by Eulana Weekes
St. Kitts and Nevis (WINN) – Economist in the Research, Statistics and Data Analytics Department at the Eastern Caribbean Central Bank – Mr Leon Bullen discussed some factors that influence the price of fuel and the pricing mechanism used by the Governments to determine the price that consumers pay at the pump.
The fuel suppliers in the region are mainly private entities that the Governments regulate to receive shipments from countries such as Venezuela, the US Virgin Islands and Trinidad and Tobago. However, the Governments of the ECCU do not supply oil.
In the case of St. Kitts and Nevis, the storage capacity for oil is three weeks, which suggests that shipment comes in every 3 to 4 weeks to replenish the stock. The price of oil on the international market at the time of shipment is used to determine how to price fuel for the domestic market.
“As new shipment comes in, the prices will vary based on the international benchmark. As I mentioned, Brent Crude Oil is the main international benchmark. So, that’s one thing, but also, the prices get fed through immediately to the domestic pricing, [as] in the case of St. Kitts-Nevis and Montserrat. They have what we call a “Full Pass Through System”. Whatever the price is on the international market, they are felt immediately in St.Kitts and Nevis. Basically, what the suppliers do is that they would average the cost of the new product that would have been imported with the existing stocks that they have on island, and they feed that average price through to the consumers immediately.”
Meanwhile, other islands like Dominica and Grenada use a “Partial Moving Average System”, which is the use of the average price on the international fuel market registered in the previous four weeks. According to Bullen, the Partial Moving Average System is beneficial to consumers as they do not feel the full effects of the rapid rise in prices.
The main factor that influenced the fluctuation in price globally over the past year was the war in Ukraine. The prime supplier of oil in the global market, Russia, invaded the neighbouring country Ukraine, thus creating a huge amount of uncertainty in the global economy. Sanctions were placed on Russia, and countries were no longer importing Russian oil, resulting in a global oil shortage. The supply of oil decreased, and demand increased; hence the price of oil increased, which led to a rise in inflation.
According to Bullen, revenue generation is one of the main factors contributing to the cost of fuel on the domestic market. Wholesalers and retailers have to get their respective margins, and the Government likewise generates revenue for the purchasing and sale of fuel under the consumption tax.
“Wholesalers and retailers have different margins across the different islands, and in the case of wholesalers, it has to do with their internal cost. So, for instance, transporting fuel in Dominica is a much more expensive venture than transporting fuel in St.Kitts and Nevis or Antigua, where these countries are relatively flat. So the cost to the wholesalers is much higher in Dominica, and as a result, they charge a higher wholesale margin.”
He added, “Retailers also charge a margin as well, and it varies across islands. Basically, the wholesalers and retailers negotiate with the Governments for any increases or changes in their margins, and the Government will either agree to their request or not. So the margins are an essential component, but I think the biggest factor is the consumption tax that the Government levies on the product. Consumption taxes range from as low as $2.50 to over $4.00 across the islands, and Governments, based on their fiscal needs, they would determine what consumption tax is appropriate for them.”
There is a noticeable difference in the cost of fuel in the Eastern Caribbean Central Union. As of December 2022, the cost of fuel in Anguilla ranged at about EC $17.72, Montserrat $17.80 and St.Lucia $17.70; St. Kitts and Nevis EC $15.50, St. Vincent and the Grenadines $15.06, Dominica $14.87, Antigua and Barbuda $13.99 and Grenada $11.19.
Basically, Brent Crude Oil is used as the international benchmark and is currently being treated at about US$81.00 per barrel. At its peak last year, it was treated at US $133.00 per barrel, Bullen explained. The international price of crude oil, therefore, feeds into domestic prices.