Zia Mian, Contributor

Mian

These are difficult times for oil-dependent economies. There is a significant market disconnect.

While the traditional oil supply/demand fundamentals are in the balance and stable, the market view remains volatile (mainly due to the weak United States dollar; recent financial crisis; bursting of the housing bubble and continued geopolitical concerns). The West Texas Intermediate (WTI) crude oil futures are trading close to US$130 per barrel on the NYMEX at the end of last month. Goldman Sachs predicts that the oil price is likely to surpass US$140 per barrel mark by the middle of this year. Other pundits believe this prediction to be conservative (usually self-fulfilling prophecies).

The current world demand is about 86 million barrels per day. Current supplies are adequate to meet this demand. Producers see no reason to increase the production. They are afraid that any increase in physical production might not find buyers. It is interesting to note that while WTI production is only about half a million barrels per day, on the commodity exchange its trading exceeds a billion barrels.

Obviously, the cash liquidity is finding a solace in the paper oil. Generally, the commodity prices have become highly volatile. It is a complex situation, which is likely to prevail until there are measures that address the underlying causes of the current financial crises and insecurity.

Transport sector demands

In Jamaica, in 2007, oil consumption by the transport sector was estimated at 5.2 million barrels of oil equivalent (about 29 per cent of primary energy consumption). The demand by this sector is increasing at 4.3 per cent per annum.

As automotive fuels represent the lighter cut of the crude oil barrel, they are more expensive. The cost of supplying the fuel demand of the transport sector is estimated at about 35 per cent of Jamaica's total oil import bill, which, in 2007, stood at over US$2 billion.

In the fiscal year 2006/2007, there were about 379,000 certified vehicles in Jamaica. If we assume an average efficiency of vehicles at about 7km per litre (20 miles per gallon), the average vehicle km per annum would be about 15.3 thousand, costing about US$0.13 cents/km (J$ 9/km) in foreign exchange for fuel alone.

Reduce reliance

The government must lead the way in more efficient use of motor vehicles. - File

In Jamaica, relatively large numbers of low-efficiency SUVs are a status symbol. The average vehicular occupancy is low. To improve the efficiency of the transport sector and reduce the cost of transport, Jamaicans would need to alter their lifestyle. The new status symbol would have to be hybrid, small vehicles.

There is a policy initiative to blend ethanol to reduce reliance on imported gasolene. It is worth noting that:

The blend of ethanol beyond 10-15 per cent requires flexi-vehicles to avoid damage to the fleet.

At present, ethanol is not an indigenously produced fuel. Jamaica imports hydrous ethanol and after removing water, it is re-exported to the US market under the CBI provisions (tax incentives). To benefit from the introduction of ethanol from imported feed-stock, there must be a cost advantage. The cost implications of imported ethanol must, therefore, be carefully evaluated.

The energy content of ethanol is only 66 per cent of the gasolene energy content. This has implications for higher levels of EB blends and cost of fuel.

Once domestic ethanol production capacity is built (its economics is subject to the international price of sugar) higher blends might reduce dependence on imported oil and save some foreign exchange.

Some believe that replacing gasolene with imported propane (cooking gas or LPG) might reduce the fuel cost of operating motor vehicles. Detailed analysis shows that the price differential in propane and gasolene is compensated by the lower energy content of propane, which delivers only 74 per cent of the energy content as compared to gasolene.

Considering the conversion costs and current relative prices of gasolene and LPG in Jamaica, there are no cost advantages. To introduce LPG as auto fuel, the Government would have to forgo tax that it collects on gasolene. If and when natural gas is introduced in Jamaica, compressed natural gas would be an excellent and attractive alternative to reduce the cost of auto fuels.

Policy considerations

The policy considerations for the transport sector require an integrated and comprehensive approach which, among others, must include:

A comprehensive road maintenance programme.

Traffic management and consideration to flexi working hours, as well as an alternate work week (working for nine days in two weeks through increased daily working hours).

Improving the efficiency of public transport and introducing a comprehensive school-bussing system.

Evaluating options for a comprehensive urban transport system.

Increasing reliance on non-motorised transport.

Implementing appropriate fiscal incentives and measures to discourage the import of inefficient vehicles. The taxes should be directly related to the fuel efficiency of the vehicles rather the engine rating alone.

The Government must launch an education programme to ensure that public makes informed decisions regarding the purchase and operations of motor vehicles.

Zia Mian, a retired senior World Bank official, is an international consultant on information technology and energy. Email mian_zia@hotmail.com or columns@gleanerjm.com.