The recent budget has introduced the liberalisation of the petroleum fuel industry locally and will allow the myriad owners of gas stations to fix their own margins according, hopefully, to market competition.
The concern, of course, will be what is the wholesale price, and this appears to be related directly to the global market prices of the products. Also, there is a complaint that our price of electricity is highly subsidised, which also causes waste of electricity, hence waste of natural gas that is now in short supply; the basic input into our Pt Lisas petrochemical plants.
Still, we ignore that the major part of our natural gas production goes to LNG and, further, that the upstream price of gas is now globally uncompetitive, given shale gas, etc, forcing our petrochemical producers into the role of swing producers.
However, it is enlightening to look at our petroleum industry with no preconceived notions about, for example, how cheap local products may or may not be compared with world prices. Traditionally the petroleum resource is considered as the national patrimony; indeed, since January 1902, the State reserved all subsurface rights—the subsurface mineral rights of State and private lands and marine areas are vested in the State. Thus, each and every one of us collectively owns the resource, the petroleum asset.
However, we, according to personal requirements, need some products from this resource for consumption locally and, very importantly, T&T needs to sell part of this resource and its products on the world market to earn our lifeblood—foreign exchange.
Government receives payment for the use of this resource on our behalf. Though we talk about diversification, the desire to get the onshore sector to become major exporters, today the energy sector is still the major foreign exchange earner. These then provide a complex scenario in which local prices and the proportion of the resource dedicated to local consumption (and which will not earn foreign exchange directly) have to be astutely managed.
Consider the trivial example in which I own several mango trees. Then the cost of a mango for my use is what I pay someone to pick the mangoes, and not the price at which these fruits are sold in the market. Similarly, the price of petroleum products we use locally should reflect directly the price to produce the product locally (not including the intrinsic value of the asset), and surely not the world market price. The point here is that in a country like T&T that has an oil resource, the price of gasoline should be lower than, say, that in Jamaica that does not produce oil.
To take this analogy a bit further; if I had more mangoes than I require for my consumption, then I could sell the excess in the market and make money. I could even have a production-sharing contract with the harvester and pay for his services in mangoes. Hence the view that we may be subsidising local fuel prices compared with world market prices is unfounded, since we own the patrimony—vested in the State. This trivial example is close to reality when we operated a local refinery and produced fuels from our own resource.
Let us complicate this a bit further in which we export the oil we produce and import fuels, both at world prices. By simple arithmetic which considers that we earn world price for our exports, the local price of fuels cannot be the global market price; instead it should be the cost to produce/manufacture the fuel, in part externally. This assumes that we export more oil than is required to provide fuel for the local market.
A similar argument can be made for natural gas that we require for the production of electricity and which we also “export” as LNG and to the petrochemical plants. Hence the apparent low cost of electricity locally compared with what happens elsewhere is an irrelevant observation since we should only be concerned with the production costs of gas and, in turn, electricity. Indeed T&TEC may not be recouping its production costs, but that is a problem for the RIC and our decision makers.
Let us complicate this a bit further and consider that we need to export part of our petroleum resource to earn foreign exchange so that we can import the necessities and others, much of which we cannot produce for ourselves. Hence, in the strategic management of the use of our petroleum patrimony, decisions have to be made as to the optimum use locally of our production of oil and gas. For example, world data may show that at local prices of electricity we are way above global usage norms adjusted for price. Then, there may indeed be wastage, if curtailed could result in increased exports and the earning of foreign exchange. The same could be done for transport fuels and decisions made as to what kind of transport sector we require—one in which everyone has a car??
Hence by taxation, fiscal means, local consumption can be modified in an attempt to optimise the mix between resource used locally and that for export.
To further complicate the decision-making process, some of the local use of our patrimony may be as inputs onshore into export production. Since in most cases we will be price takers for our exports, as long as we can turn a profit as we earn foreign exchange, locally-determined prices of our petroleum inputs do not matter, especially since they should be below world market prices.
In conclusion, prices of locally used petroleum products should not be benchmarked against world market prices. However, optimum use of the petroleum resource can be attained by fiscal measures and now via the use of the emerging technologies of renewables.