Zia Mian, Contributor
WORLD MEDIA headlines and editorials are all focused on the recent sharp increases in the price of oil.
Last week the spot price for the US benchmark reference crude oil, WTI (West Texas Intermediate), crossed the psychological threshold of US$40 per barrel. Also, for the first time ever, the US national average retail price for the regular gasoline topped the US$2 per American gallon (AG) mark.
On May 14, 2004, the spot quote for the WTI was at US$41.42 per barrel. This price was US$12.35 per barrel higher than the price last year and US$1.44 per barrel higher than the previous week.
On May 17, 2004 the average US price for the regular gasoline was about 52 US cents higher than a year before, hitting a record level of US$2.02 per AG. That same day the retail price for the automotive diesel (ADO) in the USA averaged at US$ 1.76 per AG, about 32 US cents higher than a year before.
Table 1 gives a snapshot view of the recent and historic comparative reference prices as they apply to various global benchmark crude oils (WTI, Brent, Arab Light and OPEC Basket) and those that are relevant to Jamaica (Venezuela and Mexico).
Although this comparison does not include the quotes for the Ecuadorian crude oil (last year Jamaica imported Ecuadorian Oriente crude oil amounting to 50 per cent of the refinery's total crude oil imports), for those who may consider this crude oil relevant for supplies to Jamaica; quotes for the Oriente API 30o crude oil during the past three weeks were: April 30 at US$29.38 per barrel; May 7 at US$31.19 per barrel; and May 14 at US$32.58 per barrel.
VOLATILITY
The current volatility in the oil price, in addition to compro-mising the long awaited global economic recovery, is once again threatening deja vu the quest of the oil importing developing countries (OIDCs) to attain long-term economic sustainability and achieve positive economic growth. Many believe that the current price volatility once again is a result of shortages in the supply of oil.
Nothing could be farther from the truth. This time around we cannot pass the buck and blame OPEC for curbing oil production to boost the prices.
VOLUMES HIGHER THAN DEMAND
As a matter of fact, at present the world crude oil supply volumes are higher than the world demand for it. OPEC's first quarter 2004 production, excluding natural gas liquids (NGLs), was estimated at 28.1 million barrels per day against an agreed quota of 24.5 million barrels per day.
Table 2 shows that OPEC members, as usual defiant to their quotas, have been pumping more oil in the world market than they had agreed with their colleagues at the last OPEC oil ministers meeting. The current OPEC production ceiling for 10 of the 11 member countries (excluding Iraq as she does not have a production quota) is 23.5 million barrels per day. I expect that next week at the Interna-tional Energy Forum in Amsterdam, Holland, and at the June 3 Extraordinary meeting of the OPEC oil ministers in Beirut, the oil minister would avail the opportunity to regularise overproduction into approved higher quotas and even attempt to increase the production quotas further (including 1.5 million barrels per day increased production from Saudi Arabia).
BLAME BUSH
Whether these increases in the production quotas would ease the pressure on oil prices is altoget-her a different issue. Some OPEC members lay the blame for the high prices at the feet of the Bush administration. On May 7, 2004, Venezuelan President Hugo Chavez said that, "Oil prices have risen to nearly $40 per barrel because of what is happening in Iraq and the Middle East George W. Bush is to blame not only in the Middle East, but in a fair part of the world because of his imperialist policies."
Let us try to list some of the factors that are impacting the psychology behind the current upsurge in the oil prices:
Geopolitical security concerns (principally in Iraq, Syria, Kuwait, Saudi Arabia and Middle East). Regional political tensions (such as in Nigeria and Venezuela).
Increase in demand for oil in Asia and the United States (China factor and expected high summer demand for the motor gasoline in the USA).
At the March 31 OPEC meeting in Vienna, Austria, the oil ministers observed that the expected world demand during the second quarter of 2004 would be weak, and decided to lower the quotas by one million barrels per day to 23.5 million barrels per day (this decision has not been strictly enforced).
Concerns regarding the low minimum inventory levels in the USA.
Speculations on the part of traders and oil majors as well as profit taking.
US government's denial to a request to release 60 million barrels from the emergency stocks to ease the speculative demand situation.
Weakening of the US dollar (prices in real terms have been deteriorating over the years). The Bush administration has expressed a desire to seek an increase in production from the OPEC members. Many have indicated their willingness to respond to this request positively.
However, the fact remains that the additional productive capacity in many OPEC countries is limited and cannot be brought on line during the short-term. When one adds the geopolitical security concerns to this limited capacity, it is unlikely that the price of oil will come down soon.
GET USE TO PAYING
HIGHER PRICES
The consumers may have to get used to paying higher prices at the gas stations and higher bill for their electricity use at least until the end of summer.
Last year Jamaica's oil import bill reached an all-time high of US$809.6. Since 1999 the oil demand in Jamaica has increased at annual rate of 3.9 per cent while the GDP in real terms has increased at 1.4 per cent. This means that for every one per cent increase in GDP, the oil demand in Jamaica increases at 2.9 per cent.
Indeed, the Jamaican economy is highly energy intensive. Every one-dollar per barrel increase in the price of oil adds US$27 million to her import bill. Without addressing the issues of security of energy supplies and a long-term stability in energy prices, achieving long-term development sustainability will not be possible. Table 3 provides a snapshot view of oil import volumes and the cost trends for the past five years:
It is worth mentioning that last year the cost of imported oil that was used to generate electricity increased by 50.4 per cent. This cost was a direct pass through to the ratepayers through their higher electricity bills. This cost increase is further compounded by the fact that last year the utility company's own fuel use and system losses were in the range of about 18.9 per cent (Source: Economic and Social Survey Jamaica 2003). This translates into a high electricity rate, which makes Jamaican products non-competitive in the international market. We will address this issue in detail in a forthcoming column.
What I want to point out to readers at this point is that the high income elasticity of demand for oil and increasing costs of energy impact the economy negatively through increased cost of production, higher freight rates, reduced exports and loss of jobs. As far as the tourism sector is concerned, it is dependent on affordable travel. If people have less to spend, they will first cut on leisure travel.
The jet fuel costs have increased by more than 60 per cent. As the fuel cost accounts for 12 per cent to 20 per cent of an airline's operating cost, no airline can be expected to absorb 7.2 per cent to 12 per cent direct increase in its operating costs. This will definitely mean that the airlines will introduce a fuel surcharge to cover these fuel cost increases.
How will this impact Jamaica's tourism, which is already faced with high utility rates and increased cost of ground transport. In a forthcoming column we shall review in detail the energy sector issues as they impact OIDCs, with a special reference to Jamaican and CARICOM region, the options that OIDCs have at their disposals, the policy framework that could help them to attain the long-term security in supplies at stable prices, and the strategies that must be pursued to realise these policy objectives and improve competitiveness.
Zia Mian, a retired senior World Bank official, is an international consultant on information technology and energy. He writes on issues of national, regional and international interest. Views expressed in this column are those of the author and do not reflect those of the government. Send your comments to mian_zia@hotmail.com.
