THE Market Pass Through (MPT) system has been in the news in Saint Lucia quite a bit and has caused a number of pointed questions to be raised by the public. Spinners, pundits and supporters as well as technicians from the public service have been called in to try to explain and demystify the Market Pass Through system for the benefit of the public. The heightened interest in the MPT at this time is based on the recent adjustments of the price of gas and petroleum products made by the Prime Minister and Minister for Finance on January 12. Public outrage and dissatisfaction in the adjustment made has prompted deeper scrutiny into the technical workings of the MPT.
The key point of debate as regards the adjustments to the prices of gas and diesel, centres on the reduction of fuel costs at the pumps, from a previous $15.85 per gallon of gas to the current cost of $13. 64, a mere reduction of $2.21. It should be noted that Saint Lucian consumers have been paying a relatively high rate of $15.85 since October 2014.However world oil prices declined steadily from over 90 US dollars a barrel to the mid-40s during the last quarter of 2014 into January 2015.
By all indications this is less than what was anticipated by the watchful public, many of whom have been following the decline and trends in world oil prices on television and on the internet.
This scrutiny is understable bearing in the mind that far more significant adjustments were implemented in neighbouring territories with similar pricing systems for fuel products. This system for pricing petroleum products was recommended by the Monetary Council of the Eastern Caribbean Central Bank as a better means for pricing of petroleum products, which was largely price controlled before that. Moreover, the justification for such a system came about as a result of the steady increases in world oil prices from the last quarter of 2007 into 2008.
Indeed the sensitivity and reaction to this less than satisfactory reduction in the price of fuel is based on the fact that petroleum products, directly affect the cost of living in terms of the production of goods and services and the economic and social livelihoods of everyone.
As a price controlled product in Saint Lucia for many years, government lost significant amounts of revenue when oil prices started to rise above a critical point as was the case in 2008, where government actually had to subsidize all petroleum products, unleaded gas, diesel, LPG, the 20 pound and 100 pound cylinders as well as bulk LPG. Evidently this was clearly unsustainable for a small country and so it was necessary to review the pricing system for petroleum products. In so doing, the response was to change the pricing system to one that responded to market trends generally, albeit with a lag. So after careful consideration of all the relevant factors in the context of Saint Lucia’s economy, a one month MPT was introduced in 2009 until July 2012, which proved to be quite appropriate to our circumstances.
Clearly a rigid system for the pricing of fuel such as three months or longer is not desirable if the pricing of the commodity itself is flexible at source market and in some cases is volatile. It is simple and logical to understand that if the price of fuel in Saint Lucia is fixed, and the input price or CIF of fuel is a moving target, there will be times when there would be a significant gap or price differential between the appropriate price according to the world market and the actual price charged in Saint Lucia.
This gap can be a cost to government and by extension consumers, or a windfall to importers or wholesalers. This then results in some amounts being owed to one of the partners, government or the importers, which in fact is an accounting problem, where some amounts have accrued and would have to be cleared. It is inelegant and inefficient and should be minimized. As a result good sense suggests, and as most economists would advise: a shorter period between adjustments is better and more efficient because it responds more quickly to the market prices and minimizes any misallocation of resources as a result.
If this is the accepted wisdom on the calibration of a MPT, then why all the noise and nasty exchanges on radio programmes? Why is there a three month Market Pass Through System in Saint Lucia? At best the answer is politics again.
Some of us may recall that from the inception of the monthly MPT in October 2009, when the first price change was done, and up to the time it was reviewed in July 2012, the system worked quite smoothly. It was always a few cents upward or a few cents downward, so there weren’t any shocks to the system. However certain individuals, particularly from the Petroleum Dealers Association expressed their disapproval or dislike for such a system, which played out in the political realm in Saint Lucia and the then leader of the opposition, the current Prime Minister Dr. Kenny Anthony, indicated publicly that he would review the system upon assumption of office.
He kept his word and did so in his budget address of May, 2012 when he announced that the period between adjustments of fuel prices for the MPT would be increased. By all indications the change to the MPT has not been in the best interest of Saint Lucia. This was most apparent in the last quarter of 2014, when oil prices started a sharp decline from over US$ 90 a barrel to US$ 40 something a barrel.
