Stephen: Gov’t has few options to cushion impact of high oil prices in Barbados

Economist Jeremy Stephen says Government has little to no room to shield consumers from soaring global oil prices that triggered an increase in petroleum products here over the weekend.

But he suggested that while the hike is out of the hands of local authorities, it is not too late for the Mia Mottley administration to follow through on a commitment to put a cap on the fuel tax as prices continue to rise.

On Monday, world oil prices traded around $120 per barrel and international experts predict prices will continue to go up daily unless a solution is brokered to halt the Russia-Ukraine crisis.

Effective Sunday, the cost of gasoline here increased by 14 cents to $4.13 per litre; diesel went up by 17 cents to $3.46 per litre; and kerosene cost $1.80 per litre, an additional 22 cents. The cost of all liquefied petroleum gas (LPG) – cooking gas – cylinders also registered increases.

Stephen suggested that a cap on the fuel tax, which contributes to the increase in prices at the pump, should have already been in place.

“They should have not let the road tax be more than a fixed amount on the price of fuel, especially since demand for fuel is inelastic – that is, it remains basically the same number no matter the price,” he told Barbados TODAY.

“By my very loose calculations, it shouldn’t have been more than 15 cents per litre. Considering the demand for fuel it would have amounted to the same total or a little more than was being collected by Licensing Authority. So, it should have been capped long time. Government doesn’t need to collect more than $5 million to $10 million a year via road tax.”

Last year, amid public complaints about the increasing prices, Prime Minister Mottley said Government was open to capping the fuel tax if oil prices continued to rise, even as she urged Barbadians to be patient given the economic fallout from the COVID-19 pandemic

Stephen, suggested that if Government were to argue that it needed the tax revenue to maintain its road works programme, he would have no quarrel with that position, though noting that the country has historically borrowed for road works.

He stressed that “capping the tax is a good, temporary relief, but it does little in terms of mitigating any upward shocks that come about because of OPEC’s [Organisation of Petroleum Exporting Companies’] response to the war”.

The 23-country-strong cartel will add 400,000 barrels of oil per day to the market from April.

The group is sticking firmly to an agreement signed by its members in 2021 to continue the gradual restoration of output that was halted during the COVID-19 pandemic. Many countries produced fewer barrels of oil during the pandemic as demand dropped sharply during lockdowns.

Stephen told Barbados TODAY the only action Barbados could take to cushion the impact of high oil prices in the medium term is by using derivatives.

He explained that derivatives are “financial instruments that fix the price on delivery in the future”.

“They’re used in oil and gas. So, the Government can look at investing more in those instruments so that you can fix the price of delivery of, say, natural gas for delivery in nine months. The main problem here is that if you order what is considered a small amount, then it’ll be expensive relative to what a larger or wealthier country could pay per gallon for delivery in the future.

“Think of a wholesaler. If I want to buy a bunch of drinks next month, the more I can buy and pay for upfront, the cheaper each drink will be to me the retailer,” Stephen further explained.

The economist said oil-rich Caribbean Community (CARICOM) member states like Guyana and Trinidad and Tobago can do little to alleviate the challenges facing their Caribbean neighbours.

He explained that while Guyana is an oil-producing nation, it had licensed the extraction of its oil deposits to international companies who pay licence fees for usage.

“So, what is being extracted right now is basically by two companies, with Exxon being the largest one. Now, Exxon is not going to sell oil on behalf of Guyana cheaper to regional neighbours just because there is a regional understanding between Guyana and Barbados. They are not going to honour that.

“The CARICOM idea of Guyana being able to lend assistance is neither here nor there at this point. They are not going to be able to cheapen the price of oil because the oil has been licensed for extraction up to a certain amount of years and as long as the Guyanese Government is receiving licences or royalties from those companies, it matters not to Exxon what Barbados’ particular predicament is. They are going to sell at the world market rate,” Stephen insisted.

In the case of Trinidad and Tobago, the economist explained that the twin-island republic, with its natural gas reserves, has a similar arrangement with British Petroleum (BP) and other firms to extract fuel.

He, however, noted that the Trinidad product was really designed to supplement the local market.

“One can argue that they can set aside a few extra litres of natural gas at greatly subsidised rates for consumptive purposes in Barbados, but that is not sustainable and you wouldn’t want to depend on that. That gas is for local distribution and then any excess they may want to sell and if they are smart business people, they will never sell at a greatly reduced cost. The amount that Barbados orders on a weekly basis does not qualify for any greatly reduced costs or benefit to us,” he added.

Stephen contended that the current development is a wakeup call for Government to accelerate its energy efficiency initiatives.

“A greater push towards incentivising the use of electric vehicles and further incentives of using solar grids to power homes would definitely assist us should this war drag out,” he said.

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