Fuel prices in Guyana vulnerable to external forces
A GINA Feature
By Lloyda Nicholas
Georgetown , GINA Monday, 25 October 2004
At the end of last year fuel prices were US$37 per barrel. Today fuel prices have jumped to as high as US$54 per barrel. Poor and developing countries have been gripped in the whirlwind of spiralling oil prices.
After meeting with major stakeholders in Guyana’s production sector, President Bharrat Jagdeo ordered the reduction of the consumption tax on diesel from 35 percent to 10 percent to bring immediate relief to the affected sectors.
This relief follows a reduction of the consumption tax on gasoline and cooking gas and the removal of such tax from kerosene.
The manufacturing sector has welcomed this reduction. The Executive Director, Mr. Edward Shield of the Guyana Gold and Diamond Miners’ Association said that his sector welcomes the reduction in consumption tax for diesel, since they were operating at a loss and might have been forced to cease operations.
The point to note is that the Government of Guyana has put this reduction in place, even though it represents a loss of $500M per quarter in revenue to the Administration.
The Guyana Government is also continuing to pursue other avenues to bring more long term relief for Guyana.
These include the development of renewable energy sources such as hydropower and the Petro Caribe approach, which is to bring together the petroleum related assets and facilities of all the Caribbean countries, with some coordinated arrangements and operations to minimise the cost to persons using fuel in the Caribbean area.
According to Mr. Joseph O'Lall, Energy Coordinator of the Guyana Energy Agency, " Guyana is vulnerable to the vagaries of prices on the World Market. The prices at the pump have nothing to do with the Guyana Government". He pointed out that prices are fixed according to OPEC and market and political forces.
Some of the forces that are acting to push fuel prices up include the growth of China as a major manufacturing force in the world. Mr O'Lall noted that the consumption per capita of fuel in any country is a reflection of its standard of living.
He noted that continued economic growth in that country has caused a high demand for fuel and China is sucking up all the excess fuel on the world market.
The ongoing war in Iraq is another factor that is contributing to the fuel shortage. Production levels on the world market are suffering because this major oil source has been severely affected.
Continuing political tensions in oil rich Venezuela have played a role in increasing supply fears and driving up fuel prices. Industrial disputes in Norway and a general strike in Nigeria have also bolstered price gains.
Fears of limited supplies of winter fuel is another factor pushing fuel prices up. At the beginning of the fourth quarter, European distillate stocks stood at 3.4 percent below last year’s stock for the same period. Heating oil inventories and kerosene supplies are significantly lower than last year’s.
These factors have worked together to reduce the supply of fuel on the world market and push prices skyward.
This sustained rise in fuel prices has been a key factor in the performance of the global economy. A rise in fuel prices boosts the economy of oil producing countries but the effect on oil-dependent countries’ economies is always greater than the effect on oil producing countries.
According to the International Energy Agency Report (IEA) for May 2004, “the growth of the world economy has always fallen sharply in the wake of each major run up in oil prices”.
The economic impact of higher fuel prices on poor and indebted countries are extremely harsh. Guyana and other developing countries in Latin America and the Caribbean are dependent on imported oil to drive their economies.
A large share of these countries’ GDP is dependent on energy-intensive manufacturing. The sugar, rice and mining industries are examples of industries in Guyana that have a significant share of the country’s GDP.
This increases the oil intensity of the country along with the fact that in many developing countries, modern fuels are replacing traditional fuels in the household sectors and increased motorisation continues in the transportation sector.
The more oil dependent developing countries become, the stronger the effect on their economies.
Increased prices immediately push the oil import bill up and increase the demand for foreign exchange. The IEA report makes it clear that an increase in the oil-import bill tends to destabilise the trade balance and drive up inflation. The deterioration in developing countries terms of trade is often magnified by sharp currency depreciations and raises the cost of servicing external debt.
In these conditions, the investor environment weakens and inflation rises. Developing countries are made even more vulnerable because they lack the ability to switch to alternative fuel sources.
Industries within developing countries are particularly vulnerable. According to GEA figures, Guyana’s fuel bill to date is $74M. Projections for the year end figure are high when compared to last year’s total energy bill, which was $100.3M.
Guyana Power and Light is the largest energy consumer in the country and a fuel shortage or increase in prices significantly affects its operations. This company is facing an additional monthly cost of $260M.
The IEA report points out that Government policy cannot eliminate the adverse impact on the economy and industries.
It is a continuing challenge for developing countries to find alternative sources of energy so that they are less dependent on oil rich countries.
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