Tempest in a Barrel

First Published: 2005-08-17

The Minister of Trade and Industry, Leslie Miller, continues to make every effort to convince Bahamians that a major reduction in the price of gasoline is at hand.

With prices at the pumps presently averaging $3.80 per gallon, Bahamians may have high expectations, false or otherwise, that the government is coming to their rescue. These expectations have been raised by the minister’s barrage of insults and accusations that have demonised an important industry in the country.

Attempting to fulfil his glib promises, Mr. Miller signed the country on to a financing deal with Venezuelan strongman, Hugo Chavez called PetroCaribe (a political deal that promises oil on cheap credit to 14 regional nations).

Regional prices

In complex situations like these it is always important to look at as many of the facts surrounding the issue as possible. Very little factual information has been provided by the government, so the Nassau Institute surveyed current fuel prices in several regional countries:

Local pricing and government taxes

The detailed breakdown of local pricing, including government taxes, distributor mark up and the dealer mark up, based on the average of local retail prices looks like this:

As in other regional countries, the government’s share of the pie is larger than the producer’s share. In The Bahamas, the distributor and the dealer are allowed a total of $0.77 per gallon, while the government receives $1.18 per gallon (at the present retail price).

While the mark up allowed by the government to distributors and dealers here exceeds that in most of the countries surveyed (Cayman did not have those numbers available), it can be argued that the cost of living and business operating costs are higher in The Bahamas than in the other responding countries (except Cayman and Aruba), so higher mark ups are necessary.

Not to be deterred

Once Mr. Miller became aware of the local pricing policy, and calls were made to reduce prices by cutting the government’s high duty rate, he seems to have realised that his initial arguments were baseless. However, he now appears even more determined to "control" the market, even to the extent of signing the country on to a diplomatically undesirable multilateral agreement.

So his attention has now turned to the supposedly extortionate profits being made by the regional oil companies that sell to the local distributors. His current complaint is that they are making too much money at the wholesale level so he will cut them out of the pricing structure.

To accomplish this, he signed the PetroCaribe agreement with President Chavez. Unfortunately, the facts have not been considered here either. PetroCaribe offers favourable financing of oil supplies from Venezuela, but not better prices, as the following section of the agreement shows:

IV FINANCING MECHANISMS AND COMPENSATIONS

Apart from the benefits set forth in the San Jose Agreement and in the Caracas Energy Co-operation Agreement, the Bolivarian Republic of Venezuela shall extend credit facilities to the countries of the Caribbean exhibiting less relative development on the basis of bilaterally fixed quotas.

2. Long-term Financing

PRICE PER BARREL (%) PER CENTAGE TO BE FINANCED

> = 15 dollars per barrel 5

> = 20 dollars per barrel 10

> = 22 dollars per barrel 15

> = 24 dollars per barrel 20

> = 30 dollars per barrel 25

> = 40 dollars per barrel 30

> = 50 dollars per barrel 40

> = 100 dollars per barrel 50

There are also short term and deferred payment options available.

PetroCaribe – Crude or refined – Lower prices and foul play

The fact is that the PetroCaribe arrangement will provide product at market prices, but nowhere does it specify whether the product will be crude or refined oil. This has not deterred Mr. Miller. He continues to allege foul play by the oil companies and insists he will reduce the price of gasoline at the pumps.

Are those middlemen dastardly?

So, let’s examine the price of oil for a moment.

If we assume the price of crude oil is $61 a barrel in the local pricing structure above, and there are 42 gallons in a barrel, this would mean the cost of crude is $1.45 per gallon.

Therefore, it would cost $0.32 per gallon for the middlemen to purchase the crude, refine it, and transport it to the port of Nassau for the CIF price of $1.77 per gallon.

This is obviously a very efficient process, and if the estimates here are representative, this certainly would not indicate that the middlemen are ripping the consumer off.

A mark up of $0.32 per gallon of gasoline to process from crude oil to delivery at Clifton Pier cannot be portrayed as excessive, nor can it be considered gouging.

