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Audit revealed Gov't could have lowered gas prices, light bills
Wignall's World
Mark Wignall
Sunday, March 11, 2012
AN operational audit of Petrojam carried out in 2009 indicated that had the Government of the day seen it fit to comply with the results of an extensive audit of Petrojam, carried out by Centennial Group of Washington, DC, gas prices and our monthly light bills would have been considerably decreased.
We have had no shortage of politicians pontificating from their platforms and insisting that they have our interests at heart. At various times they have pounded it into us that our annual oil bill (around US$1.5 billion for 2008, more in 2011) is unsustainable and that an alternative fuel source ought to be considered. We respond by saying that such an approach seems reasonable enough, but it seems to be pure talk, talk and more talk.
PAULWELL… informed us that Petrojam’s ex-refinery prices are adjusted weekly to ensure that local prices are consistent with prices in the international oil market
The Petrojam oil refinery in Kingston.
finces are adjusted weekly to ensure that local prices are consistent with prices in the international oil market
Read more: http://www.jamaicaobserver.com/colum...#ixzz1pClYw6yA
On March 5, in answers to questions posed in the House, Minister Paulwell informed us that Petrojam's ex-refinery prices are adjusted weekly to ensure that local prices are consistent with prices in the international oil market.
The main input to the ex-refinery pricing formula is the US Gulf Coast (USGC) reference price for the product such as gasolene.
We were further told that the USGC reference price represents the cost of the product in the largest geographical market of relevance to trade in the Caribbean/Central American/South American area.
When Minister Paulwell answered questions posed to him by Gregory Mair on February 7, the minister gave the various components which made up the pump price. US Gulf reference price 61 per cent, taxes 26 per cent, retailers' margin nine per cent, and other costs four per cent.
I am putting it to the minister and the Opposition spokesman that they are both playing with us. Certainly they would have long known of the 2009 audit and the key recommendations in it. Why use such a high-powered entity to complete a special audit and then seemingly reject the very recommendations from the audit?
The Operations Audit, which has been in the public domain for some time now, has not attracted the level of attention that was warranted, and media comments on key aspects of it, if not already covered, needs to be revisited.
Under the heading, Existing Supply Arrangements Observations, the following is stated, "Since the natural supplier of crude and products to Jamaica is the Caribbean region, the use of Caribbean cargo prices as the reference price should be considered. There are many arguments put forward against this, including the one that there is a ministerial directive of 1988 to base the reference price on US Gulf Coast postings. However, changing over to Caribbean cargo prices would reduce the price of petroleum products to Jamaican consumers. Fuel oil prices in Jamaica would decrease significantly, which would result in lowered electricity prices."
Let me repeat a part of that, "Fuel oil prices in Jamaica would decrease significantly, which would result in lowered electricity prices".
Under Pricing Mechanism Observations, the audit states, "Although petroleum product prices are deregulated in Jamaica, ex-refinery prices continue to be fixed based on import parity prices. The current pricing mechanism is being administered by Petrojam. Being one of the market participants, it is not proper for them to carry out this activity without adequate oversight. The function of administering the pricing formula could be assigned to the Office of Utilities Regulation working in collaboration with the recommended Sector Regulator to be appointed.
The audit consistently reminds us that Jamaica purchases its oil from Trinidad and Venezuela.
It states, "Caribbean cargo prices are consistently lower compared to USGC postings, especially for fuel oil which is consumed by power companies and many industrial plants. Switching to Caribbean cargo prices as the reference price would reduce the price of petroleum products to consumers in Jamaica. This would impact significantly in power generation costs, leading to lower electricity tariffs due to cheaper fuel oil. Lower electricity prices would benefit all sectors of the economy and make industries more competitive.
A scandalous state of affairs
A theme which runs throughout the audit is the changing of the pricing mechanism from USGC to Caribbean cargo pricing, lower prices at the pump and, more significantly, lower light bills.
