Surviving deadly disasters and the economic crunch

Jamaicans cannot have missed the news of the tornadoes that have devastated southern and mid-western areas of the United States in the past two months. The images of the destruction suffered by the people of Joplin in Missouri, which last week was hit by the deadliest tornado since 1950, remind us what can happen when disasters strike. This reminder comes as the Americans mark their Hurricane Preparedness Week, and we ought to be making our own preparations for the season.

Last year we were fortunate, as the season turned out to be less active than had been forecasted. Whereas the National Oceanic and Atmospheric Administration (NOAA) of the United States predicted that the Atlantic season could have brought three to seven major hurricanes, on par with what happened in 2005 and 2008, activity turned out to be far less. This year, the forecast is for 12-18 named storms that could turn into three to six major hurricanes (category 3, 4 or 5) which would be an above-normal season.

The climate factors cited by NOAA include warmer-than-average sea-surface temperatures in the Atlantic Ocean, where storms often develop, and reduced wind shear related to La Niña. It attaches a 70 per cent likelihood to each of the ranges predicted, cautioning that the ocean and atmospheric conditions appear to be in line with the pattern of more active Atlantic hurricane seasons that have been evident since 1995. Over this period, Jamaica has been in the path of several hurricanes, suffering major damage in 2002, 2004, 2005, 2007 and 2008, and less serious losses from Tropical Storm Nicole in 2010.

Agricultural boom

The fact that we got off fairly lightly last hurricane season is evident in improved output levels for agricultural crops that are important in the food basket. Indeed, increased supplies of locally grown vegetables, fruits, and ground provisions have given households some relief from cost-of-living pressures, with farmers' markets allowing for wider distribution at affordable prices. And this relief is what is reflected in the slowdown that took place in the monthly rate of inflation in January and February.

Indications are that the favourable weather conditions we have experienced so far this year are also helping to keep agricultural production going and may lessen the price spikes that usually occur in the drier summer months. This will be critical in keeping inflation pressures down, as we are now feeling the impact of the jump in oil prices on our electricity bills and on gas prices. A less-active hurricane season would be a stabilising factor for the cost of living.

But cost-of-living pressures in Jamaica and the overall cost competitiveness of our economy is going to revolve around what we do about energy. The price of oil is moving beyond US$100 per barrel, driven for now largely by speculation and currency movements. Major oil-producing countries have stated that these factors account for more than US$30 per barrel of today's oil price of over US$100 per barrel.

Energy price crunch

As the global economic recovery strengthens, we can, therefore, expect that prices will increase further, and this is why Goldman Sachs and other leading financiers have forecasted that prices could climb to as high as US$150 per barrel by 2012 or 2013. The conversion of Jamaica's power-generation system to coal or natural gas must proceed at full speed if consumers and businesses are to survive the likely energy price crunch. This is an area of such critical economic impact that the usual slow-moving regulatory processes must be expedited.

Further, while natural gas has been designated as the fuel of first choice, careful thought ought to be given as to whether to give the nod to private investors who are prepared to select coal as another fuel. While the capital cost of coal-fired plants are higher than natural gas plants, the long-term price of electricity based on coal are expected to be lower. The amount of power capacity to be replaced in the public electricity system and the bauxite industry is such that there is room for both fuels to be introduced. Put differently, an energy-efficient, high-cost economy should not limit its options, especially if private capital can be attracted.

The controversy surrounding the LNG project is of great concern, considering the urgency of getting the project off the ground. It is vital that the findings of the contractor general's report be dealt with and that every effort be made to chart a clear path to the finalisation of the investment and gas supply arrangements. Given Jamaica's near total reliance on oil and the price projections mentioned above, the consequences of delay are grave.

Dennis Morrison is an economist. Email feedback to columns@gleanerjm.com.