THE PRICE AT THE PUMP

Jan 22, 2015 Features / Columnists, Peeping Tom

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How is it that oil prices declined by more than half over the past six months and yet the prices that Guyanese consumers were being asked to pay at the pumps remained relatively unchanged?
This is what most motorists in Guyana were wondering. They were reading that oil prices were declining rapidly but yet seeing no change in the price of petrol at the petrol stations.
Even after the government announced that the Guyana Oil Company was going to reduce prices by some 30%, some motorists could not understand why it was not higher considering that oil prices had more than halved what they were last June.
The reasons why the decline in the price of petrol at the pumps did not correspond to the decline in global oil prices revolve around a number of factors, both international and local.
Firstly, it is a myth that a decline in oil prices should lead to a corresponding decline in prices for petroleum. The prices given for oil are the prices for crude oil. This crude oil has to be refined to be converted to petrol which is used, for example, in motor vehicles.
This petrol is produced by the refineries and they have always argued that the full extent of oil prices reduction cannot be reflected in the price of petrol because of the costs of the technological process required to convert oil to petrol. In other words, the fact that oil prices decline by 50% does not mean that the cost of production at the refinery is going to be reduced by that corresponding figure. Prices for petrol can also remain high, even in the face of declining oil prices, if demand for petrol is high or increasing.
Ever since oil prices began its free fall, the prices at the pump in the United States have been coming down but this decline has not corresponded with the decline in oil prices.
Another reason for this happening is that it takes time for the refineries to reduce their prices and to pass these on to the consumer.
Secondly, the price paid at the petrol station is not just a function of the international prices for petrol. There is the issue of taxes. In Guyana when the oil prices began to rise, petrol prices followed. In order to cushion the effects, the government slashed the excise taxes payable on petrol. This helped keep prices down. If consumers had to bear the full extent of the taxes it would have had graver effects for transportation and the economy as whole.
Now that prices are coming down, it is only fair that the government restore some of the taxes that had been forgone previously since it was effectively subsidizing the price at the pump when prices were high.
But declining prices have equally presented a problem for the government. Over the past two years, revenues from petroleum imports have nearly doubled. With government spending being premised on certain assumed prices for petroleum and with these prices declining there will be savings on the foreign exchange side (assuming demand remains the same) but there are serious implications for the more then twelve billion dollars that the government collects each year from petroleum imports.
This is why the government was very guarded in how it approached the issue. It has however now decided to allow GUYOIL to slash its prices by close to 30%. This is likely to be achieved in part by reducing the import taxes on petrol.
But the downside to this is that there will be less money coming in for the government to spend.
The government has probably decided that it can live with a tradeoff between the foreign exchange savings and the reduced revenues. And so the prices for gasoline and diesel at the pump for at least for one company have been slashed by 30%, a move that will find popular support amongst the population.
The caution that the government exercised is not misplaced. There is a strong view out there that this decline in oil prices will not last for more than a year. It is felt that some members of OPEC, particularly Saudi Arabia which could have cut production to prevent oil prices from freefalling did not do so because it wanted to preserve its market share.
When this objective is formalized it is felt in some quarters that the Saudis will then slash production and force oil prices to be restored to their June 2014 levels.
There is as second viewpoint that argues that shale production in the US helped contribute to this freefall and that certain members of OPEC are encouraging the free fall of oil prices so as to discourage further investment in shale technologies and production.
If oil prices fall, it will act as a disincentive for investors to pump money into shale production. It is felt that certain members of OPEC are prepared to take short term losses for long term gain.
There is no guarantee that oil prices will remain low. So full your tanks at the low prices soon to be offered and thank Uncle Ashni. The reduced price could well evaporate within a year.

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