Successive administrations, including the newly elected PNP Government, have been beating up on JPS and using the company as a political football when it is plain from a reading of the audit report that Government has deliberately stuck to using the USGC pricing to keep the prices of gasoline and light bills artificially high so that it can extract the maximum taxes from the people.
This is nothing short of scandalous!
My taxi driver friends have always complained to me that whenever the price of oil on the world market jumps, the prices at the pumps make a similar leap, but when world prices fall significantly, it is a crawl to reduce the price of gas at the pumps.
I always tried to explain to them (having faith in Petrojam) that the pricing mechanism works. Well, was I ever wrong.
Here is what the audit states, "One important issue for the Government to resolve is the market price adjustment mechanism which Petrojam is following virtually without oversight. As noted earlier, it seems that Petrojam is not giving much relief to consumers when world oil prices are rising rapidly; while it seems to be using the mechanism to make significant profit when world oil prices slump by passing only marginal decreases in ex-refinery prices to the consumer, thus using the mechanism to its advantage.
Hmm... it seems my taxi driver friends, many with only primary school education, could have assisted in that section of the audit.
It goes further, "It is noted that the price smoothening mechanism Petrojam is following is not in compliance with the official pricing policy which calls for a full pass-through by Petrojam of the import parity price using the US Gulf Coast price as the benchmark. Petrojam points out that it is following the market price smoothening mechanism to avoid gas riots that had happened in the past. If the local market price smoothening is a social objective of GOJ, it should be administered by an independent sector regulator using a social protection fund or some other mechanism with the help of the Office of Utilities Regulation".
While the operational audit covers all areas of Petrojam's operation, to me the most important aspects of it are where it relates to prices of gas at the pumps and light bills.
Crude oil is always unitised in barrels. For the benefit of the reader, a barrel of oil is 42 gallons. After the complex process of refining, one ends up with about 19 gallons of gasolene, nine gallons of fuel oil, four gallons of jet fuel, and 11 gallons of other products, including lubricants, kerosene, asphalt, and petrochemical feed stocks to make plastics.
It is the fuel oil that is sold to JPS for use in its electricity generation machinery. Based on the audit, should Petrojam decide to switch to Caribbean pricing (it purchases from the Caribbean region anyway) most of those products, including fuel oil, would be reduced in price and we would see an automatic reduction in our JPS bills, even though JPS would still be operating with the same profit margin.
The audit states, "The current pricing formula does not give the least economic cost of petroleum as many of the components that are in the formula are unrealistic and inflated to the benefit of Petrojam. Petrojam reaps revenue generated through the current pricing formula. The other marketing companies also reap benefits by following the market leader without passing on any price advantage they enjoy on their imports."
It then concludes from that section: "Due to this, the benefits of market liberalisation have not reached the consumer."
Why was the switch made to US Gulf Reference prices?
The petroleum market in Jamaica was deregulated in 1993, but as stated in the 2009 Operational audit, "the benefits of market liberalisation have not reached the consumer".
The current Government needs to fully explain this, as the hypocrisy of the previous Government on this matter cannot now be explored.
Prior to liberalisation, the JLP minister in charge, Hugh Hart, wrote to the chairman of Petroleum Corporation of Jamaica re: a ministerial directive on pricing.
The August 1988 letter opens with, "In keeping with Government's policy that Petrojam must be the least-cost option for the supply of petroleum to Jamaica, I directed that an evaluation of Petrojam's ex-refinery prices be carried out on a continuing basis. Recently, my ministry, in consultation with the PCJ, completed a historical analysis of current prices on the basis of which a change in Petrojam's reference price from Caribbean Parity to the mean of US Gulf Prices is recommended as being more consistent with Government's policy as stated above.
Now, if the previous and the present political administrations were truly representative of the people of this country, certainly they would have long reviewed Petrojam's pricing mechanism and conclude that the least-cost option was to the benefit of the consuming public.
In 1988, before liberalisation, the consumer benefited when the switch was made from Caribbean parity to USGR prices. The 2009 audit revealed that the least-cost option is to switch back to Caribbean pricing. That, of course, assumes that the Government is in the business of listening to good sense.
