Statement on Petroleum Price Adjustments by Hon Dr. Kenny D. Anthony

Statement on Petroleum Price Adjustments

By Hon Dr. Kenny D. Anthony

Prime Minister and Minister of Finance

August 22, 2005

Introduction

Tonight, I am not the bearer of glad tidings. I am here to announce and explain the adjustments in fuel prices, which have now become necessary in the context of the St. Lucian economy.

From your television channels of choice, you would have noticed that increasing petroleum prices have been generating significant interest and anxiety globally during the last sixteen months. Increasing petroleum demand from the United States and the developed Asian economies (India and China) combined with supply concerns in Saudi Arabia and Iran has placed tremendous upward pressure on prices. Analysts are fearful that an increase in oil prices beyond US$ 70.00 per barrel would compromise the recovery in the world economy. This Government, mindful of the likely consequences of an increase in petroleum prices has managed to keep prices fixed for over a year, despite the turbulence in the international petroleum market.
 

A few weeks ago, the International Monetary Fund (IMF) indicated that real GDP Growth for St. Lucia in the year 2004 stood at 4.0 per cent. Real GDP growth for 2005 is forecasted at around 5 per cent. The realization of 4 per cent GDP growth in 2004 signalled a full recovery from the downturn, which occurred during the period 2001 to 2002. For this reason, this Government is anxious about the events in the international petroleum market and their likely impact on the economy of St. Lucia. The Government is aware that any increase in petroleum prices will have inflationary consequences on key sectors such as transport, construction, and wholesale and retail trade

Supply Constraints and Increasing Demand

Developments in international oil prices have been influenced by a number of factors including, increased supply side pressures and increasing global demand. On the demand side, newly developed economies such as China and India have been increasing their demand as their economies continue to expand. China’s recent attempts to slow down the expansion of their economy by floating the Chinese Yuan to a basket of currencies has not yielded significant results in terms of reducing the supply for fuel. The summer driving season in the United States and increased car sales have also placed upward pressure on the demand for oil. Further, the International Energy Agency has forecasted that global energy demands will rise to a record 86.4 million barrels per day in the fourth quarter of 2005.

Supply side constraints are generating greater concern, as a number of factors are impacting on potential oil supply. Fears of political instability in the Middle East, and new security concerns about possible terror attacks in Saudi Arabia and the reopening of Uranium processing plants in Iran have placed upward pressure on international oil prices. In the United States, the supply of oil has been further constrained by refinery capacity due to breakdowns occurring at various refineries and the closure of at least three refineries. Further, the forecast for an intense hurricane season and the impact of tropical storms has constrained supply at refineries along the Gulf of Mexico. Other supply concerns include the inability of OPEC countries to further boost their production of crude oil as a response to growing demand in an attempt to lower prices.

Impact on Oil Prices

The factors, which I have just mentioned, have placed unrelenting pressure on international oil prices. It is useful to compare the price of petroleum during the period 2003 to 2004 on the one hand, to the position in 2004 to 2005 on the other hand. In December 2003, petroleum prices averaged US$32.39 per barrel. By June 2004, when the Government of St. Lucia took a policy decision to increase prices at the pump, the price averaged US $37.88 per barrel. In December 2004, the price averaged $43.14 per barrel, representing a 33 per cent increase over the average for 2003.

In January 2005, petroleum prices averaged US$46.73. During the month of July, petroleum prices continued to increase to average US$58.67. On August 11, 2005, prices hit another record high soaring to US$65.80 per barrel. This represents a 73.7 per cent increase over the price in June 2004, when the Government of St. Lucia last increased prices. Industry analysts predict that oil prices may reach US$70/barrel and beyond, for the rest of the year and well into 2006. Goldman and Sachs, one of the leading financial forecasting firms, predict that petroleum prices of US$60 per barrel will remain a phenomenon within the medium term (one to two years).
 

Impact on Government Revenue

The escalating oil prices have had a dramatic and adverse impact on Government revenue and thus will impact on its ability to proceed with the planned expenditure for 2005/06. Despite the increase in prices at the pump last June, the Government of St. Lucia has foregone a substantial amount of revenue and is currently subsidizing the price of some petroleum products such as cooking gas.

Consumption tax rates for petroleum products have declined to the extent that the government has had to refund consumption taxes to suppliers to support their guaranteed margins and continue the sale of the products. Assuming oil prices remain as high as US$65/barrel, government consumption tax receipts from unleaded gas and diesel are projected at $6.1 million in 2005/06 compared to $25.4 million and $37.1 million in 2004/05 and 2003/04 respectively.

