes on fuel generate a significant amount of revenue for the Government and, as we well know, these taxes are not likely to be slashed.

We recognise that gasolene price is an emotional issue for Jamaicans, largely because of its knock-on effect on the economy and its impact on household budgets. Anything that has to be transported or shipped will cost more as gasolene prices rise.

The single biggest factor influencing gasolene prices is the price of crude oil. Jamaica’s oil imports are indexed to the US Gulf Reference Price. It follows that, when oil prices spike, people expect to see higher prices. Similarly, when the price falls, they expect to see a dip in gas prices. But, as we have come to understand, it’s not that simple.

Beyond oil prices, factors such as government levies, weather, demand and supply, military action, foreign exchange rates, and dealers’ mark-up must also be added to the mix. This means a number of components are included in some sort of pricing formula at Petrojam, the state oil refinery, to arrive at a pump price.

Admittedly, shock at the pumps is not only being felt by Jamaicans, it is happening all over the world as people slowly emerge from the coronavirus pandemic.

RISE SHARPLY

The stark difference is that gas prices in Jamaica tend to rise sharply than they fall. Some consumers are convinced that Petrojam has been allowed to flex its monopolistic marketing muscles to the detriment of consumers.

The Private Sector Organisation of Jamaica (PSOJ) has repeatedly complained about Petrojam’s pricing policy, describing it as a “significant contributor to the high price of finished products in Jamaica”. The manufacturing sector has a definite interest in the price of oil since their fortunes easily rise or sink with the price of fuel. Indeed, oil is the lifeblood of development and high oil prices add to the cost of doing business, which is ultimately passed on to the consumer.

When in Opposition, we recall Mr Montague railing about Petrojam’s pricing strategy and calling for reform. In 2015, he likened Petrojam to a “three card” act, because the prices were inconsistent and did not reflect what was happening in the global market.

But the ruling Jamaica Labour Party (JLP) has done nothing to provide transparency or reform around the activities at Petrojam.

Up to now, consumers have no digestible information on Petrojam’s pricing mechanism. Who knows whether Petrojam is manipulating the figures on a weekly basis to get desired results? Is their pricing mechanism as efficient as it should be? Who is going to lift the veil of secrecy on Petrojam’s pricing strategy?

A government has limited control over shifts in oil prices, as this largely depends on global supply and demand. For example, demand for oil plummeted last year because of the COVID-19 pandemic, but now that economies are slowly emerging from the pandemic, demand is going up. Additionally, the market has had to adjust to the fact that more than two million barrels of oil from Venezuela and Iran are no longer available because of political tensions.

However, what the Government can do to is to allow for independent oversight of Petrojam’s pricing mechanism. If the Government is really interested in reforming the pricing system of petroleum products, then it needs to establish an independent monitor that will apply an econometric model to determine the true relationship between Petrojam’s global crude oil prices and the domestic prices of these products. It is time.