Certainly, if we were to bring about a lowering of JPS bills to commercial and industrial interests, even those in Government with severely deficient IQs would see that such a decrease would trigger an expansion of the economic and productive base of the country. Employment would increase.
But Jamaican political administrations have been unable to see beyond anything that exists outside of a five-year rotation and election exercise.
It is my understanding that the Government and those at Petrojam are not too interested in having any open debate on this matter. One official who did not want his name used said, "The Government needs the money. It is thought that it would be more difficult to lower the pricing and tax it at the back end".
Another said that in the IMF agreement, there are many conditions that the public is never made aware of. He said that as a result of the IMF agreement, certain sub-sectors, like the petroleum industry, are targeted and the revenue streams of those sub-sectors must be maintained.
In other words, the Government of Jamaica is not in charge, it is the IMF!
Petrojam is thought of as a cash cow, and cows are to be milked. Unfortunately, all the people of this country tend to end up with in that approach is a sour stomach.
Breaking the colour barrier in banks
In 1969, black faces in companies like banks, insurance companies and other large organisations which employed accountants, supervisors and other key management personnel, tended to have a much lower percentage than what was represented in the population.
Many of these companies preferred light-skinned employees, especially those at the front desk. All ancillary staff, that is, kitchen, clean up and security, were black people.
I came at a time when the change was already made, but it rapidly accelerated in the 1970's under Michael Manley, even as he allowed his irresponsible, personal politics to bring about a near ruination of the economy by the end of the decade.
Many in the population have absolutely no idea of what it was like back in the days when the 'system' was geared towards maintaining the status quo.
In Anthony Johnson's excellent book, Kingston College, founded 1925, under the sub heading 'Race Prejudice' he captures the stirrings inherent in the building of a nation and the contribution made to it by that giant of a man, the late Percival Gibson, simply "Priest" to KC old boys who knew him. I had the privilege of being lectured ("Priest" was beyond a teacher) by him once or maybe twice in the 1960's. History, I think it was.
Physically, Bishop Gibson was a small-framed, short man, but the influence he wielded nationally and in the school he founded was simply awesome.
To quote the section of the book, "The headmaster was ahead of his time in publicly denouncing racial prejudice in an age when it was impolite to discuss the subject of race. Billy Hall remembers him lecturing: 'Black boys will have to work harder than the others, because the white boys will go into their father's business, but you will have to struggle to get one.' He was, of course, making reference to finding a job.
"The story of how Gibson (PWG) got the first black boy to be employed in a clerical position in a commercial bank is instructive. Gordon Wells (1944-1949) remembers the priest informing a group of sixth formers that he had received a request from Barclays Bank for a clerk, and wished to know if any of them was interested. All the fair-skinned boys raised their hands.
PWG: "McFarlane, you said you wanted a job. Why didn't you raise your hand?"
Roy McFarlane: "You said a bank, sir, and they don't employ black boys like me.
PWG: "Nonsense! If you are interested, come for a letter and go to the manager."
The next day McFarlane reported to the headmaster.
McFarlane: "They didn't need me, sir, but they sent me to Seprod, where they take me. I am waiting for a decision."
PWG: I did not send you to Seprod, I sent you to Barclays Bank. Now go back to the manager and tell him that I expect you to be employed, or he will hear about it from the pulpit of St George's Church on Sunday night.
Roy McFarlane was hired.
The sixth formers were ecstatic as McFarlane broke through the glass barrier which had prevented any person of colour from gaining other than a menial job at the banks in Jamaica. Eldon Forrest (1944-1952) relates that Edna Ffrench was the first black girl hired. Don Banks of Wolmer's was the third, and Forrest himself was the fourth (he, too, was sent by PWG).
