Letters & Opinion

Fuel Prices, Oil And Snake Oil Politicians

By Andrew Antoine
By Andrew Antoine

NOW that you’ve seen where I’m going with this, let’s review the fundamental issue(s) so we can arrive, possibly, at a conclusion of this matter. In so doing, we just might uncover the purveyors of the latest batch of snake oil. Here goes!

Approximately nine to ten months ago, the price of crude oil on the world market began declining. From prices close to US$150 for a barrel of crude to less than US$50, crude seemed to be in free fall, much to the delight of consumers and the consternation of oil producers.

Saint Lucian consumers were no less happy at the falling prices than consumers elsewhere. The problem was, those falling prices were not being reflected in the price of petrol at the local pumps fast enough. For example, if the price of crude declined one or more times during a particular period, consumers would have to wait several weeks before realizing the benefits of that decline. Why was this so? It was so because of an arrangement called the “pass-through” mechanism. Introduced in 2009 by the former United Workers Party (UWP) Government, the time period for changing the government-controlled price of petroleum products was increased from one month (2009 to 2012) to three months by the successor SLP Government beginning sometime in 2012.

But, why the change from one month to three months? What was the rationale behind this policy shift? In 2011/2012, the price of crude on the world market began to escalate rapidly. The result, of course, was a corresponding increase in the price of petroleum and petroleum products. Consequently, a deafening howl of protest was heard from Gros Islet in Saint Lucia’s north to Vieux Fort in the south as Saint Lucians couldn’t understand or just refused to accept the monthly increases in the prices of petroleum products. To bring a measure of “stability” to the prices, and thus afford Saint Lucian consumers a modicum of protection from the ravages of monthly price increases, the Government increased the time period of the pass-through mechanism from one month to three months in 2012. While this benefitted consumers somewhat, it had an adverse impact on the fuel importers. Here’s how:

Let’s assume that the cost of fuel at the pump is EC$10.00 consisting of the cost of the product, insurance coverage of the product, the cost of freighting the product to Saint Lucia (CIF), plus the wholesalers’ or importers’ profit margin, the retailers’ profit margin, the Government’s excise tax, and its service charge. The EC$10.00 cost of fuel at the pump isn’t the actual cost of the latest batch of fuel landed in Saint Lucia, but an average of the actual costs of all the fuel imported into Saint Lucia over the past three months. So, let us again assume that we’re at the beginning of the three-month period when the EC$10.00 charge for fuel is imposed by the government. During that three-month period, the actual cost of crude on the world market increases three or four times, making the actual cost of fuel imported into Saint Lucia, and thus the actual cost of petrol at the pump, higher (as was happening prior to 2014) than the EC$10.00 currently being paid by consumers. The net effect is that the importers would have to take a hit on their profit margin fixed by Government so they could pay the increased price of oil. In other words, they suffer a loss of profit fixed by the Government because of the escalating price of oil on the world market.

Now, let us fast forward to 2014 when the cost of crude begins to decline rapidly on the world market. Whereas, previously, the importers were losing money because of the rising cost of oil and the three-month pass through mechanism, they’re now making a great deal more money than what the profit margin fixed by Government entitles them to. And, whereas, consumers enjoyed something of a financial reprieve because of the three-month pass through mechanism, which delayed the current cost of fuel, they’re now questioning the policy that keeps them from enjoying the falling price of oil in real time.

Not surprisingly, the opposition UWP added its voice to the growing clamour for the government to change its three-month pass through policy, to enable consumers to feel the benefits of falling oil prices much faster than is currently happening. To press for this change, the Party’s leaders make certain claims designed to show that Government is refusing to change its pass through policy because it’s now raking in huge amounts. Are those claims valid? Have they been substantiated? What is the basis for those claims? We’ll examine these issues in the final article.

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