Response to Letter to Editor”Address Gas Prices, Mullings” July 27, 2011
Sent by: K.E Samuda
With reference to the above-captioned published in the Gleaner on Wednesday, July 27, although the questions were asked of the Minister of Mining and Energy, Hon. Clive Mullings, we are pleased to provide the responses below, as the issues relate to the operations of Petrojam.
Rationale for Weekly Change in Gas PricesOil is an internationally traded commodity. The price of oil is assessed and published daily by reputable price reporting services such as Platts, a McGraw-Hill Company. The US Gulf Coast (USGC) prices form the basis of Petrojam’s ex-refinery prices. The US Gulf Coast is an appropriate pricing reference for Jamaica for several reasons including transparency & liquidity of the market. Mexico, Venezuela and Trinidad, Petrojam’s trading partners, also use the USGC prices to determine the value of their products.
It is true that in some countries, prices are announced monthly; but there are also countries such as the United States that announce price changes daily. However, many countries also use the pricing model employed at Petrojam, where prices are calculated using a historical average of prices of the previous week. This practice is based on the fact that weekly price changes reasonably reflect current price levels. It is critical for the re-pricing period to be sufficiently short to keep pace with market movements. Monthly price changes could result in domestic prices that do not reflect the reality of the market within which Petrojam competes. Moreover, unless stability returns to the oil market; with annual price changes not exceeding $5 per annum, then holding prices for longer periods, for example one month, would be ill-advised and would not benefit consumers. In brief, consumers would be asked to pay the same prices throughout a month, even when prices may have fallen substantially during that same month. Petrojam would not seek to impose such a model on consumers. It must be emphasized that there are two large international suppliers of petroleum products within the local market. Petrojam would not have been able to compete with these entities if its prices were unreasonable or did not reflect movement in prices in the international market.
Is Crude Oil purchased weekly?The mean-time between crude oil cargo arrivals is approximately 14 days. Petrojam purchases crude oil and finished petroleum products in cargo sizes that are appropriate to economic shipment sizes, demand patterns, dock & terminal capacity, and physical storage capacity. This allows us to benefit from lowest possible freight rates . Petrojam’s Holding CapacityIn addition to dedicated storage for finished products, Petrojam has a gross crude oil capacity of 850,000 barrels. This represents 24 days of supply.
Petrojam’s Ex-Refinery Pricing PolicyPetrojam’s Ex-Refinery Pricing Policy follows the principle of Import Parity. The Import Parity Pricing method establishes the market-based cost of the product and ensures that it does not exceed the cost of importing the product. This means that a product such as gasoline is priced at no more than it would cost to import it; that is at the fair market value. It should also be noted that Petrojam does not always refine the finished products that are sold; as the company sometimes finds it necessary to import these.
Correlation of ex-Refinery and World PricesThe writer refers to a recent Petrojam statement regarding the relationship between Petrojam Ltd’s prices and the price of crude oil, as reported by CNN. It is important to note that Petrojam’s Ex-Refinery prices are not solely based on world crude oil prices. Our prices are based off the US Gulf Coast Reference prices, which report on the prices of finished products – not crude; as it is finished products that Petrojam delivers to the local market, which is deregulated and, as stated prior, has other suppliers of finished petroleum products. It is therefore this correlation – between Petrojam’s Ex-Refinery Gasoline and the USGC Gasoline prices – that consumers should seek to monitor. This currently shows a strong, positive 97% correlation; which means that almost all the variations in Petrojam’s Ex-refinery gasoline prices are explained by changes in the underlying USGC reference prices for gasoline. We again emphasize that the USGC reference prices are the prices used by the overwhelming majority of the refineries within the region. They reflect the prices within the international market, which directly impacts the operations of Petrojam and the prices at which its products can be reasonably sold in a competitive marketplace. We sincerely hope that we brought clarity to the questions raised.
Thank you.Petrojam Limited