Business Page   Cheap oil is dead part 2

Sunday, September 25th, 2005

                                 

                                                               Source: The Trade

 

Introduction:

Today we continue looking at the current oil crisis, which we noted in last week's column mainly reflects the demand for oil to fuel the phenomenal growth in the economies of China, India and South Korea in particular, as well as other countries across the world including Brazil just across our border. Last week we referred to some other supply factors and readers are of course aware of Hurricane Rita's impact on the oil facilities in Texas in the USA which account for approximately 40% of that country's production. On a positive if not overly optimistic note, President Jagdeo announced earlier this week that Guyana would have hydro-power in five years' time.

Recently too we have heard much about the Chavez Initiative, labelled 'PetroCaribe,' which is intended to spare Caribbean oil-importing countries the immediate consequences of spiralling oil prices by way of extended credit on concessionary terms. In the past, most of our energy needs were met by purchases through the national body from Venezuela. After the disruptions caused by the Chavez coup attempt in the early nineties and the dislocating strikes in Venezuela affecting the supply, permission was granted to fuel importers - Shell, Esso, Texaco, Guyoil - to import fuel from the country of their choice.

Elements of pricing:

Given that duty is payable in addition to Consumption Tax (C/Tax) on any fuel imports outside of Caricom, Venezuela and Curacao, all importers chose Trinidad. Some of them obtained preferential prices such as Guyoil (because of government involvement). When PetroCaribe was first announced with much fanfare, the perception was created that the concession involved price and not the terms of payment, but as a member of OPEC Venezuela is bound by OPEC prices, while Trinidad which is outside of OPEC, is not. Trinidad, however, sells its oil by choice at the international price on COD while Venezuela is offering 40% deferred payment terms.

Petroleum attracts (C/Tax) at the following rates: diesel - 20 per cent, gasoline - 35 per cent (recently reduced from 40% which was in effect from 31 Mar, 2005), kero - 0 per cent, fuel oil - 10 per cent, bitumen - 30 per cent, others - varying rates of duty or C/Tax and propane and butanes - no duty or C/Tax. The cost of the product to the consumer is made up of: CIF cost (product cost, freight, insurance) + C/Tax + markup which varies by product and by company since each company sets its own margin. An additional variable reflects the different types of distributors such as:

dealer owned/dealer operated (most independent gas stations);

company owned/dealer operated (eg Shell owns some of the stations operated by dealers); and company owned/company operated (eg Guyoil).

The elements of the products pump-side are shown in the table below. In the case of gasolene, there are two columns for August - the difference being the drop in the rate to 35 per cent. It was widely believed that many stations did not adjust their prices claiming that they had paid (C/Tax) at 40 per cent.

Source: The Trade

The cost per gallon of gasoline (MO Gas) and diesel on September 16, 2005 was G$818 and G$701 respectively. The prices of gasoline (MO Gas) and diesel at pump have increased by more than 40% since January 2005 but because of the vagaries of the market and the operations and pricing policies of the oil companies not all price increases can be explained by changes in the OPEC prices. Instead of the clumsy and politically motivated attempt at controlling the mini-bus fares, Minister Manzoor Nadir should have considered how the government could 'negotiate' with the oil companies to manage the prices of their products. With government being a not inconsiderable purchaser of products it is not without some leverage in the market.

The right solution in the wrong place:

Minister Nadir's ill thought-out attempt was a way of compensating for the absence of a meaningful energy policy over eleven years since the first policy document was submitted to the Office of the President. The country's signal failure in the energy sector is at best as much to do with price movements as it is to do with the failure of policy. And the President's announcement in his address at the opening of Guyexpo 2005 probably has more to do with the obvious need to avoid the usual boiler-plate speeches at such events, where the only difference is the year than with any firm initiative.

Does the President realize that the biggest and most costly waste of petroleum resources takes place in the state-owned Guyana Power & Light Inc, where 40% of production is lost? Just think what shareholders would think and what consumers would do if Banks DIH or DDL were to waste 40% of their produce after production. Someone needs to tell the President about the financial burden on the country, the domestic consumers and the business community and that he cannot find the right solutions by looking in the wrong place.

The challenge for us is as much the absence of an energy policy as the colossal failure of the first policy. That policy established a host of objectives but never put in place any system to collect the data to monitor the extent to which we were on target. While the management and staff of the Guyana Energy Agency have been extremely helpful and co-operative in providing me with the information they have, it seems that in certain important respects the statistics up to 1992 were more comprehensive that they are now! Any policy has to be based on hard data and urgent steps need to be taken to rectify this very serious problem.

Missed targets or wild dreams?

Yet the information that is available makes for some interesting reading. The number of barrels of imported petroleum products has decreased from 3.924M in 2000 to 3.904M in 2004, even as the authorities report stronger and more successful measures to curb illegal importation of petroleum. Premium gasoline, the most expensive type now accounts for 19% of petroleum products, up from 14.5% average during 1988-1992. Most of the vehicles on the road can do equally well with lesser-grade products, saving the country and consumers considerable sums.

Data on sectoral petroleum consumption in volume terms shows that electricity generation at 42% is more than twice marine and road transportation, the next highest sector. Both of these sectors increased their share of energy consumption between 1994 and 2002, while agriculture has dropped significantly from 20.1% in 1994 to 13.8% in 2002. The residential sector had no statistically significant change over the period, while industry including sugar declined from 11.7% in 1994 to 10.6% in 2002.

The 1994 Energy Policy Paper had projected that "as a result of strategies to be pursued, energy supply for 1998 will be provided by indigenous resources, 53.7% and imported petroleum products 46.3 per cent." In fact by 2000, petroleum products provided 72% of the energy by source. Confidently, that paper had also predicted that despite an overall increase in demand between 1992 and 2004, there would be a 26% decline in the use of imported petroleum products due to increased utilization of indigenous resources and less dependence on the imported products for electricity generation. Incredibly the paper predicted a reduction in the fuel bill in the sector from US$17.9M in 1992 to US$0.7 M in 2004! If you think there was a mistake, the paper actually calculated a reduction of 95 per cent.

Clearly unable to critically evaluate the contents of the Energy Policy Paper, the government naively accepted the paper's recommendation for the establishment of the Guyana Energy Agency. In their 1997 Manifesto, the PPP/C went further, pledging resources to that agency, while largely thinking of energy in the context of electricity generation, a conceptual error magnified in the 2001 Manifesto and in the hope of finding oil.

To be concluded next week.