The future for the pricing of petroleum products suggests that based on the geo–politics surrounding that commodity, oil prices are likely to remain soft for the rest of 2015, and therefore not expected to climb significantly. So why are we paying so much per gallon, costing the economy of Saint Lucia millions more than is necessary?
OPEC countries and other players would like to see oil prices remain at more moderate levels, and not soar into the US$ 80s and US$ 90s. There are reasons for that. As a result, many have resisted demands from oil dependent exporting countries like Venezuela and Russia, for an upward adjustment because they want to forestall or discourage major interests such as the United States from their concentration on finding alternatives to fossil fuels and discussing more investments in extracting oil from tar, sands and shale oil deposits as well as deep water drilling.
President Barack Obama recently announced: “We’re making new investments in the development of gasolene, diesel and jet fuel that’s actually made from a plant-like substance — algae.” Therefore OPEC dependent countries, would like to see oil prices remain at a certain threshold.
Other aspects of the geo–politics including the desire of the west to exert pressure on Russia and other so–called rogue states that are dependent on oil may be in the mix as well; however, this is not our worry. Our immediate concern here is that as a small developing country, we would want to reduce expenditure on imported fuel which has significant inflationary effects on our economy.
Because of the far–reaching importance of this commodity, we need to put in place a price regime which is in our best long term interest. In that sense, if there is a system that delivers that objective then we should gravitate almost immediately to it. So on this basis, we would need our leaders to set aside the politics and have the courage to recognize the weaknesses of the current three month MPT and to now move speedily to re–implement the one month pass through mechanism which by all indications is far more superior and allows for more timely adjustments, reduces accruals (amounts owed to government or importers), minimizes the price gaps and other problems including importantly the misallocation of resources.
With the current price of $13.64 there is a gap or differential in price between $2.22 and $2.89. When we apply an estimate of about 1.8 million gallons a month in petroleum gas and diesel, which is being utilized in the economy on average (and if one multiplies this by 2.5 which is the range between 2.2 and 2.89) one can see that we are talking about almost $5 million more being spent on fuel than is necessary in Saint Lucia as compared to other OECS countries. Can’t we avoid this? It is avoidable, and so I hope that the Prime Minister has the courage to stand and make the right decision and revert to a one month system.
It is really urgent that he puts aside his political inclinations and show leadership, for a change. Leaders need to know and accept when they are wrong and have the magnanimity to do so gracefully. All the Prime Minister has to do is to correct his missteps, where the Market Pass Through is concerned and lead the country in the best way possible.
Sadly what we have seen and heard pass for analysis on the issue in this country amounts to tribalized debate, reflective of the deep-seated party divisions that unfortunately permeate this small island and blinds citizens to their own best interest. The debate has been about who says what, from which political camp.
This is a bread and butter matter. If our OECS neighbours with smaller economies than Saint Lucia can offer their people more relief from the drop in oil prices, then why can’t we? This is an economy where things are difficult and citizens are looking for relief. This issue is not about political patronage. It is not about one’s political party. It is about the national interest, analytical thinking and pragmatic solutions. Saint Lucians let your voice be heard in supporting not your party, but what is best for the country. One month is better than three.
By Alexis B. Montegomery
This fuel price so-called debate exposes all menacing superficiality of all of the main acts and the main actors on stage so far: Most —- except one — do NOT KNOW WHAT THE HECK THEY ARE TALKING ABOUT — save for making political hay out of the very complex situation. They mechanism remains a mathematical ‘black-box’.
No one has outlined, as principal spokesperson, what is the line of transmission in the cost structure of the landed (CIF i.e., , Cost, Insurance and Freight) price and the final figure or the final cost facing the consumer at the pump as this exists IN OUR CASE IN SAINT LUCIA.
Therefore, one can conclude that either they don’t know, or it is way beyond their tether and their cognitive capacity to calculate it, or to understand it.
Listen: You can tinker like a monkey and ‘fix’ a problem, but you cannot boast that you understand it. There lies the problem with all our several arm-chair experts in energy pricing.
Good Lord! They — from top to bottom, and on each side of the political fence — have been playing us for fools.