We need to have an appreciation for where we once were, and more importantly we need to use that knowledge to better appreciate our present while steering us towards a better future.
observemark@gmail.com
Read more: http://www.jamaicaobserver.com/colum...#ixzz1pCkolFyi
Wignall's World
Mark Wignall
Sunday, March 11, 2012
AN operational audit of Petrojam carried out in 2009 indicated that had the Government of the day seen it fit to comply with the results of an extensive audit of Petrojam, carried out by Centennial Group of Washington, DC, gas prices and our monthly light bills would have been considerably decreased.
We have had no shortage of politicians pontificating from their platforms and insisting that they have our interests at heart. At various times they have pounded it into us that our annual oil bill (around US$1.5 billion for 2008, more in 2011) is unsustainable and that an alternative fuel source ought to be considered. We respond by saying that such an approach seems reasonable enough, but it seems to be pure talk, talk and more talk.
PAULWELL… informed us that Petrojam’s ex-refinery prices are adjusted weekly to ensure that local prices are consistent with prices in the international oil market
The Petrojam oil refinery in Kingston.
finces are adjusted weekly to ensure that local prices are consistent with prices in the international oil market
Read more: http://www.jamaicaobserver.com/colum...#ixzz1pClYw6yA
On March 5, in answers to questions posed in the House, Minister Paulwell informed us that Petrojam's ex-refinery prices are adjusted weekly to ensure that local prices are consistent with prices in the international oil market.
The main input to the ex-refinery pricing formula is the US Gulf Coast (USGC) reference price for the product such as gasolene.
We were further told that the USGC reference price represents the cost of the product in the largest geographical market of relevance to trade in the Caribbean/Central American/South American area.
When Minister Paulwell answered questions posed to him by Gregory Mair on February 7, the minister gave the various components which made up the pump price. US Gulf reference price 61 per cent, taxes 26 per cent, retailers' margin nine per cent, and other costs four per cent.
I am putting it to the minister and the Opposition spokesman that they are both playing with us. Certainly they would have long known of the 2009 audit and the key recommendations in it. Why use such a high-powered entity to complete a special audit and then seemingly reject the very recommendations from the audit?
The Operations Audit, which has been in the public domain for some time now, has not attracted the level of attention that was warranted, and media comments on key aspects of it, if not already covered, needs to be revisited.
Under the heading, Existing Supply Arrangements Observations, the following is stated, "Since the natural supplier of crude and products to Jamaica is the Caribbean region, the use of Caribbean cargo prices as the reference price should be considered. There are many arguments put forward against this, including the one that there is a ministerial directive of 1988 to base the reference price on US Gulf Coast postings. However, changing over to Caribbean cargo prices would reduce the price of petroleum products to Jamaican consumers. Fuel oil prices in Jamaica would decrease significantly, which would result in lowered electricity prices."
Let me repeat a part of that, "Fuel oil prices in Jamaica would decrease significantly, which would result in lowered electricity prices".
Under Pricing Mechanism Observations, the audit states, "Although petroleum product prices are deregulated in Jamaica, ex-refinery prices continue to be fixed based on import parity prices. The current pricing mechanism is being administered by Petrojam. Being one of the market participants, it is not proper for them to carry out this activity without adequate oversight. The function of administering the pricing formula could be assigned to the Office of Utilities Regulation working in collaboration with the recommended Sector Regulator to be appointed.
The audit consistently reminds us that Jamaica purchases its oil from Trinidad and Venezuela.
It states, "Caribbean cargo prices are consistently lower compared to USGC postings, especially for fuel oil which is consumed by power companies and many industrial plants. Switching to Caribbean cargo prices as the reference price would reduce the price of petroleum products to consumers in Jamaica. This would impact significantly in power generation costs, leading to lower electricity tariffs due to cheaper fuel oil. Lower electricity prices would benefit all sectors of the economy and make industries more competitive.
A scandalous state of affairs
A theme which runs throughout the audit is the changing of the pricing mechanism from USGC to Caribbean cargo pricing, lower prices at the pump and, more significantly, lower light bills.