The overall revenue projection is worse when other petroleum products are considered. Consumption tax rates in 2005/06 are forecasted at -$1.99 for kerosene; -$0.26 for 25 lbs LPG and -$35.82 for LPG cylinders greater than 25 lbs. The actual average per gallon consumption tax rates for the period April 1 to August 9 is detailed in Table I below;

Table I: Consumption Tax Rates for various Petroleum Products

The table highlights significant erosion in the per unit yield of the consumption tax rate for petroleum products over the years. The consumption tax rate yield on unleaded gas moved from EC$2.75 per gallon in 2003/04 to $1.00 per gallon in 2005/06. The consumption tax yield on diesel moved from $2.60 in 2003/04 to $0.58 in 2005/06.

Assuming that the price of oil remains at approximately US$65.00 per barrel, the Government of St. Lucia is likely to forego EC$ 20.6 million in consumption tax collection from the sale of diesel and unleaded petroleum products. Further, it has been forecasted that the Government of St. Lucia will lose approximately $1.3 million, which will have to be paid to LPG and kerosene suppliers, in order to maintain existing prices.

Policy Response from the Region

In light of the increase in international prices, various Governments in the region have decided to pass on some of the burden of this increase to consumers. On Monday, August 8, 2005, the Government of Antigua announced an increase in retail prices by $1.00 both on unleaded gas and diesel. Thus, unleaded gasoline is now EC$9.30 and diesel stands at $9.31. Montserrat has also announced that effective August 15, 2005; the price of unleaded gas will increase by 95 cents to $9.50/gallon. Other Governments in the Caribbean, who have increased petroleum prices in 2005, include Anguilla, Dominica, Barbados, Guyana and the Bahamas. The current price of unleaded gas and diesel in the Caribbean is highlighted as follows:
 

Table II: Petroleum Prices in Various Caribbean States as at August 2005.

It should be noted that in most of the countries highlighted above; drivers/motorists must pay an annual licensing fee. Vehicle owners in Saint Lucia are not required to pay annual licensing fees.

Policy Response from St. Lucia

The Government of St. Lucia has carefully reviewed the developments in the international petroleum market and balanced this against the economic recovery that is currently taking place in St. Lucia. Currently, activity in the construction sector is very buoyant, and the tourism industry appears to have gained full recovery after the decline in 2001-2002. The Government of St. Lucia recognizes that an increase in fuel prices may impact negatively on these sectors and on the wider economy of St. Lucia.
 

However, the external factors just discussed are placing significant pressure on the consumption tax revenue of Central Government. Currently the Government of St. Lucia is subsidizing the consumption of LPG gas, given that the going international prices do not allow dealers to reap the guaranteed profit margin. Additionally, revenue from consumption taxes on unleaded gasoline and petroleum has declined by almost 50 per cent when compared to the intake in 2004. This development has significant implications for the implementation of the recurrent and capital budget for 2005/2006. In light of the factors highlighted above, the Government of St. Lucia has decided on an upward adjustment in the price of unleaded gasoline and diesel by EC$ 1.00 respectively. This would result in a price of $9.50 per gallon for unleaded gas and $8.75 per gallon for diesel. These changes will become effective on Wednesday August 24, 2005.

Policy on Cooking Gas

The Government of St. Lucia also deliberated on a price increase for LPG (cooking gas). However, the Government has decided that the price of LPG gas should remain unchanged. This decision reflects the desire to limit the inflationary consequences of this price change on the economy. In particular, the Government hopes to cushion the impact on low-income households. This therefore means that the Government of St. Lucia will continue to subsidize the price of LPG cooking gas.

I cannot promise that this policy will continue indefinitely. Much will depend on the future movements in the prices of petroleum on the international market.

The Government is fully aware that increases in the prices of petroleum have led to increases in the cost of production, shipping and in the prices we pay for imported commodities, goods and services. I wish to make it absolutely clear that the Government will not hesitate to impose price controls, if it feels that importers and retailers are taking undue advantage of consumers.

Finally, I want to urge each and every one of you to take greater charge of your energy consumption. I recommend that persons seek to conserve fuel by avoiding unnecessary use of their vehicles and wastage in electricity consumption. Additionally, I encourage you to invest in energy saving bulbs and devices in order to offset the likely financial impact of the increase in petroleum prices.

Thank you, for being with me tonight and may God be always with you.

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