- REUTERS
A Thai worker installs a liquefied petroleum gas (LPG) tank in a car at a garage in Bangkok, September 1, 2005. As world oil prices continue to rise, many of Thailand's owners of gas-guzzling vehicles such as U.S. jeeps and European luxury cars are switching over to LPG to keep their fuel bills down. The workshop owner claims he has installed more than 400 LPG tanks in passenger cars this year alone, with new orders backed up until October.
Dr. Cezley Sampson, Contributor
OIL PRICE increases over the last three decades have had significant impact on the growth of the Jamaican economy. Prices remained stable around US$3 per barrel (bbl) between 1958 and 1970. Then, the power to control crude oil prices shifted from the United States to the Organisation of Petroleum Exporting Countries, formed as a producers' cartel in 1960 by five nations.
The Yum Kippur War brought the first major oil shock when OPEC severely curtailed production. By 1974, oil price quadrupled to US$ 12 per bbl. Since then, oil price movements have been highly volatile. Between 1974 and 1978 crude oil prices ranged between US$ 12.21 to US$ 13.55 per bbl. The Iran and Iraq war led to another round of oil price increases. Crude oil prices more than doubled, moving from US$14 per bbl in 1978 to US$ 35 in 1981.
The escalation in prices led to the first serious energy-efficiency measures and electricity demand side management, both globally and in Jamaica. With recession triggered by the high oil prices, and additional supplies of 10 million bbl per day, prices slumped to US$10 by mid-1986. Prices remained weak up to 1990, but spiked during the Gulf War, and declined when it was over.
ASIAN ECONOMIC CRISIS
With a strong world economy in the first half of the 1990s, prices increased again up to 1997. Then the Asian economic crisis of 1998 saw prices falling to US$ 12 per bbl. OPEC curtailed production and prices recovered to US$ 25 in 1999. OPEC set a band of US$22-28 per bbl after 1999, and prices essentially fluctuated within this band.
Like the USA, OPEC lost control over prices after 1999. The continued strength of the U.S. economy and the insatiable demand for energy by the economies of China and India resulted in depletion of the reserve production capacity. The world now consumes 80 million bbl per day of petroleum products. With demand about the same level and growing, coupled with natural disasters and frequent man made crises such as the Iraq War, a significant risk premium has arisen and has driven prices way above US$ 40 per bbl since 2004.
Crude oil prices have touched US$ 70 per bbl. Accounting for inflation, this is still below the 1980 peak in real terms. The 1980 prices translate today into US$90 per bbl, indicating further increases are possible and likely. The informed view of oil economists is that there is a structural shift in the demand for oil and prices below US$ 30 per bbl is now a thing of the past. To make matters worse, the USA has not built a new oil refinery in the past 29 years, which puts further pressures on the price of gasoline.
ONE BRIGHT SPOT
There has been one bright spot since the latter part of the 1980s. Large deposits of relatively cheap natural gas have been discovered, and natural gas has more or less become the fuel of choice for generating electricity. The main uses of oil today are for transportation and home heating, with declining use in electricity generation.
Jamaica has tried to address the energy dilemma through a series of energy policies. In 1981, the government issued an Energy Policy. A revised Policy document was issued in late 1995. There have been two problems associated with these documents. Firstly, the tendency has been to look for solutions on the supply/production side. Secondly, there is a tendency for the country to become concerned only when there is an oil price crisis, as we are now experiencing, and to relax after prices decline.
Jamaica's dependence on imported oil has increased to 90 per cent. We are 95 per cent dependent on imported oil for generating electricity. Globally, oil is used to generate less than nine per cent of electricity. In the USA, oil accounts for less than three per cent of the electricity generated. Oil is mostly used in the USA for transportation and home heating. Electricity is generated mostly from coal. China, South Africa, USA, Australia and India, generate most of their electricity from coal. Africa relies heavily on hydropower. France is unique with 80 per cent coming from nuclear plants.