Here is a cost list supplied by an expert in the field:
Crude oil price; crude transport, storage and shipment to the refinery; refining costs; refined product storage; refined products broker fee; marine loading terminal cost; marine transport cost, Nassau storage terminal costs; trucking costs; sales point costs, sales point profit and government taxes.

Of course there is a margin of error with these calculations, but if the middlemen charged a dollar per gallon to get the product from crude to the port here in Nassau, would that be excessive when considering the process involved?

(This link to the BBC News titled The Cost of Fuel Clickable Guide How Petrol Is Priced helps with understanding international pricing and government taxation.)

Ministerial stamina

Having put himself out on a limb, Mr. Miller continues to show resolve in his quest to prove his theory.

So, he has appointed an advisory committee, chaired by former Shell Bahamas CEO Vincent Coleby, who just might have an axe to grind with his former employers that he happens to be investigating. Shirlea M.P. Pierre Dupuch, consultant Gerry Wirth, Brenda Lockhart, Deepak Battnagger, "and two other consultants" are also members of the committee charged with making recommendations to the government as to how it should proceed in this matter.

Theirs is not an easy task as government has distorted the local fuel market for decades with price controls and a moratorium on gas stations, which naturally restricts the number of distributors that can sell into The Bahamas. All this intervention has created a triopoly among Shell, Texaco and Esso (Focol, which is locally owned, has a similar position in Freeport, Grand Bahama).

In any event, it is hoped that the work of the advisory committee will be no less transparent than the oil industry is expected to be. So far, this has not been the case.

World pricing mechanisms

As transparency appears to be a big concern to Mr. Miller, a quick search of the Internet reveals endless sources of information about the oil industry. Pricing is available from all regions of the world, so it does not take much to determine that the largest component of the retail price here is the $1.18 per gallon the Government receives in duty and stamp tax.

One possible danger arising from this entire exercise is that the pricing structure of an important world industry is coming under attack.

The question is how to determine what a fair mark up is for the wholesaler to make. However, this is for the consumer to decide by either buying, or not buying, gasoline if it becomes too expensive in their view.

The larger question then is how "the authorities" can determine what a fair margin is for a particular product? Because of the different skill sets required from manufacturer to wholesaler to retailer, it is difficult for laymen to determine what is a fair or acceptable price at any point along the supply chain.

With any business, the margins between the producer, the wholesaler and the retailer must cover their costs, and of course, include a profit. There are industry norms that have been established over many years that are accepted by creditors and governments alike all over the world. But, it appears Mr. Miller thinks he can be successful with micromanaging the oil industry in spite of all the potential danger in trying to manipulate a very volatile (pun intended) industry.

If the government goes down this road, there will be no stopping them. They will see their way clear to micromanage all economic sectors, with all the opportunities for graft and patronage that will imply.

The world’s market pricing mechanisms must be left intact. Any attempt at government intervention is a fool’s game that ultimately leads to more and more government control, and eventually economic collapse.

Calmer heads must prevail in this debate and The Bahamas should politely withdraw from PetroCaribe, and its socialist schemes, and work more closely with the oil majors who have the economies of scale to see where savings might be achieved to help reduce energy costs if possible. The country cannot simply ignore the fact that prices at the source are rising exponentially – this is clearly not a question of the mark ups of middlemen.

Also, as emerging economies like China and India demand more energy, experts suggest that the supplies will diminish and other sources of energy will be needed. In light of this, Mr. Miller’s time might be better spent trying to bring competition into the market place, promoting conservation efforts and alternative energy sources. The elimination of duty on solar panels was a good start. Ideas like car pooling, buying more fuel efficient, and therefore, smaller vehicles and the like also deserve consideration.

It would appear that the Minister of Trade and Industry is not attempting to develop trade and industry here at all, but thinks it is his sole responsibility to demonise business, even though he is a former businessman himself. This is not good for national development.

This is a difficult and complex issue, but it seems Mr. Miller is creating a tempest in a barrel of oil for little more than short-term political advantage.

Click here for a copy of detailed survey of gas prices from the responding countries.

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