Middle East fuel shock

With the price of oil and gas now surging on the global market amid the United States’ (US) and Israel’s military offensive against Iran – and Tehran in turn bombarding the oil- and gas-producing Gulf states – one local economist is of the view that small island developing countries like Jamaica, with a heavy dependence on imports, are set to be disproportionately affected.

Following the killing of its Supreme Leader Ayatollah Ali Khamenei and other senior members of the Iranian regime, Tehran has hit back with a wave of missiles directed at energy sites across several Gulf states, including Saudi Arabia, Qatar, Bahrain, Kuwait, Amman and the United Arab Emirates.

Iran’s response has led to the forced shutdowns of many oil and gas facilities across the region, and brought to a virtual halt global oil shipments that are routed through the Straight of Hormuz, a narrow but important waterway in the region.

Economist Keenan Falconer told The Gleaner yesterday that any supply disruptions as a result of the closure of the Straight of Hormuz could introduce inflationary pressures, both locally and across the globe.

He said key local sectors that could be affected are energy, transport and agriculture, since agricultural inputs, including chemicals and fertilisers, would also be impacted.

“Price pressures will filter through the entire supply chain because shipping delays, the cost of finding alternative routes and the likely increased insurance costs to insure safe passage, even if tensions are cooled going forward, will increase and there will be some trepidation in conveying goods throughout the region,” Falconer said.

He said the sharpness of the supply shock is expected to have implications for the possible recasting of some elements of the 2026-2027 Budget since the price of oil is a key input.

Falconer has agreed with some global projections for oil prices to rise somewhere in the region of US$100 per barrel in the worst-case scenario.

Although higher-than-targeted inflation could result in fiscal overperformance of tax revenues, Falconer said it would simultaneously pose a risk to the expenditure profile.

He said that depending on the duration of unstable conditions in the Middle East and the extent to which the conflict escalates, inflation expectations would also have to be revised upwards. This, he said, could potentially affect the direction of monetary policy, which has only just started to ease.

Bank of Jamaica (BOJ) Governor Richard Byles said last week that inflation over the next two years is expected to average 5.9 per cent.

Addressing the Quarterly Monetary Policy Report press conference at the BOJ auditorium in downtown Kingston, Byles said that this forecast was below the previous projection of an average of 7.4 per cent.

RECALIBRATION OF PARAMETERS

Falconer suggested that all economic parameters would now have to be recalibrated, given the expected increase in inflation owing to surging oil and gas prices.

“Overall, the situation will have to be monitored carefully, and the requisite adjustments would have to be made to macroeconomic policy, given the extent of Jamaica’s import dependence and the need to preserve foreign exchange and balance of payment stability,” he added.

He argued that the maintenance of price stability will have to be the highest priority of the Government, especially given that inflation was projected to fall within the target ban for most of 2026.

However, Falconer said that projection was at risk of being reversed, which now necessitates coordination on both the monetary and fiscal side to ensure that the country remains within target, as any deviation will have implications for revenues and expenditure profile, including wages.

Brent crude was trading about US$82 per barrel yesterday, a 13 per cent increase over the price it traded for last Friday.

Elon Parkinson, communications manager at Petrojam, the state-owned oil refinery, said while international oil prices have increased due to tensions in the Middle East, it is important to note that crude oil and finished petroleum products are traded in separate markets.

He therefore argued that movements in crude oil do not always translate directly or proportionally into local fuel prices.

“As Jamaica’s primary refinery and fuel supplier, the pricing mechanism used by Petrojam mitigates the full exposure to price shocks. The extent of any local impact will depend on how sustained the international price movements are,” Parkinson said, in response to questions from The Gleaner.

Commenting on steps that motorists could take to mitigate the impact of increased petrol prices, Parkinson said individuals can help manage fuel costs by ensuring they use the grade of fuel recommended by their vehicle manufacturer.

He said if a vehicle is designed for 87-octane, using a higher grade does not typically provide additional benefit and only increases cost. Maintaining vehicles properly, driving efficiently, and improving energy management practices can also help cushion the impact of higher fuel prices, he added.

Parkinson pointed out that local fuel prices are adjusted weekly using the average US Gulf Coast product reference prices from the prior week. If the upward trend continues, he said Petrojam’s ex-refinery prices would likely reflect changes.

edmond.campbell@gleanerjm.com