Since 1990, relatively cheap natural gas adopting combined cycle gas turbine technology (CCGT) has been the fuel of choice for generating electricity. In the USA and the UK, natural gas has grown from less than three per cent to now account for about 20 per cent and 30 per cent respectively, of generation capacity.
RELATIVE COSTS
Oil is competitive mostly for peak demand because of its relatively low capital cost. Natural gas has relatively low capital cost and low energy/operating costs. While the thermal efficiency levels of oil range between 30 per cent and 35 per cent, recent CCGT plants can produce thermal efficiency as high as 60 per cent. CCGT plants are less wasteful in terms of energy resources by as much as 80%. CCGT plants in sizes as small as 40 MW allow for modular addition to capacity in relatively short construction time. Supplies can be added more readily to match demand increases without creating excess capacity, which costs the consumer must cover until demand catches up with the new capacity. The medium speed or low speed diesel plants that some talk radio experts are recommending are yesterday's solutions.
Globally, more than 50 per cent of new capacity over the medium term will be natural gas-fired combined cycle; combustion turbine, distributed generation technologies and cogeneration. With the increased demand for natural gas, coal is expected to become more competitive. Advanced clean coal technologies after 2015 and pulverised coal technology will increasingly meet new capacity. Despite the hype around renewable energy, all other forms of renewable energy (excluding hydro plants) are not expected to meet more than 10 per cent of new capacity additions in the medium term. So nuclear power is once more one of the solutions in the larger economies. Countries such as Germany and the UK that are vigorously pursuing renewable energy solutions provide extensive subsidies. which Jamaica will not be able to guarantee. The UK imposes a levy of 1% on electricity sales to finance renewable energy and energy efficiency solutions. Renewable energy resources except for hydropower and geothermal are yet to become competitive for base load supply.
We must view solutions to Jamaica's energy problem in this framework. The large import energy bill of over US$937 million in 2004 has had a major impact on our balance of payment and exchange rate. Over the last two decades, the imported cost of crude and oil products increased from 20 per cent of merchandise export to over 60 per cent. We are now using 60 cents of every dollar of export earnings to meet the imported cost of crude and oil products. The increase in the oil bill between 1998 and 2004 amounted to over US$600 million, more than the increased incomes from our major foreign exchange earners, alumina and tourism. This is not sustainable.
The high cost of electricity, US 14 cents in 2000 and now approaching US 23 cents/kWh, is also having a major impact on inflation. Inflation in Jamaica is not currently driven by 'too much money chasing too few goods', with fiscal remedies offering solutions. Inflation is driven by exogenous factors, largely by increases in oil prices. The recent World Bank Country Assistance Strategy Report states that increases in oil prices present one of the major threats to Jamaica meeting its economic targets over the medium term.
CENTRAL ROLE ENERGY PLANNING
Currently, the total available system capacity of the JPSCo grid is about 737 megawatt (MW), with peak demand of about 600 MW at the end of 2004. The installed capacity is nearer 850 MW, but about 100 MW of capacity is currently unavailable for dispatch. I have worked with Minister Paulwell in securing financing from Canadian International Development Agency, Canada to review our energy plans and least cost expansion solutions. The existing JPSCo licence gives the company a central role in the energy planning process as it relates to grid electricity. That is a conflict of interest. Such responsibility should rightly rest with government, and not one of the market players.
From work done to date, indications are that by 2010/11 the system will need about 350 MW of new capacity. The time to bring new plants on stream constrains our ability to adopt the least cost solution, which is the CCGT plants. Government has only recently been able to tie up the agreement with Trinidad for the 20-year supply of liquid natural gas (LNG). Given this constraint, Government has given its support for 49 MW capacity additions by independent power producer Jamaica Energy Partner (JEP). JEP expects to introduce a dual fuel plant, enabling operations to switch to natural gas after 2008. This solution will reduce the take and pay capacity charges.
Next week: Policy focus on diversification.
