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Firm decision needed on new energy sources to save economy

Published:Sunday | March 25, 2012 | 12:00 AM

Dennis Morrison, Contributor

Rising gasolene prices have become a campaign issue in America, as speculation about tensions in the Middle East has exerted pressure on oil prices.

Contenders for the Republican Party nominee are promising to cut America's dependence on foreign oil, exploiting the emotional response of United States (US) consumers to the threat of high fuel prices.

Meantime, Jamaican consumers are feeling the effects of the jump in gasolene prices and the fuel charge on electricity bills.

The possibility that high gasolene prices could become a threat to President Barack Obama's re-election campaign is felt to have influenced what was rumoured to be a possible release of oil from the strategic petroleum reserve by the US and United Kingdom (UK). These rumours followed reports that in their recent meeting, President Obama and UK Prime Minister David Cameron had agreed to a release of oil in the summer. Putting additional oil on to the market would, presumably, halt or slow down the uptick in prices.

Since January, oil prices have jumped more than 15 per cent, and it is feared that further increases will choke economic growth worldwide. As much as the political implications of oil prices, the negative economic impact must be preoccupying the minds of world leaders and influencing decisions about the release of oil on to the market. The reaction to news of the pending release was, however, a brief dip, because with tensions still running high in the Middle East, financial speculation is still driving oil prices.

Oil prices not likely to fall soon

While Americans worry about gasolene reaching US$5 per gallon, prices at the pump in Jamaica are above this level. The fuel charge on our electricity bills in February was more than 30 per cent above where it was in January 2011, climbing steadily since September. This comes after the brief relief we got in the latter months of 2011 when oil prices came down following the end of disruptions to Libyan oil supplies.

The fact that the prospect of a release of oil from stockpiles was so quickly discounted is an indication of how deeply held are the fears of military conflict with Iran and the exposure of world oil supplies to such a shock. A release is, therefore, not likely to deter financial speculation on high oil prices. Indeed, when oil was released from the strategic stockpile last June, the effect was modest and temporary.

This is further evidence that oil prices are not likely to come down in the near or medium term. Jamaica can, therefore, not postpone action to deal with our energy problem, as we have done in the last three decades. We should have learned that any decline such as what occurred in the throes of the recent recession, when oil prices dropped to US$33 per barrel, is soon reversed as economic activity picks up again.

One hopeful sign is that the Jamaica Public Service Company now seems more prepared than ever to invest in new generating capacity to replace its old, inefficient oil-burning plants. The current private-sector owners, both Asian, possess the financial strength to undertake the programme and the market connections in terms of negotiating clout with equipment suppliers. I expect that they should be able to secure terms for natural-gas supply that would make a big dent in the cost of fuel.

Time to act

Shouldn't these investors and the bauxite companies be anchoring the natural-gas project with the Government acting as facilitator? What of the local private sector? Aren't our investors looking for opportunities? Who in the private sector is going to package the projects and begin to promote energy as an area for investment? The primary role of the State should be to establish the regulatory framework.

The initiative to introduce natural gas as an energy source in Jamaica has been pursued on and off for some 10 years. Coal has been on the radar since the 1970s. It is time to make a firm decision.

Such a decision would be the strongest single action to put the local economy on a growth path. The cost of energy is a determining factor in the recovery of the bauxite sector and it is obviously critical to manufacturing as well. Our competitiveness in tourism is also significantly affected by the cost of electricity. Surely, private sector companies must understand what this means for their businesses and should be moved to act.

Dennis Morrison is an economist. Email feedback to