Petrojam Limited's Gas Prices Explained

In recent weeks, persons have raised concerns about the movement in the ex-refinery prices of gasoline & diesel oil announced weekly by Petrojam, compared to the movement in the price of crude oil.

Petrojam Ltd. wishes to explain this relationship between crude oil and gasoline prices and to assure persons that Petrojam’s ex-refinery prices have been moving in tandem with the oil market. The company’s pricing policy remains fair, open and transparent, as we seek to fulfil our mission of providing petroleum products at competitive prices to the Jamaican marketplace. Petrojam acknowledges that the prices of these products are of acute interest to the public and to policy makers. Indeed, gasoline and other petroleum products are critical to households, the transportation and manufacturing industries and the economy as a whole.

HOW DOES PETROJAM DETERMINE THE PRICES OF REFINED PRODUCTS?
Crude oil is the raw material used in the manufacture of refined petroleum fuels. Petrojam delivers petroleum products to the domestic market. The products supplied to the market are either produced as output from our refining process, using crude oil as raw material, or imported directly. Very often, movement in crude oil prices are misinterpreted as product price movement.

PETROJAM’S PRICING POLICY
Ex-Refinery prices are adjusted weekly to ensure that local prices are consistent with prices in the oil market. While changes in the market price of crude oil are generally reflected in the refined product prices, this is not the only determinant of product prices.

US GULF COAST (USGC) REFERENCE PRICE The main input into the ex-refinery pricing formula is the US Gulf Coast (USGC) Reference Price for the appropriate product. Other critical components of the ex-refinery price include logistics costs and Government of Jamaica Taxes, which vary with the price of oil. The USGC area is the key spot trading hub for the Americas where gasoline and diesel are bought and sold. Prices at which each grade is either bought or sold are gathered and reported by certain price reporting Agencies and Oil companies and traders base their prices on these benchmarks. The USGC is an appropriate pricing reference for several reasons including the size, transparency & liquidity of the market. Mexico, Venezuela and Trinidad, Petrojam’s main trading partners, also use the USGC prices to determine the value of their petroleum products.

THE CONNECTION BETWEEN CRUDE OIL & GASOLINE PRICES
While movements in the market price of crude oil generally drives product prices such as gasoline, a more detailed examination is needed to explain the apparent disparity between the WTI crude oil price, as is commonly reported in the US media and gasoline prices.

WTI VS BRENT CRUDE
Generally, the changes in oil prices announced in the media refer to the West Texas Intermediate (WTI) crude oil prices, which is the variety of crude oil traded on the New York Mercantile Exchange. The WTI benchmark usually reflects demand and supply conditions in the US market for crude oil. On the other hand, Brent Crude Oil another benchmark, tends to more closely reflect global supply and demand dynamics. Under normal conditions, Brent crude oil sells for less than the price of WTI, because of its slightly lower quality. But, regional supply and demand conditions can distort this relationship, as has been the case recently. Whereas, the price of WTI has tumbled by approximately 28 percent, from its high in late April 2011 to its recent low in the range of $82 to $86 per barrel, Brent crude oil only declined by 15 percent from its high of almost $127 per barrel to its recent low of $107–$110 per barrel. Therefore, while both WTI and Brent have fallen from their 2011 highs, WTI prices fell more sharply in comparison to its European counterpart.

WHY IS THIS OF SIGNIFICANCE?
It is significant because the price difference between Brent and WTI has departed from historical levels for several reasons, largely connected to supply/demand dynamics in the applicable trading regions, which have combined to depress the WTI price relative to Brent. For instance, in August 2011, a barrel of Brent crude oil went for $110, up 42 percent from year-ago levels, while WTI was up only 12 percent over year-ago levels. The wholesale price of gasoline in the US Gulf has followed the Brent price and is up 45% on it’s year-ago price. Examining movements at the retail level for the August 2010 to August 2011 period tells a similar story; with pump prices up by 35% in Florida & the Gulf Region over year ago levels to about US$3.72/gallon (J$85/litre). By comparison, Petrojam’s ex-refinery gasoline price, after the April 2011 reduction in the ad valorem tax, is up only 27% on year-ago levels to J$98.8/litre. The ability of WTI crude oil to influence overall price levels has therefore decreased, and is not as indicative of world price levels at this time as has typically been the case.

ARE PETROJAM’S PRICES REFLECTIVE OF MOVEMENTS IN THE GLOBAL OIL MARKET?
Petrojam’s ex-refinery prices have been moving in tandem with the oil market, as established for petroleum products. Any apparent disparity in price movements lies in the fact that WTI’s prices have been depressed relative to other benchmarks, which has led to the US Gulf Coast Reference prices being driven by other factors instead of the WTI. Despite this fact, however, WTI remains the most widely quoted oil benchmark in the U.S. and local media. Accordingly, many persons, upon hearing recent updates of WTI price reductions, incorrectly assume that oil prices, in general, have weakened substantially; which raises questions about why gasoline prices have not changed by a similar proportion. It is this fundamental disconnect between WTI and global oil price levels that has given rise to the notion that Petrojam’s prices are out of step with the market. Nothing could be further from the truth.

The truth is, that, as previously mentioned, Petrojam’s Ex-Refinery prices are indexed to the US Gulf Coast Reference Prices for finished products such as gasoline and diesel. Movements in our prices have generally been in keeping with movements in these reference prices.

Petrojam’s ex-refinery pricing arrangement provides a fair and transparent mechanism for pricing our products and is based on internationally recognized practices.

At Petrojam Limited, we remain fully committed to our mission, which is to “….supply petroleum products at internationally competitive prices and quality, acting in the best interest of Jamaica and all other stakeholders.