Regional Fuel

First Published: 2004-08-31

If you believe Trade Minister Leslie Miller, the future of the Bahamian economy rests on the goodwill of a South American strongman.

Venezuelan President Hugo Chavez has proposed a broad integration of energy policies in Latin America and the Caribbean under an umbrella initiative he calls PetroAmerica.

The initiative envisions the formation of two regional energy companies – PetroCaribe for the Caribbean and PetroSur for South America.

Venezuela is the world’s fifth-largest oil exporter, producing up to 3 million barrels a day. Chavez is a former army officer elected in 1998 (and again in 2000) as the leader of a populist “Bolivarian Revolution”, which is described by Marxists as “nationalist and muddled left-leaning”.

He launched his grandiose scheme to boost Venezuela’s influence in the region by leveraging its vast energy resources. However, the project does have some serious precedents.

Chavez’ 1999 Caracas Accord funnelled cut-rate oil supplies to Cuba and other Caribbean states. And that arrangement built on the much earlier San Jose Accord, in which both Mexico and Venezuela provided oil to several countries in the region through a system of trade credits (but at market prices).

Reports say PetroCaribe will allow Venezuela and 13 Caribbean countries to engage on a government-to-government basis in the exploration, production, processing and distribution of oil and gas.

It also has a lot to do with propping up Fidel Castro’s creaky communist regime in Cuba, which now owes Venezuela more than $800 million for oil imports.

Chavez has often criticized what he says is American dominance in the hemisphere and has accused the US of trying to topple him. His brother is Venezuela’s ambassador to Cuba.

“Venezuela has clearly replaced the USSR,” says the US-Cuba Trade and Economic Council, a New York-based monitoring group. “Without Venezuela, Cuba would not be able to maintain its current system.”

Another PetroCaribe project will involve refining Venezuelan crude in Trinidad for the eventual marketing of oil products to Caricom countries, including the Bahamas. The oil will be owned by governments rather than private distributors.

Trinidad, Jamaica and Barbados already have state-run energy corporations. And there are rumours that Trinidad’s National Petroleum Company (already a monopoly retailer at home) is looking to buy Shell’s multi-million-dollar retail network in the eastern Caribbean.

Meanwhile, high-level regional meetings are set for Jamaica later this month to frame a political agreement that will allow operational talks to begin. But we have yet to receive a clear briefing from our policymakers on the issues and consequences involved in this groundbreaking project.

In fact, this humble column is probably the most detailed and rational account of the situation you will be able to find.

According to Venezuela’s Oil Minister, Rafael Ramirez, PetroCaribe will lower fuel prices by cutting out the middleman and controlling what he termed “the sometimes offensive speculative and margin factors.”

But Shell, Esso and Texaco – who have supplied us with fuel for some 85 years – are understandably sceptical: “Our local pricing and markups are completely controlled by the government, but somehow they have the misunderstood perception that we are making huge profits offshore,” one senior oil industry executive told Tough Call.

This is what Minister Miller has been going on about for months – stirring up a political storm by condemning private fuel suppliers for passing on soaring world market prices. He says the government will be able to slash prices by importing Venezuelan fuel at below market cost.

That would, of course, take the oil distributors out of the business of procuring their own product. But they could conceivably continue to operate their capital intensive distribution networks as long as they were allowed sufficient margin to make a return on investment.

“Our position is that if the government can get product at below market rates and can assure quality and reliability of supply, then we will work with them…But there are serious implications to this that require careful evaluation and consultation. It is not something to be rushed into emotionally”

And since Mr Miller’s plan seems to require the formation of another state-owned monopoly like Batelco and Bahamasair, we are more than sceptical. If the minister is so sure of himself, why doesn’t he enlighten us on the details of his so-called ‘energy policy’ before embarking on such far-reaching negotiations?

As one independent fuel retailer put it: “Even if we get discounts, prices will inevitably rise, so instead of trying to make cheap political points by presenting himself as the ‘energy saviour’ of the country, perhaps Mr. Miller should earn his pay by getting together the best minds (including the very groups he seeks to castigate) to formulate a national energy policy that will increase our use of renewable energy sources.”

There is more to all this than meets the eye. Some reports say that Trinidadian support during last year’s crippling strikes in Venezuela prompted Chavez to offer concessionary oil prices. And Trinidad Prime Minister Patrick Manning promised in turn to help Caricom countries on energy supply matters.

It’s all a question of quid pro quo – witness Fred Mitchell’s jaunts down south in support of Trinidad’s bid to host the FTAA HQ.

There are also reports that Trinidad – with its huge natural gas reserves – wants to invest in one of the proposed LNG terminals in the Bahamas to pipe gas to Florida. Tractebel – which is the leading contender to build an LNG plant in Freeport – already has significant interests in Trinidad.

But Mr Miller should know (he is, after all, a paint manufacturer and retailer himself) that ranting on about prices is not the same as a reasoned policy exposition. It cannot be expected to help citizens understand what is at stake or allow them to make input. Rather, it is designed to obfuscate….which gives rise to suspicion.

