Is Petrojam being disingenuous?

By Dashan Hendricks

The argument over the pricing of fuel in the Jamaican market exploded last week with the Private Sector Organization of Jamaica (PSOJ) publishing a study in which it shows that, by its calculation, Petrojam is not passing on the full impact of the decline in fuel prices, whereas it does so when prices rise.

The PSOJ did so by showing that when the price of oil rose by 10.8% during the six months, January to June, the U.S. Gulf Coast prices for refined fuel, which Petrojam uses as a benchmark, declined 11.8%. At the same time, Petrojam increased its fuel prices by an average of 10%. These movements affect consumers at the pumps and there, the PSOJ says, its research showed prices rose 8.7%.

The PSOJ also shows that, when oil prices fell 28.5% from June to November, the U.S. Gulf Coast prices for refined fuel fell 30.5%. At the same time, Petrojam reduced its prices by only 12%. At the pumps, consumers saw a reduction of 8.5%.

The PSOJ then drew the conclusion that when the U.S. Gulf Reference prices for refined fuel rose, Petrojam increased its prices almost in line with the increase in its reference prices. But when the U.S. Gulf Coast prices fell, the decline from Petrojam was less than half that of its reference price.

Before we analyse the issue, consider this: Petrojam has always stressed that it does not arrive at its fuel prices by simply putting a margin on the cost of its crude oil to account for production costs. It has always maintained that it uses the U.S. Gulf Coast prices as a reference to price its products, after accounting for the movement in the exchange rate. In fact, its weekly published fuel price announcement is accompanied by that statement.

So what is the problem here?

Petrojam has disputed the PSOJ's findings and I will look at them one by one.

First, the refinery, in response, said the PSOJ news release "consistently linked movements in Petrojam's ex-refinery prices for gasoline to the West Texas Intermediate reference prices for crude"...adding that it "is not in the business of selling crude" so the comparison is erroneous.

As pointed out above though, it is clear that the PSOJ DID compare Petrojam's price movements to that of its reference prices. A fact clearly ignored by Petrojam in its response, which begs the question: Why was it ignored?

Second, Petrojam pointed to differences between the movements for prices quoted for crude oil and that of finished products, such as gasoline or diesel. That fact is not in dispute. The daily quoted prices for crude are for oil to be delivered at a future date, usually a month away. With that, it means that the changes in prices for crude should not reach the market until about 6 to 8 weeks after. Many consumers will however be hard pressed to be convinced that this is so, especially when they see the prices of crude rise and almost immediately, pump prices rise.

The delays always however seem to apply when prices fall. I have not done any research to verify if that is the case, but one thing is for sure; in the long run, the prices of finished products tend to follow the price of crude. That much is clear from any analysis, including that done by the PSOJ, as quoted above.

What seems rather curious and was never publicly stated in all my years in media, is a comparison of our prices to what obtains in Miami. I have interviewed the Managing Director of the Petroleum Corporation of Jamaica (PCJ) Winston Watson, both on the phone and on camera many times about the reference prices for locally distributed fuel and I have never heard him mention that to me.

What was always consistently mentioned when I asked about the mark-up that is applied to arrive at its ex-refinery prices, was that there is no mark-up. I was always told that the prices are based purely on what the price of the same product is in the U.S. Gulf with adjustments made for the value of the Jamaican dollar as already stated above. To try to tell consumers to consider prices in Miami and imply transportation costs and the like, would seem to suggest a cost plus whatever approach Petrojam uses, which it says, it doesn't. To me, that smacks of being disingenous. That especially when a publicly owned company has even side stepped the laws of the country by not providing information to the public when it was requested under the Access to Information Act, on how it prices its products. In my eyes, the reason the refinery gave, citing that it does not want to let in its competitors on its pricing methodology, at best was an insult to the intelligence of the Jamaican people.

Petrojam then went on to do what I would call nit-picking. It pointed out that the PSOJ research showed its prices moved up by 10% from  January to June, when its prices in fact moved up by 12%. I realised immediately, on reading the PSOJ report, that it was a bit off, due to the differences in dates used. The PSOJ used the prices for fuel on January 2, 2014 to compare to the last prices in June (June 26, 2014). The PSOJ should have used prices for petrol at the end of December 2013. The differences in dates used account for the differences in movements.

The PSOJ was also wrong in its calculations for the movement of Petrojam prices from  June to November. It said Petrojam cut its prices by 12%. Petrojam pointed out is that its prices fell 16% in that period. I can find no reason to explain for that discrepancy. I used different dates to do the calculation but still did not get the answer the PSOJ did.

Still, the PSOJ's point holds. Curiously, Petrojam, in its response, did not address the assertion that it did not pass on the full impact of the reduction in fuel prices using its own reference prices, the U.S. Gulf Coast prices for finished products.

The PSOJ said U.S. Gulf Reference prices fell 30.5%, but Petrojam said it cut its prices by only 16%. At the same time, when the Gulf Reference prices rose 11.8%, Petrojam hiked its prices by 12%. The argument is, why do prices move in tandem with increases, but not so when there are declines? Clouding the issue by referring to prices in Miami, when we do not index prices to that of fuel sold in Miami, is not only a means of side stepping the issues raised, but is a clear case of the refinery being disingenuous with the public. All that can be cleared up by simply being transparent and consistent.