Bad Petrojam policies batter consumers - study
Published:Sunday | January 9, 2011 | 12:00 AM
Tyrone Reid, Sunday Gleaner Reporter
AS THE search for exploitable oil reserves intensifies and consumers continue to pay dearly at the pumps, a study has claimed that the high cost of petrol and related products such as electricity could be significantly lower if the Government switched from one pricing mechanism to another in its oil-import strategy.
According to the study, in addition to choosing to base the reference price for petroleum products on the higher United States (US) Gulf Coast postings for more than two decades, Petrojam's price-adjustment mechanism, used for market-price smoothening, has had an adverse impact on consumers.
These observations were highlighted by consultants from the US-based Centennial Group, hired by the Government of Jamaica to conduct a special operations audit of Petrojam Limited in which it is the majority shareholder. The minority shareholder is PetroCaribe SA, an affiliate of Petróleos de Venezuela SA, the national oil company of Venezuela.
The review was occasioned by the multibillion-dollar losses incurred by the entity in the 2009 financial year.
However, Petrojam, in a written response, noted that losses during the period under review were not unique to the Jamaica-Venezuela-owned company, but were as a result of the volatility experienced in the market at the onset of the financial crisis.
After examining the existing supply arrangements, the consultants noted that "since the natural supplier of crude and products to Jamaica is the Caribbean region, the use of Caribbean cargo prices as the reference price should be considered.
Switch
"There are many arguments put forward against this, including the one that there is a ministerial directive of 1988 to base the reference price on US Gulf Coast postings. However, changing over to Caribbean cargo prices would reduce the price of petroleum products to Jamaican consumers. The consultants were supremely confident that such a switch would see fuel oil prices in Jamaica decreasing significantly, which would result in lowered electricity prices."
The consultants recommended that the Government consider the feasibility of shifting to Caribbean reference pricing, again arguing that it would result in lower prices for petroleum products in Jamaica and could have a positive impact on the rate of inflation. "Especially in the case of fuel oil, the resultant lowering of prices would be so advantageous that it can result in much lower electricity prices and have a salutary effect on all economic sectors of the island," the consultants noted.
However, Petrojam challenged the consultants' position on reference prices. "The process of choosing a suitable reference price is far more complex than is posited by Centennial. Winston Watson, general manager of Petrojam Limited, pointed out that the decision to use the US Gulf Coast postings was taken after the numbers were crunched during a government-commissioned study. The company also noted that it had discussed the suitability of Caribbean prices with PDVSA, Platts - a price-reporting agency - and some oil traders, and it was ascertained that "no one at the regional level uses the Caribbean prices for price determination".
"In fact, some traders have quite clearly stated that they do not see the utility of the Caribbean prices as they lack transparency and do not relate to regional realities," read a section of the company's response.
Price-adjustment mechanism
The consultants noted that on the one hand, under the market price adjustment mechanism utilised by Petrojam, the company does not pass on the full cost of petroleum products when prices skyrocket. On the other hand, when world prices start slumping, Petrojam does not pass on the full benefits to the consumer, the consultants noted in their findings.
"It seems the company is using the mechanism when world prices decline to make substantial gains to the company. Data from Petrojam shows that the company provided a relief to consumers to the tune of J$580 million during April-June 2008 when world prices went up sharply, and subsequently, it made a gain of J$4.3 billion when world prices slumped from July onwards."
Under Petrojam's price-adjustment mechanism, a huge disparity exists between the benefits passed on to the consumers when world oil prices are slumping versus the cushion provided by the company to consumers when those prices skyrocket.
Sunday Gleaner calculations show that while consumers received an average of J$193.3 million in relief from Petrojam between April to June 2008 when world oil prices soared, the company benefited far greater than the consumers for the remaining nine months of that financial year as it raked in approximately J$477.8 million per month under the price-adjustment mechanism, even though world oil prices slumped from July onwards.
As the debate over petroleum policy heats up, James Robertson, minister of energy and mining, told The Sunday Gleaner that no administration in Jamaica's history had paid more attention to fixing the country's energy crisis than the current one. He pointed out that a long-term energy policy, which has been embraced by all the stakeholders, is in place and the Government will be guided by it. "We stand on it and we will deliver on it," the energy minister said.