Fighting a losing battle
Published:Friday | December 23, 2011 | 12:00 AM
Dennis Morrison, Financial Gleaner Columnist
As the year is ending, upward pressures on oil prices have resumed, despite the slowing in the pace of growth in China, and sluggishness in the developed economies.
The fact is that oil prices have been on a roller coaster throughout the year, starting at under US$90 per barrel in January but climbing sharply as political unrest swept the Arab world - the Arab Spring.
By April, when oil production in Libya was halted by military conflict, the price had jumped to over US$110 per barrel.
At the height of the fighting in Libya and when it appeared that unrest could spread to Saudi Arabia and other Gulf oil producers, the Brent crude price actually went over US$120 per barrel.
But by October, after the Gaddafi regime was brought down and the risks of a double-dip recession increased, oil prices dropped back to under US$90 per barrel.
Within a few weeks, rising political tensions in Iran were, however, to send prices back up.
Jamaican motorists and households felt the impact of rising oil prices at the gas pumps and in their light bills within the first few weeks of the year as the billing price for gasolene and the fuel charge moved up steadily. The billing price for both grades of gasolene rose by nearly 20 per cent by early April, sparking opposition from taxi operators and other players in the transportation sector.
Eventually, the Gvernment responded to the pressure by capping the ad valorem tax on fuel, as the billing price burst through the J$100-per-litre mark.
Billing prices came down briefly in September-October, in line with the brief respite in crude oil prices to just over J$90 per litre. They have remained in that region even as crude prices have gone back up, suggesting that there has been some cushioning of prices by the refinery in the past few weeks.
If, as is expected, crude prices continue to revolve around the US$100 mark per barrel, then Jamaican gasolene prices will resume their upward movement unless the tax on fuel is adjusted.
Dennis Morrison, Financial Gleaner Columnist
Heated criticisms also came from private-sector groups and consumer advocates about the spike in electricity bills. Attention has been focussed on the JPS' licence and the view that the company's monopoly control of the transmission and distribution system is the major factor driving up electricity costs.
This position ignores the fact that fuel costs account for some 60 per cent of electricity costs and that Jamaica is almost totally dependent on oil as its fuel source.
There is also the matter of JPS' aged electricity-generating plants.
The recent announcement by the company that it has got approval for the construction of 360 megawatts of new capacity which is to be based on natural gas is a first signal of the change that needs to take place if electricity costs are to be brought down.
In the absence of bankable contracts for the supply of gas, the announcement has to be treated cautiously, especially given experience with the earlier proposed supply from Trinidad and Tobago.
Indications that there are offers from leading international companies suggest that supply conditions in the gas market may now be more predictable.
The urgency of diversifying our fuel source is demonstrated by the huge jump in the fuel bill from US$921 million in January to July 2010 to approximately US$1.5 billion for the corresponding period of 2011, an increase of over 60 per cent.
While this is partly due to an increase in total consumption related to the reopening of the Ewarton alumina plant, the increase in the price of oil has been a key factor.
The cost of energy is perhaps the most significant impediment to economic growth in Jamaica and the main threat to the stability of the Jamaican dollar and to inflation and to interest rates.