Diversify fuel source, modernise energy systems

While Jamaican consumers and businesses have spoken out about the financial burden of high electricity bills, the latest balance of payments report shows that the country's fuel bill jumped by a startling 34.9 per cent in the first four months of this year.

Oil imports actually went up by US$193.7 million and accounted for over 61 per cent of the increase in total imports of goods in the period. This increase, together with a rise in food imports of US$32.9 million, led to a US$121.2 million deterioration in the current-account deficit, or a doubling of the deficit, compared with the similar period of 2010.

The jump in the fuel bill partly reflected an increase in oil imported by the bauxite-alumina industry with the re-opening of Windalco's Ewarton alumina plant. But the major factor responsible was the hike in oil prices that came in the wake of the Libyan conflict, which disrupted that country's oil production. In fact, crude oil prices which stood at US$89.17 per barrel (West Texas Intermediate) in January moved up to US$109.53 per barrel by April or by 23 per cent.

The most worrying about the hike in oil bill in the January - April period is that it exceeded the increase in the exports of all goods shipped by Jamaica in the period. Simply put, the additional expenditure to cover the oil bill alone was more than the increase in total earnings from the export of goods - a position that is unsustainable. So while consumers and businesses are feeling the effects of rising oil prices directly through their light bills, the impact is also being felt in Jamaica's macroeconomic situation.

Serious drag

Our fuel bill has been a serious drag on the performance of the economy since the first oil price shock back in 1973, but has intensified in the last decade or so. Not many people would recall that in 1999, as oil prices were about to take off, Jamaica's oil bill was US$380 million, just over a half of the US$688 million of gross earnings by the bauxite-alumina industry and around 30 per cent of the gross earnings of the tourist industry. In other words, the bill could be covered by the earnings of either of these two industries.

But by 2000 the picture began to change significantly as the oil bill shot up to roughly US$650 million, an increase of US$162 million or about 43 per cent in that year alone. Meanwhile, the combined increase in earnings of the bauxite-alumina and tourist industries was US$95 million, only about 60 per cent of the amount needed to cover the additional expenditure on the oil bill. As oil prices picked up speed thereafter, the oil bill was to outstrip the entire earnings from the bauxite-alumina industry by 2003 - US$ 830 million versus $779 million - even though bauxite earnings were climbing.

By 2008, the oil burden on the local economy became chronic as prices peaked at over US$130 per barrel sending the bill skyrocketing to US$3.15 billion, more than twice the US$1.32 billion of gross earnings from the bauxite-alumina industry. In just eight years the oil bill had moved from only a half of, to more than twice, the industry's earnings. And this happened even though bauxite earnings had gone up by 95 per cent over the period.

The oil bill also outstripped gross earnings from tourism, moving from 30 per cent of those earnings in 1999 to 165 per cent by 2008, even as tourism earnings increased by 55 per cent. We got a respite in 2009 and 2010 when oil prices collapsed, but the dynamics of the oil market have changed and prices are on the upturn again. The pressure on our balance of payments is, therefore, going to build up unless we move to diversify our fuel source and modernise our energy systems expeditiously.