The impact of rising oil prices – what The Bahamas can do about it

First Published: 2005-10-08

Notes by Mr. Marlon Johnson for his presentation at The College of The Bahamas School of Business Panel Discussion on "The Impact of rising oil prices: Policy alternatives for a small, open economy like The Bahamas" reprinted here with his kind permission.

Thursday, October 6, 2005

* Spike in oil prices definitely affect small businesses

o Higher cost inputs

o Need for more working capital

o Pass on higher prices which lowers demand for products

o Consumers having to pay more for electricity and gas, THUS have less money to spend.

* Interesting thing is that we have been down this road before

o Oil Shocks of 1970s

o In fact, inflation adjusted price of gas per gallon is just reaching where it was in the early 1980s.

o Gallon of gas cost the same as it did in 1981, when adjusted for inflation and government tax increases

o Saw collapse in demand for large cars – focus on smaller, more economical vehicles.

* History is important because it shows that oil prices will fluctuate and could spike even higher in case of war, terrorism or other catastrophic event.

* SO, if we DO get cheaper gas today, doesn't mean that it will be so tomorrow.

* Price of Gas around the world…..

What we must focus on is a COMPREHENSIVE ENERGY POLICY that aims to reduce substantially our reliance on fossil fuels in our daily lives.

* Diminish the effects of shocks

* Strengthen our foreign reserve holdings (20 percent of import bill in 2004; 365m out of 1,810m import bill)

* Reduce environmental stress…..

* Determine "appropriate" price levels for gas products and proper incentives to curtail oil usage. And this may NOT mean cheaper gasoline

Almost exactly, TWO YEARS Ago , Mr. DeCosta Bethel of BEC noted the need for a National Energy Plan. Since, others have joined in.

We must now develop a full National Energy Policy. Aims of which

* Curtail and discourage usage of fossil fuels

* Encourage and facilitates alternative forms of energy production

* Encourage and facilitate construction designs that are energy efficient

* Undertake sustained educational efforts to encourage energy efficiency at the individual level

This discussion cannot and should not about getting Cheap Gas!

IT'S ALL RELATIVE: APRIL, 2005

Amsterdam $6.48

Milan Italy $5.96

Brussels Belgium $5.91

London $5.79

If that was the case, the government could eliminate the $1.06 tax on a gallon of gas and make it up by placing the tax burden elsewhere.

If govt. intervenes, should NOT force vendors to purchase oil from the new national entity. It should only be one more supply alternative and vendors should be left to be able to CHOOSE who to purchase fuel. As the market is already there, the new entity should be one of another potential supplier

In fact, if the government is able to negotiate cheaper fuel, it will only provide us with a false sense of security and keep us from pursuing this national energy policy.

What should elements be:-

TRANSPORTATION POLICY:

* Up Duty and licensing on Personal Gas Hogs (SUVs; large engine sports car)

* Lower duty on smaller vehicles,

* Lower duty on standard shift vehicles

* Eliminate duty on hybrid vehicles

* Subsidize construction of alternative fuel stations – work with car manufacturers as test site

* IMPLEMENT PROPER MASS TRANSIT SYSTEM

o Coordinated, comfortable, reliable system

o School Bussing system

o Local Taxi cab service

Aim of this should be to reduce gasoline consumption and encourage persons to purchase more fuel efficient vehicles or make use of mass transit.

ALTERNATIVE ENERGY SOURCES/DESIGNS FOR EFFICIENCY

* We have lots of SUN

* Commend government for eliminating duty on solar panels

* Increase duty on conventional water heaters

o Need to incentivise businesses to push them

* Create competition and reward for architects to design energy efficient homes for Bahamian marketplace. Make use of natural lighting and ventilation.

o Make standard for Govt. low cost homes.

o Give duty exemptions for those who use the energy efficient designs.

* Reward efficient resort designs – those that have open-air lobbies; key activated A/Cs.; use of sunlight for lighting; use of trees for cooling.

* URBAN DESIGN: Subdivisions and living areas need to incorporate shopping within walking distances i.e. European cities and towns. Not American approach that forces you to drive to the convenience store.

* What about BEC and the surcharge? How efficient is BEC's operation? Is the entity being run at optimal capacity? Has BEC's operation been audited to see how it could deliver its services more cheaply? Have we given any serious consideration to liberalization of the sector and permitting private companies to compete to provide electricity to the island's grid?

BOTTOM LINE:

* We don't produce oil

* We need to reduce our appetite for fossil fuel products

* No prediction that even with a national oil company that prices won't continue to rise.

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.

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