Jamaican firms caught napping as energy costs spout

Dennis Morrison, Guest Columnist

Soundings from the international oil markets portend renewed pressures on the Jamaican economy from rising oil prices.

Indeed, experts who monitor global commodity markets are warning that the price of oil could reach US$100 per barrel in 2011, and that by 2012 gasolene could be selling for more than US$5 per gallon in America.

These are not remote possibilities: The world average crude oil price was over US$88 per barrel on December 10, and in some markets it exceeded US$91 per barrel before the Christmas break, while the United States' national average gasolene price is back over US$3 per gallon.

When oil prices collapsed from a high of over US$137 per barrel on July 4, 2008, to a low of US$35.99 on December 26, 2008, Jamaican consumers got a respite in their electricity bills and at the gas pumps.

On average, monthly electricity bills had jumped by nearly 50 per cent at the height of the run-up in oil prices between January and August 2008, contributing significantly to the spike in the rate of inflation during that period.

But as oil prices plummeted in 2008 and early 2009, our power bills slid back to their mid-2007 levels.

At the highest point in July 2008, gasolene billing prices also skyrocketed to nearly J$80 per litre, driving consumers to near flash point.

By the end of December 2008, however, they had plunged to J$47.16 and J$48.60 per litre for 87 and 90 gasolene, respectively, bringing about savings of roughly 40 per cent, a huge relief for motorists.

These dramatic reductions in our energy bills played a big role in pulling down the local inflation rate to zero in the last three months of 2008 and helped to hold down cost-of-living pressures in the first part of 2009.

With the emerging economies rebounding, oil demand gathering strength, and major oil producers, particularly OPEC, restraining production, prices moved up steadily from the middle of 2009.

While the average world price for crude oil was just under US$50 per barrel in the first half of 2009, it averaged more than US$70 per barrel in the second half of the year, an increase of 40 per cent.

The rate of oil price increase moderated during the first nine months of 2010, but gathered momentum in the last quarter when prices shot up by 20 per cent by the Christmas weekend.

Every Jamaican should, by now, be acutely aware of the severe impact of rising oil prices on the cost of living - electricity, transportation, food, and so on.

Apart from the direct effect on the cost of these items, there is, as well, the overarching pressure which higher oil prices impose on our balance of payments, foreign reserves and the rate of exchange of the Jamaican dollar.

After a near two-year break, that pressure may well be reignited in the coming months. The tragedy is that the breathing space provided is going to end without any noticeable adjustments in the structure of our economy that would serve to ease the pressure.

Worse, private-sector businesses seem utterly unaware of the impending crisis and have under-invested in energy-saving measures. They are, instead, making their plans on the basis of Government abandoning the parameters of the energy policy and strategies for promoting conservation, raising energy efficiency, and adjusting consumption patterns.

Motor car dealers, for example, are busy lobbying for duty reductions on larger-engine vehicles and for a relaxation of age restrictions on imported used vehicles as their proposals for job creation and economic growth. Such proposals, which would involve increased outlays of foreign exchange to pay for an expanded volume of vehicle imports, cannot be the priority in an economy where foreign-exchange earnings have fallen dramatically.

Our memories cannot be so short that we have already forgotten the painful effects when the national oil bill went up by 50 per cent from US$1.8 billion in 2006 to US$2.7 billion in 2008. Last year, it fell to US$1.33 billion, or by 50 per cent, but in the first seven months of 2010 it rose by 23 per cent. While the credit arrangements under PetroCaribe - 40 per cent of the bill for oil imports from Venezuela is converted to long-term loans - will provide a cushion against the buffeting from a return to high oil prices, the burden on the economy will still be great.

Hence, the imperative is that we expedite implementation of the energy policy if we are to put our house in order. The priority should not be an expansion of motor vehicle imports, but greater investment by the private sector in energy-efficiency initiatives.

Res ipsa loquitur — the thing speaks for itself.

business@gleanerjm.com