Price controls may affect oil supply

One of Cayman’s two major petrol distributors said Friday that price controls, as recently proposed by the government, are not sustainable in the long run and could end up affecting service, supply and reliability at retail gas stations.

‘Government’s attempt to limit profit margins may limit Esso’s availability to make necessary investments and could be detrimental for the country dealers and ultimately consumers,’ Esso Standard Oil Ltd. Country Manager Alan Neesome said.

‘Many people assume wholesale or retail regulations protect consumers from higher prices,’ Mr. Neesome added. ‘More often, however, such market distortions undermine service, supply and reliability by encouraging gasoline consumption and discouraging investment. Moreover the government, through a regulation, will not prevent international price variations from influencing or impacting local prices.’

Leader of Government Business Kurt Tibbetts announced Thursday that Cabinet would be reviewing a form of price control regulation on the local petrol supply shipped to the Cayman Islands by oil distributors.

The regulations, if approved, will give the country’s Chief Petroleum Inspector Gary McTaggart the ability to review price increases by the country’s two oil distributors and either approve, deny, delay or change those measures.

Oil distributors would be able to appeal any decisions by Mr. McTaggart’s office through the Cabinet.

Mr. Tibbetts said the proposal would not affect the local ‘mark up’ at gas stations; that’s the difference between what those outlets pay for supply and what they charge consumers at the pump. However, government ministers do believe the regulations will allow the petroleum inspectorate to keep better records of those ‘mark ups.’

Wholesale oil prices are generally considered proprietary information, but Mr. Neesome and Mr. McTaggart both agreed Friday that Cayman officials are usually aware of those prices.

Mr. McTaggart said Cayman’s oil supply is generally shipped in every three weeks and believes his three-person office is certainly able to keep up with the latest data in what has been a wildly fluctuating oil market over the past year.

He also told the Caymanian Compass that it’s unlikely his office would be disputing routine wholesale price increases by either Esso or Chevron-Texaco.

‘If everything is normal and appears to be on the level, I don’t see any reason to disagree,’ Mr. McTaggart said. ‘But I can’t see us giving an increase of anything more than a cost increase to the wholesaler. If the cost increase is 10 cents, we won’t give anything more than 10 cents.’

Officials with Chevron-Texaco were asked to comment for this story but they had not replied by press time.

Government officials said Thursday that Cabinet intends to review changes to the Dangerous Substances Handling and Storage Law in a few weeks. Those amendments would implement the pricing regulations.

The afternoon before that announcement, Mr. Neesome said Esso received a ‘discussion document’ containing the proposed regulatory changes. He said the company was reviewing the plans and would make a response soon.

The oil companies were not caught completely by surprise. Mr. Neesome said they had discussions last year with the petroleum inspectorate on several issues, including pricing. He also noted that the government recently completed a petroleum study. The oil companies did review and make a response to the conclusions in that document. (See Compass, 2 October, 2007 ‘Fuel mark up is high’).

Mr. Neesome said many oil markets around the world are actually moving away from additional pricing regulations.

‘Hawaii abandoned price regulation after a brief test because it was determined not to be in the best interest of the consumer,’ he said.

Mr. Tibbetts said last week that research done by his office indicated at least nine Caribbean countries had petroleum bulk product price controls in place. Two others have set regulations on gas station mark ups.

‘Only Jamaica and Puerto Rico responded as being 100 per cent free market with no price controls,’ according to documents released by Mr. Tibbetts.

‘Attempts to increase gasoline prices in the recent past have resulted in major riots in Kingston and Montego Bay.’

Mr. Tibbetts said research indicated oil companies operating on larger islands could keep gas prices lower precisely because more people are buying their products.

‘In Puerto Rico, the larger volume imported keeps the prices in check,’ according to research compiled by the LOGB’s office.

But Mr. Neesome said Cayman’s relatively small fuel volumes would therefore make price controls here even less attractive to the oil companies.

‘We have to meet the same industry safety standards including oil spill insurance, public liability insurance, etc. as large countries have but they have much higher volumes and therefore efficiencies of scale,’ he said.

Mr. Neesome noted price control measures could have the eventual result of reducing fuel availability in Cayman.

‘Government policies that minimise interference in the free market system are the best course to ensure adequate supplies,’ Mr. Neesome said.