Successive administrations, including the newly elected PNP Government, have been beating up on JPS and using the company as a political football when it is plain from a reading of the audit report that Government has deliberately stuck to using the USGC pricing to keep the prices of gasoline and light bills artificially high so that it can extract the maximum taxes from the people.
This is nothing short of scandalous!
My taxi driver friends have always complained to me that whenever the price of oil on the world market jumps, the prices at the pumps make a similar leap, but when world prices fall significantly, it is a crawl to reduce the price of gas at the pumps.
I always tried to explain to them (having faith in Petrojam) that the pricing mechanism works. Well, was I ever wrong.
Here is what the audit states, "One important issue for the Government to resolve is the market price adjustment mechanism which Petrojam is following virtually without oversight. As noted earlier, it seems that Petrojam is not giving much relief to consumers when world oil prices are rising rapidly; while it seems to be using the mechanism to make significant profit when world oil prices slump by passing only marginal decreases in ex-refinery prices to the consumer, thus using the mechanism to its advantage.
Hmm... it seems my taxi driver friends, many with only primary school education, could have assisted in that section of the audit.
It goes further, "It is noted that the price smoothening mechanism Petrojam is following is not in compliance with the official pricing policy which calls for a full pass-through by Petrojam of the import parity price using the US Gulf Coast price as the benchmark. Petrojam points out that it is following the market price smoothening mechanism to avoid gas riots that had happened in the past. If the local market price smoothening is a social objective of GOJ, it should be administered by an independent sector regulator using a social protection fund or some other mechanism with the help of the Office of Utilities Regulation".
While the operational audit covers all areas of Petrojam's operation, to me the most important aspects of it are where it relates to prices of gas at the pumps and light bills.
Crude oil is always unitised in barrels. For the benefit of the reader, a barrel of oil is 42 gallons. After the complex process of refining, one ends up with about 19 gallons of gasolene, nine gallons of fuel oil, four gallons of jet fuel, and 11 gallons of other products, including lubricants, kerosene, asphalt, and petrochemical feed stocks to make plastics.
It is the fuel oil that is sold to JPS for use in its electricity generation machinery. Based on the audit, should Petrojam decide to switch to Caribbean pricing (it purchases from the Caribbean region anyway) most of those products, including fuel oil, would be reduced in price and we would see an automatic reduction in our JPS bills, even though JPS would still be operating with the same profit margin.
The audit states, "The current pricing formula does not give the least economic cost of petroleum as many of the components that are in the formula are unrealistic and inflated to the benefit of Petrojam. Petrojam reaps revenue generated through the current pricing formula. The other marketing companies also reap benefits by following the market leader without passing on any price advantage they enjoy on their imports."
It then concludes from that section: "Due to this, the benefits of market liberalisation have not reached the consumer."
Why was the switch made to US Gulf Reference prices?
The petroleum market in Jamaica was deregulated in 1993, but as stated in the 2009 Operational audit, "the benefits of market liberalisation have not reached the consumer".
The current Government needs to fully explain this, as the hypocrisy of the previous Government on this matter cannot now be explored.
Prior to liberalisation, the JLP minister in charge, Hugh Hart, wrote to the chairman of Petroleum Corporation of Jamaica re: a ministerial directive on pricing.
The August 1988 letter opens with, "In keeping with Government's policy that Petrojam must be the least-cost option for the supply of petroleum to Jamaica, I directed that an evaluation of Petrojam's ex-refinery prices be carried out on a continuing basis. Recently, my ministry, in consultation with the PCJ, completed a historical analysis of current prices on the basis of which a change in Petrojam's reference price from Caribbean Parity to the mean of US Gulf Prices is recommended as being more consistent with Government's policy as stated above.
Now, if the previous and the present political administrations were truly representative of the people of this country, certainly they would have long reviewed Petrojam's pricing mechanism and conclude that the least-cost option was to the benefit of the consuming public.
In 1988, before liberalisation, the consumer benefited when the switch was made from Caribbean parity to USGR prices. The 2009 audit revealed that the least-cost option is to switch back to Caribbean pricing. That, of course, assumes that the Government is in the business of listening to good sense.
