Fuel suppliers have defended their pricing before and during the COVID-19 pandemic, stating that wholesale margins are slim and high local costs are largely responsible for gas prices at the pumps.
The prioritisation of fuel-supply security over price and limited storage in Cayman also meant that wholesalers were not able to take full advantage of the lowest available prices in March and April, they said.
The Public Accounts Committee heard evidence from fuel companies SOL, RUBiS and ReFuel on Wednesday, in an effort to gauge how the fuel market and fuel prices could be better regulated. The hearing was part of the PAC’s examination of an auditor general’s report that criticised the performance of utility regulator OfReg in its first three years of operation.
OfReg is currently undertaking a review of whether fuel wholesalers and retailers passed on the effect of collapsing crude oil prices earlier this year to local consumers quickly and sufficiently.
Wholesalers said Cayman only saw a slow reduction in gas prices, even after the crude oil price dropped dramatically into negative territory for a single day, when the low cost of oil was contrasted by a shortage of – and escalating prices for – oil storage.
The fuel suppliers argued that, for a variety of reasons, Cayman’s prices at the pump cannot be compared with those in Florida.
Pierre Magnan, president of Parkland International and the SOL Group, noted that Florida reprices refined oil products several times a day, whereas SOL delivers fuel to the islands once a month.
“In Cayman, we have very infrequent price changes,” Magnan said, due to the time it takes to transport oil from the US Gulf to Cayman.
Fuel tankers that deliver to the islands are usually part of a ‘milk run’ to several destinations in the Caribbean to share and drive down transportation costs.
As a result, the price of SOL’s refined fuel imports changes monthly. During the COVID-19 pandemic, the drop in demand for fuel and the reshuffling of supply routes meant that the time lag was even longer.
Conversely, Cayman benefits from lower prices longer, Magnan said, as Cayman prices remain low, while US prices have increased again.
Magnan said that SOL operates on the basis of long-term contracts and has “no ability to game the price”. He said supply security was more important than timing market prices. Because the company buys fuel when it is needed, SOL was not able to purchase new product when prices were at the lowest point. But, Magnan said, “There was no space in the tanks in Cayman in any case.”
In contrast to the price for West Texas Intermediate crude oil, the relevant price for fuel in Cayman is refined fuel from the US Gulf Coast, known as Platts. The price of Platts never went close to zero but dropped from $1.95 at the beginning of the year to $0.54 on 27 April. Since then, Platts has climbed back to just under $1.20.
Nicolas de Breyne, managing director of RUBiS Cayman Islands, said, after discussions with the government, the company decided to drop wholesale prices first by 40 cents in mid-April and then by 80 cents. On Cayman Brac, RUBiS lowered wholesale prices by 90 cents. These price changes were applied a full 10 days before the fuel arrived in Cayman, in response to COVID-19, de Breyne said.
RUBiS took tanker deliveries in Cayman in March, May and June. Only the March delivery had stock bought at the lowest prices. “Our next tanker which we brought to the islands had gasoline at prices that increased again, and this continued,” de Breyne explained.
He added that RUBiS did not have the storage capacity to buy at the lowest prices.
“If there is an expectation that prices could be half of what they were, that is impossible,” de Breyne said, given the many different elements that make up gas prices.
The committee heard that as a result of the cost of crude, refinery margins, the costs of transport, insurance, storage, fuel blending, port fees, duties and other charges, the landing cost of fuel amounted to about $2.45 per imperial gallon in Cayman. Committee member Chris Saunders questioned how then the price could almost double at the pumps before the pandemic?
De Breyne said the difference between retail prices and landing costs comes from operating costs and the cost to make those fuels available to the end consumer. Cayman’s significantly higher average costs contribute to larger margins than in other Caribbean markets.
He said Cayman is an expensive country and the services and equipment made available by RUBiS can only be managed by overseas companies. In addition, employment and other costs to operate the local infrastructure at the highest standard with key personnel are also very high and rising every year.
For instance, the cost of building a tank in its fuel terminal is almost three times higher than in the United States, he said.
In response to a question by PAC Chairman Ezzard Miller on why fuel prices had not declined by 40% like the fuel cost charged by electricity provider CUC, SOL’s Magnan said fuel suppliers operate a high volume and low margin business.
He said his company generated a return on assets of 5.8% and net profits represented only 4.9% of revenue. This was considerably less than the net profit share of CUC or local water provider Consolidated Water, Magnan said.
Asked what the regulator OfReg could do better, Magnan pointed to public education. “Where there is a lack of transparency, there is frustration,” he said. “People deserve to know what goes into the pricing, and how expensive it is to deliver high quality product to Cayman, and to know that they are not being taken advantage of.”