Global Trading in oil is facilitated by two main factors: the ease in moving oil in petroleum tankers across oceans; and shortages or imbalances in the supply or demand for crude oil in any region in the world.
Any shortage in the supply of crude oil, in a major supply country results in increased prices on the world market. This is because the market immediately moves to balance by seeking supplies from other sources until supply and demand are again in equilibrium and prices stabilize.
Similarly, if there is a surplus in one region, the price tends to fall. As a result, the price at which crude oil trades at any given time tends to be similar worldwide. The global nature of the market also explains why significant geo-political events anywhere in the world affect oil prices in every market.
Crude Oil and Its Effect on the Price of Fuels
Crude oil is the raw material used in the manufacture of refined petroleum fuels. The price of crude oil sets the general price level and an increase or decrease in the market price of crude oil is reflected in the refiner’s output cost for converting crude oil into refined products. Such products include gasoline, jet fuel and diesel oil. Refiners sell refined or finished products to marketers and distributors, who in turn add their margins and pass on the price to consumers.
There are several grades and types of crude oils available on the world market; and therefore when prices are quoted for a particular grade, such as West Texas Intermediate (WTI) or Light Sweet Crude, they serve only as an indicator of market prices rather than the price of a specific crude type. The grade or type of crude oil used in production is determined by the Refinery’s production capability.
Determination of Product Prices
Petrojam delivers Petroleum products; not crude, to the domestic market. It is important for persons to make this distinction; since very often, movement in crude oil prices are misinterpreted as product price movements.
Crude and Product Price Benchmarks
Jamaica’s petroleum product prices are indexed to the US Gulf Coast Reference Prices, which report on the prices of finished products. The USGC is an appropriate pricing reference 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 petroleum products. Petrojam purchases crude oil according to a price formula, based on several benchmarks, which links the price paid for a cargo of crude oil to a market (spot) price.
Petroleum Product Pricing in Jamaica
Petrojam’s ex-refinery pricing arrangement is in keeping with the Government of Jamaica’s policy that Petrojam must be the least cost option for the supply of petroleum and petroleum products to Jamaica on a sustained basis. A key element of this policy is that whenever price changes occur in the international market, they should be reflected in local prices. Similarly, changes up or down in GOJ taxes and in the exchange rate also take effect immediately.
Prices are determined based on the Ex-Refinery Price Formula, which is the wholesale price at which fuels for the transportation sector, such as gasoline and automotive diesel oil as well as Liquid Petroleum Gas (Cooking Gas) and are sold to the distributive trade.
Ex-Refinery Pricing Formula
The Ex-Refinery Pricing formula is based on the principle of import parity, to establish the least cost of supply and represents the opportunity cost of importing products directly in the volumes and grades needed. These product prices published by Petrojam are independent of Petrojam’s production costs. They are therefore not –“Cost-Plus.” Parity prices reflect logical Jamaica market prices for the products.
This methodology ensures transparency in domestic pricing. To be profitable, the refinery output must be competitive with other import options.
It should be noted that Petrojam does not always refine the finished products that are sold as the company sometimes finds it necessary to import these.
Calculated weekly, ex-refinery product prices for the domestic market are:
- Indexed to the US Gulf Reference price for the comparable product plus cost adjustments
- Competitively priced
- Structured to be transparent
- Market driven
- The starting point is the US Gulf Coast (USGC) Reference price published for each product
- The ex-refinery price is determined by adding certain logistic costs, financing costs, Foreign Exchange costs and GOJ taxes to the Reference Price.
- Such elements include freight and insurance costs, ocean loss and terminal fees among others. This is then converted to Jamaican Dollars to establish the price per litre.
The pricing formula ensures transparency and that competitive prices are always a feature of the Jamaican market.
Petrojam Limited remains true to its mission “to supply petroleum products at internationally competitive prices and quality, acting in the best interest of Jamaica and all other stakeholders.”