CURRENT FUEL PRICING SYSTEM IN SAINT LUCIA

I wish to add my voice to the ongoing discussion about fuel prices in Saint Lucia. The problem is fundamentally the period of time that government is using as the basis for its “proxy” CIF price, i.e. twelve weeks over which there is likely to be considerable variation in fuel prices and hence an average will not do proper justice to real developments in world markets.

The policy of government with regards to fuel prices does not help the people of St. Lucia and the economy as it currently stands. There are several problems with the policy. First, it is creating artificially high prices for fuel causing Saint Lucians to channel into a resource significant amounts of cash that could have been utilized to finance other operations. Second, it is causing the cost of production of all goods and most services in the economy to be higher than necessary. This in turn is causing reduction in competitiveness of Saint Lucian-produced goods. Third, it is effectively creating a stranglehold on the economy by depriving citizens of the opportunity for economic growth in other sectors that could be created by savings in the fuel cost.

It is important to first understand what an average is. Average, as used by government, is the mean of several numbers. It is arrived at by adding several numbers then doing a simple division by the number of numbers added. This kind of average is only good when the various numbers being considered are reasonably similar in magnitude. However, when there has been considerable variation in the magnitude of the numbers then an average can be deceptive. To put this in context, it is possible for a man six feet tall to drown in a swimming pool of average depth two feet. The reason is that while average paints one picture of the pool depth, it does not tell us that there might be sectors of the pool that are significantly deeper than others. The fuel pass through mechanism is only useful if we are averaging prices over an interval in which there has not been too much variation.

So for instance, we expect prices to be relatively stable over a short interval like one week or perhaps a few weeks. But from experience and for a variety of reasons, prices are never stable over a long interval of many weeks. Therefore, in order that the benefits of lower oil prices in the international markets reach the people of Saint Lucia in a timely manner, government has to reduce the time interval over which the average is calculated to come up with a proxy CIF price.

As it now stands, we have two petroleum importers: Rubis and Sol. Each importer uses its contacts to source fuel on the world market and pays a certain price. Government sets its proxy CIF price based on a historical twelve week period and importers are forced to use that price until the twelve week period concludes. At the end of the twelve week period if the actual CIF price paid by importers was lower than the government set proxy CIF price, then the importers have to remit the difference to government. If the government set proxy CIF is below the price set by importers then government has to remit the difference to importers.

The problem is that when the government set proxy CIF is too high the savings that should be going to producers and consumers are appropriated by importers for three months. Hence, importers have three months to invest the surplus revenue as they wish and only after the three months are up do they remit the principal amount to government. In the scheme of things we are looking at more than $10 million dollars being misallocated as a result of the current policy. According to my own research we import approximately 1.9 million gallons of gasoline and diesel per month. With the government set proxy CIF at $8.66, given that importers can source fuel for a price in the range of $6 to $7 per gallon, the deadweight loss to the economy is approximately $3.5 to $4 million per month.

Now let us put this in context. Take a minibus driver who consumes 15 gallons per day to fill up. If the price is properly aligned to world prices he can save about $30 – $40 per day on fuel alone. This translates to greater ability to buy food and clothing for his children, pay for their education and his utility bills. The same applies for a fisherman or farmer.

Confidential data received from one importer shows an import price in December 2014 of $6.50 per gallon. Government has recently set its proxy CIF price at $8.66 per gallon. If we used the December price at $6.50 per gallon, the price of a gallon of unleaded fuel in January should have been $11.81.

Currently, the retail prices for unleaded fuel in some neighboring countries are as follows: Dominica $11.42, Grenada $12.63; St. Kitts $10.75; St. Vincent $12.72; and Saint Lucia $13.65. But given Saint Lucia’s larger economic size and consumption of fuel it follows that the least cost of fuel should be in Saint Lucia and not any of these other islands.

This policy is clearly doing significant injury to the people of Saint Lucia and there is no logical reason why it should be continued for twelve weeks. I call upon the Prime Minister to urgently review the policy in place so that ordinary Saint Lucians will benefit from lower fuel prices to the extent that we should.

Since this is an issue of national interest, I would be happy to avail my services to the government if needed.