Dodging Oil Shocks

Caribbean countries, vulnerable to “oil shocks” and worried that higher global oil prices will derail their economies, have been looking at ways to beat the heat. “Two main issues confront us - the need to address social concerns and at the same time, stimulate economic growth,” said Phillip Paulwell, Jamaica’s minister of commerce, who also has responsibility for Energy at the recent  Miami conference. “The cost of securing and utilising energy sources is, therefore, critical if all our countries are to achieve and then maintain a competitive edge in the global economy,” he added. In the case of Jamaica, over the past ten years, its energy intensity – the ratio of energy consumption to GDP – has been increasing at a rate that is economically challenging. Using 1987 as a base year, the GDP grew by 20 percent while energy consumption increased by 112 percent. The cost of imported petroleum in 2004 amounted to just under US$800 million, nearly doubling the US$420 million in 2001.

In 2004, over 60 percent of the island’s export earnings was spent on the  importation of petroleum products. Collectively, well over 60 percent of Jamaica’s petroleum imports are used by the electricity generation, mining and manufacturing sectors. In 2004,  about 8.3 million barrels of oil was consumed by the bauxite/alumina sector, 6.5 million barrels by electric power generation and 5.4 million barrels by the transport sector. Paulwell said the volatility in oil prices is also having a crippling effect on finance planning and the allocation of scarce resources in the Jamaican economy. “The direct correlation between energy consumption and development suggests that countries must consume more energy in order to increase output. However, small importing developing countries like ours face a dilemma. The larger the portion of scarce foreign exchange used to purchase energy supplies, the less available for purchase of capital goods, “ he said. “Not only does the high cost of imported energy directly impact on the cost of manufactured goods, but the security of supply and volatility in prices make it difficult to achieve the objective of sustainable development.” “This reality makes policies that promote international trade and diversity in fuel types and sources the cornerstone for energy security.”

REGIONAL RESPONSES
Paulwell said while the region is blessed with an abundant supply of clean, renewable energy resources, exploitation of renewable energy has lagged far behind its potential, hindered by market barriers such as the lack of appropriate policies, legislation and regulations, the lack of appropriately prepared bankable projects and financing and the general lack of awareness about the technologies and benefits of renewable energy. Some Caribbean islands have begun to look towards LNG as a way to diversify their energy consumption away from imported oil.In December 2004, for example, the Government of  Jamaica reached an agreement to import 1.2 mmt of LNG per year from Trinidad and Tobago, necessitating the construction of a $250 million LNG regasification terminal in Jamaica. “The potential for introducing LNG into Jamaica as a the primary fuel for generation of electricity and bauxite/alumina production is a logical step towards evolving an energy diversification strategy, “ he said. The Jamaican government, a year ago, launched licensing round for four onshore and 22 offshore exploratory blocks.

The round, to run through the end of July 2005, came about due to a re-evaluation of existing geological data about the country that indicated it could contain commercially viable oil and gas reserves. “There are numerous proposals in various stages of development to significantly increase refining capacity in the Caribbean, mostly for eventual export to the United States,” he said, noting proximity to crude oil produced in Mexico and Venezuela and a perceived shortfall in US domestic refining capacity are driving these efforts.. The Jamaican government, through state-owned refinery, Petrojam has partnered with Brazilian trading firm, Coimex, to rebuild a 40-million gallon (152 million litres) ethanol plant, construction of which is expected to begin in March 2006. In addition, Coimex is negotiating for potential sites for a new 60-million gallon (228 million litres) facility in Jamaica. “Ultimately, we want to increase the ethanol content of gasolene from the existing 5% to 10%. Ethanol production from sugar cane would produce a significant market opportunity for the industry, as in the case of Brazil and India, “ he said. 

POLICY CHALLENGES
Paulwell said while important policy steps have been taken, much more remains to be done. In addition, policy responses to the sharp increase in petroleum prices have varied across the region. In the context of the profound implications of globalisation and liberalisation, he said a regional energy policy is not only vital for the Caribbean in achieving global competitiveness but must be addressed as a matter of urgency. The issues of energy pricing, transport, investments and long-term contractual arrangements should be addressed within the context of such a regional strategy, he said. “Given these challenges, the overall objective is to remove barriers to the increased use of renewable energies and reduce implementation costs,  thus reducing the Caribbean region’s dependence on fossil fuels. “The importance of energy to government is clear. Pressures of declining fossil fuel resources, geopolitical instability, and global climate change initiatives demand government action,” Paulwell said.He also asserted that a widely acceptable regional energy policy is critical to the future of the Caribbean and the Caribbean Single Market and Economy.