Of course, that is not to deny the authentic issues involved. But higher pump prices should be the least of our worries. Bahamians use their cars the way they use phones, so perhaps price hikes will lead to less congestion on our roads. And since government taxes make up a third of the price per gallon, there is already plenty of leeway to keep prices under control if that is the objective.

Security of supply should be our top concern, since more than 90 per cent of the Caribbean’s energy needs are fueled by oil and Trinidad is the only significant producer. Even so, it can supply only about a third of the 400,000 barrels a day the region consumes. (Current average world demand is about 82 million barrels per day). And the Bahamas, unfortunately, depends on oil for all of its power.

“Today, our supply situation is very flexible,” the oil industry executive continued. “we can source from just about anywhere depending on the circumstances. But if the Bahamas enters into this arrangement we will be forced to rely on a single source of supply…which could be dangerous.”

No kidding. Venezuela’s oil production has come to a screeching halt more than once recently due to political unrest. The country remains unstable and deeply divided over Mr Chavez’ eccentric leadership. Last Sunday’s presidential recall vote (which Chavez won) was condemned by the opposition as a “gigantic fraud”.

And without assured supplies of fuel, the entire Bahamian economy will be forced to shut down. That will be a a lot worse than paying a few cents more at the pump.

Crude oil prices are posted worldwide, and the current price per barrel is over $44 – partly due to terrorism fears. A barrel holds 42 gallons of crude which is refined to produce gasoline, raising the price per gallon.

Added to this are shipping costs and government taxes, plus the 44-cent and 33-cent markups per gallon for local retailers and wholesalers. Pump prices in Nassau are now over $3.50 per gallon – the highest ever.

Other countries in the region are taking steps to address high prices. In St. Lucia, dealers have called for gradual price hikes rather than massive increases.

The Organization of Eastern Caribbean States is setting up a task force to advise on energy conservation, alternative energy sources and sector reform.

Guyana and Barbados both cut their gasoline taxes recently. And Belize is subsidizing fuel prices to lessen the effect on consumers.

Regional leaders recognize that dramatic increases in energy costs can pose serious threats to economic growth. But as one industry observer told Tough Cal: “What’s the point of rushing into an arrangement like this to save a few cents per gallon of gas…which is the rationale the minister has been pushing?”

There are a lot of issues involved with the government inserting itself into the supply chain and creating another expensive state enterprise to support grandstanding politicos. And (Messrs Smith and Roberts) aren’t we supposed to be divesting inefficient state enterprises?

Canada went through a disastrous fuel nationalization exercise (PetroCanada) courtesy of Pierre Trudeau. It’s still in the process of divesting itself, after having lost billions and making no dent in oil prices. Mexico’s Pemex is a similar long-running fiasco, that has been linked to many political corruption scandals.

According to a local industry source: “wild promises are being made that can’t be kept. We need to approach this logically and create a dialogue. There is too much political heat being generated for rational decisions to be made.”

The reality is that fuel prices here are comparable with other Caricom countries, and better than in many developed countries such as Europe. And we should remember that most Caribbean states are very small markets, which means higher cost structures due to issues of scale.

If world oil prices remain high (and experts predict they will stay over $30 per barrel for the next 10 years) we must think seriously about conservation and fuel efficiency. And both consumers and government have a big role to play in this…It is not a one-sided issue.

Here’s a parting thought for Mr Miller and the rest of the cabinet: The total retail fuel demand in the Bahamas is only about 5,000 barrels per day…that’s the gas you and I buy to run our vehicles. But most of the fuel we import goes to BEC to generate electricity for our homes, businesses, hospitals and hotels.

So all Mr Miller has to do to make himself a true energy saviour is facilitate a supply contract between BEC and PetroCaribe. That will take care of most of our problems.

August 19, 2004.

The column ‘Tough Call’ by Larry Smith is published in The Tribune every Thursday and is reprinted here as a courtesy. Mr. Smith founded and successfully grew an advertising agency over 20 years. Under his direction Media Enterprises diversified into short-run commercial printing and publishing, and is now the largest non-fiction book wholesaler in the Bahamas. He has 30 years experience as a journalist and publicist and has contributed numerous articles and columns to the Bahamian press. A former reporter at the Nassau Guardian, local correspondent for Reuters and editor at the Bahamas News Bureau, he conceived and edited the Bahama Almanac (published 2000 by Media Enterprises), wrote the commentary for Mike Toogood’s Portrait of an Archipelago (published 2004 by Macmillan Caribbean), and edited the Bahamas Environmental Handbook (published 2002 by the government). In 2003 he took a year’s leave of absence from Media Enterprises to lead a transition management team at the Nassau Guardian after the paper was acquired by local investors. After leaving the Guardian he was contracted by the Tribune as online manager/editor and columnist. He has a degree in political science and journalism from the University of Miami.

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