'Doing the best we can': Petrojam's response

 

THE EDITOR, Sir:

This is a response to the letter to editor by K.E. Samuda, titled 'Address gas prices, Mullings', published Wednesday, July 27.

Although the questions were asked of the minister of energy and mining, Clive Mullings, Petrojam is pleased to provide the responses below, as the issues relate to our operations.

Rationale for weekly change in gas prices

Oil is an internationally traded commodity. The price of oil is assessed and published daily by reputable price-reporting services such as Platts, a McGraw-Hill company. The US Gulf Coast (USGC) prices form the basis of Petrojam's ex-refinery prices.

The US Gulf Coast is an appropriate pricing reference for Jamaica for several reasons, including transparency and liquidity of the market. Mexico, Venezuela and Trinidad, Petrojam's trading partners, also use the USGC prices to determine the value of their products.

It is true that in some countries, prices are announced monthly; but there are also countries, such as the United States, that announce price changes daily. However, many countries also use the pricing model employed at Petrojam, where prices are calculated using a historical average of prices of the previous week. This practice is based on the fact that weekly price changes reasonably reflect current price levels.

It is critical for the repricing period to be sufficiently short to keep pace with market movements. Monthly price changes could result in domestic prices that do not reflect the reality of the market within which Petrojam competes. Moreover, unless stability returns to the oil market - with annual price changes not exceeding $5 per annum - holding prices for longer periods, for example, one month, would be ill-advised and would not benefit consumers. In brief, consumers would be asked to pay the same prices throughout a month, even when prices may have fallen substantially during that same month. Petrojam would not seek to impose such a model on consumers.

It must be emphasised that there are two large international suppliers of petroleum products within the local market. Petrojam would not have been able to compete with these entities if its prices were unreasonable or did not reflect movement in prices in the international market.

Is Crude Oil purchased weekly?

The mean time between crude oil cargo arrivals is approximately 14 days. Petrojam purchases crude oil and finished petroleum products in cargo sizes that are appropriate to economic shipment sizes, demand patterns, dock and terminal capacity, and physical storage capacity. This allows us to benefit from lowest possible freight rates.

Petrojam's Holding Capacity

In addition to dedicated storage for finished products, Petrojam has a gross crude oil capacity of 850,000 barrels. This represents 24 days of supply.

Petrojam's Ex-Refinery Pricing Policy

Petrojam's ex-refinery pricing policy follows the principle of import parity. The import parity pricing method establishes the market-based cost of the product and ensures that it does not exceed the cost of importing the product.

This means that a product such as gasolene is priced at no more than it would cost to import it; that is at the fair market value. It should also be noted that Petrojam does not always refine the finished products that are sold, as the company sometimes finds it necessary to import these.

Correlation of ex-Refinery and World Prices

The writer refers to a recent Petrojam statement regarding the relationship between Petrojam's prices and the price of crude oil, as reported by CNN. It is important to note that Petrojam's ex-refinery prices are not solely based on world crude oil prices. Our prices are based off the USGC Reference prices, which report on the prices of finished products - not crude; as it is finished products that Petrojam delivers to the local market, which is deregulated and, as stated prior, has other suppliers of finished petroleum products.

It is, therefore, this correlation - between Petrojam's ex-refinery gasolene and the USGC gasolene prices - that consumers should seek to monitor. This currently shows a strong, positive 97 per cent correlation, which means that almost all the variations in Petrojam's ex-refinery gasolene prices are explained by changes in the underlying USGC reference prices for gasolene.

We again emphasise that the USGC reference prices are the prices used by the overwhelming majority of the refineries within the region. They reflect the prices within the international market, which directly impacts the operations of Petrojam and the prices at which its products can be reasonably sold in a competitive marketplace.

PETROJAM LIMITED