The Bahamas and rising oil prices

First Published: 2005-08-24

When buying and selling are controlled by legislation, the first things to be bought and sold are legislators.

P. J. O'Rourke

Rather than forcing some much-needed clear thinking, record high oil prices are being used by our politicos as an excuse to grab more power for a public sector that barely works as it is.

Experts say high-priced oil will soon drive up costs for everything from food, to manufactures, to transportation. And as this inflation works through the economy, it will upset voters no end.

So our government – which has "controlled" rising fuel prices by legislation since the 1970s – is seeking to escape economic reality yet again.

Oil prices have doubled in the last two years and are likely to stay high. We are about to break the psychological barrier of $4 for a gallon of gas – and we are already paying big surcharges for electricity.

Sustained high fuel costs – or a sudden supply shock – could trigger serious consequences. Our government's response has been to join an anti-American alliance whose goal is to restore discredited confrontationist policies of the past.

Larry Smith – Tough Call

Has Oil Peaked?

The question of whether oil production has "peaked" is hotly debated around the world, with some predicting the end of civilization as we know it when the anticipated energy crunch begins – perhaps as early as the end of this decade.

But the debate is clouded by a lack of reliable data: "The definitions of oil reserves are different in many countries," according to a recent French government report. "The capacities of sustainable production by OPEC countries are very difficult to estimate."

But even big oil companies are warning that the world is running out of petroleum and calling on the public to help the industry do something about it.

ExxonMobil, the world's largest energy group (which trades as Esso in the Bahamas), said in a recent ad: "The world faces enormous energy challenges. There are no easy answers."

The intensifying debate over peak oil comes amid a slew of news stories highlighting how high oil prices are beginning to impact the American economy by hurting low-income workers and cutting into corporate bottom lines.

The New York Times recently reported that some Americans are cutting back on discretionary driving in response to record pump prices. And Wal-Mart reported that its profits are growing at their slowest rate in four years, in part because of costly gasoline.

Some analysts say this is a good thing, because higher prices will help restrain demand and make it easier for oil companies to invest in new production that will expand supply.

But there are fears that a major oil supply shock may consign us to a deep recession. Experts point to a shortage of refining capacity, security fears about Irag, Iran and Saudi Arabia, and the volatility of the Chavez regime in Venezuela, which has already threatened to cut off oil exports to the United States.

Chavez & the United States

According to one US commentator, "High oil prices have made Chavez an antagonist to be reckoned with, and we ignore such a menace at our peril. Chavez is dangerous, underestimated and capable of almost anything. He is actively working to recruit terrorist nations and developing countries into his campaign against the United States."

Earlier this year Chavez went on al-Jazeera television to call for Arab and developing nations to unite against the US. And he has tried to forge closer ties with Iran, which is embroiled in a dangerous dispute over nuclear development with the US and Europe.

Chavez recently called the United States the "most savage, cruel and murderous empire that has existed in the history of the world." Experts say there is a clear bid by Venezuela to become a 'small major power' committed to diminishing Washington's power in Latin America and the Caribbean.

Just this month the US expressed concern that Venezuela was using its oil wealth to destabilize neighbours. And Chavez recently ended co-operation with the US Drug Enforcement Administration, claiming its agents were spies.

And some think Chavez may be able to tip the strategic balance in the hemisphere enough to wrest control of the Organization of American States from Washington. This could lead to the re-entry of Cuba, which was expelled in 1962, further eroding US influence in the region.

According to one analysis: "The inroads made by Caracas' oil diplomacy have sharpened the divide in the Caribbean region. With Washington seemingly unwilling to offer incentives to oil-dependent states in the region, Caracas is free to create its 'solidarity' coalition."

Whatever view you may have on these matters, the politics involved are not insignificant. We can only speculate as to whether our government has considered the implications, but we note that both Barbados and Trinidad declined to sign on to PetroCaribe.

Chavez & The Bahamas

Trade & industry Minister Leslie Miller has been the sole promoter of PetroCaribe, which seeks to draw Caribbean nations into an alliance based on government-to-government deals. His line is that we should take what is on offer and ignore the noise in the market.

But the local political and commercial ramifications are equally significant and remain largely unexplored. Can we trust our jook-jook government to do the right thing?

According to a West Indian commentator, "spiralling oil prices have the potential of undermining our economic stability and long term growth. The Petrocaribe initiative represents a possible lifeline (but) there are hurdles in the way."

The first hurdle is that we must sign a bilateral treaty with Venezuela to set up a jointly owned state energy agency. And then presumably we would need storage facilities and a distribution network – expensive infrastructure that is currently in private hands.

We have yet to hear any reasoned account as to how PetroCaribe's requirements for state control can be reconciled with our existing privately owned energy sector.

Meanwhile, Esso, Shell and Texaco have yet to see details of how Petrocaribe will work, although a government-appointed advisory board has been looking at the issue for months.

This handpicked body is likely to endorse a new energy regime – handing Mr Miller some much-needed political cover.

Mr Miller says the Venezuelan government will ship oil around the region, selling to governments in each country at a savings. This fuel will then be re-sold to BEC and the private oil distributors at lower mark-ups, producing lower prices.

But the actual impact on pricing is unknown. PetroCaribe offers cheap credit, not cheap oil. Countries will be able to finance half their oil imports over many years at nominal interest rates, and even pay for their oil with bananas if need be.

But for this to work we have to believe that governments can provide better prices than the private sector – without tax subsidies.

Vision for the Future

Recent trends suggest that high oil prices will continue until spare production capacity increases – if that is possible. But rather than a costly search for more oil, some experts recommend conserving its use and focusing on alternative energy sources.

In its last budget, the government eliminated import duty on solar panels, but there has been no follow-up to promote solar power. And only one local outfit currently deals with this technology.

Proposals for wind farms on Grand Bahama and Abaco have been lingering on the table for years – just as the proposed LNG terminals have remained stalled since 2002.

A proposal for a multi-million-dollar waste-to-energy plant on New providence is also gathering dust on some ministerial desk.

And our policymakers still can't come up with a decent energy strategy that takes account of alternative fuels and new technologies.

Lack of vision is a big problem. There are few renewable energy systems operating in the Bahamas today – other than isolated research stations and resorts using rooftop solar cells for water heating.

Meanwhile, energy experts around the world advocate an alternative future where more efficient use of power, new technologies and green architecture replace the current centralized energy system based on fossil fuels that dates back to the early 20th century.

Instead of playing geopolitical games, taking huge risks with our US-dependent economy and trying to control basic economics, this is where we should be going.

What do you think? E-mail your comments to: larry@tribunemedia.net

The views expressed are those of the author, and not necessarily those of the Nassau Institute (which has no corporate view), or its Advisers or Directors.

This article was first published in The Tribune on Wednesday, August 24, 2005.

The column 'Tough Call' by Larry Smith is published in The Tribune every Wednesday 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. Mr. Smith can be contacted at: larry@tribunemedia.net

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