Certainly, if we were to bring about a lowering of JPS bills to commercial and industrial interests, even those in Government with severely deficient IQs would see that such a decrease would trigger an expansion of the economic and productive base of the country. Employment would increase.
But Jamaican political administrations have been unable to see beyond anything that exists outside of a five-year rotation and election exercise.
It is my understanding that the Government and those at Petrojam are not too interested in having any open debate on this matter. One official who did not want his name used said, "The Government needs the money. It is thought that it would be more difficult to lower the pricing and tax it at the back end".
Another said that in the IMF agreement, there are many conditions that the public is never made aware of. He said that as a result of the IMF agreement, certain sub-sectors, like the petroleum industry, are targeted and the revenue streams of those sub-sectors must be maintained.
In other words, the Government of Jamaica is not in charge, it is the IMF!
Petrojam is thought of as a cash cow, and cows are to be milked. Unfortunately, all the people of this country tend to end up with in that approach is a sour stomach.
Breaking the colour barrier in banks
In 1969, black faces in companies like banks, insurance companies and other large organisations which employed accountants, supervisors and other key management personnel, tended to have a much lower percentage than what was represented in the population.
Many of these companies preferred light-skinned employees, especially those at the front desk. All ancillary staff, that is, kitchen, clean up and security, were black people.
I came at a time when the change was already made, but it rapidly accelerated in the 1970's under Michael Manley, even as he allowed his irresponsible, personal politics to bring about a near ruination of the economy by the end of the decade.
Many in the population have absolutely no idea of what it was like back in the days when the 'system' was geared towards maintaining the status quo.
In Anthony Johnson's excellent book, Kingston College, founded 1925, under the sub heading 'Race Prejudice' he captures the stirrings inherent in the building of a nation and the contribution made to it by that giant of a man, the late Percival Gibson, simply "Priest" to KC old boys who knew him. I had the privilege of being lectured ("Priest" was beyond a teacher) by him once or maybe twice in the 1960's. History, I think it was.
Physically, Bishop Gibson was a small-framed, short man, but the influence he wielded nationally and in the school he founded was simply awesome.
To quote the section of the book, "The headmaster was ahead of his time in publicly denouncing racial prejudice in an age when it was impolite to discuss the subject of race. Billy Hall remembers him lecturing: 'Black boys will have to work harder than the others, because the white boys will go into their father's business, but you will have to struggle to get one.' He was, of course, making reference to finding a job.
"The story of how Gibson (PWG) got the first black boy to be employed in a clerical position in a commercial bank is instructive. Gordon Wells (1944-1949) remembers the priest informing a group of sixth formers that he had received a request from Barclays Bank for a clerk, and wished to know if any of them was interested. All the fair-skinned boys raised their hands.
PWG: "McFarlane, you said you wanted a job. Why didn't you raise your hand?"
Roy McFarlane: "You said a bank, sir, and they don't employ black boys like me.
PWG: "Nonsense! If you are interested, come for a letter and go to the manager."
The next day McFarlane reported to the headmaster.
McFarlane: "They didn't need me, sir, but they sent me to Seprod, where they take me. I am waiting for a decision."
PWG: I did not send you to Seprod, I sent you to Barclays Bank. Now go back to the manager and tell him that I expect you to be employed, or he will hear about it from the pulpit of St George's Church on Sunday night.
Roy McFarlane was hired.
The sixth formers were ecstatic as McFarlane broke through the glass barrier which had prevented any person of colour from gaining other than a menial job at the banks in Jamaica. Eldon Forrest (1944-1952) relates that Edna Ffrench was the first black girl hired. Don Banks of Wolmer's was the third, and Forrest himself was the fourth (he, too, was sent by PWG).
We need to have an appreciation for where we once were, and more importantly we need to use that knowledge to better appreciate our present while steering us towards a better future.
observemark@gmail.com
Read more: http://www.jamaicaobserver.com/colum...#ixzz1pCkolFyi
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