By Steve Thomas Observer Nevis Editor
(Charlestown, Nevis) ” After taking a battering from inflation for much of 2008, consumers are seeing a drop in prices in many key areas, including fuel and energy. While food prices have for the most part stabilized, they have not seen the same kind of decline, though eating could get cheaper in the coming months. At the heart of all of the price fluctuations is a single commodity: crude oil. In July, crude oil was trading for US$147 per barrel. The same crude oil is selling for about US$50 per barrel today. Crude oil is refined into a huge array of petroleum products, all of which have a direct bearing on what consumers pay for goods at the store, the gasoline station and for home power. The rise or fall of the price of oil has an immediate impact on the pocketbook. This is a brief description products made from refined crude oil: “The best-known of these is gasoline, or petrol. However, there are many other products that can be obtained when a barrel of crude oil is refined. These include liquefied petroleum gas (LPG), naphtha, kerosene, gasoil and fuel oil. Other useful products which are not fuels can also be manufactured by refining crude oil, such as lubricants and asphalt. A range of sub-items like perfumes and insecticides are also ultimately derived from crude oil,” according to the Organization of Petroleum Exporting Countries, the oil cartel known as OPEC. “Furthermore, several of the products listed above which are derived from crude oil, such as naphtha, gasoil, LPG and ethane, can themselves be used in the production of petrochemicals. There are more than 4,000 different petrochemical products, but those which are considered as basic products include ethylene, propylene, butadiene, benzene, ammonia and methanol. The main groups of petrochemical end-products are plastics, synthetic fibres, synthetic rubbers, detergents and chemical fertilisers.” The price gasoline has been falling steadily since July, when oil prices were at their highest. Four months ago, Federation motorists were paying an average of about $16.80 per gallon. Today, the lowest price for gasoline on Nevis and St. Kitts is $10 – $10.30 per gallon. That’s lower than the average price in January, 2008, when gasoline was about $13 per gallon. “People are happy it’s going down,” the proprietor of a Nevis service station said. “People are buying more because they”re not afraid to move around.” The price drop is good for consumers, who have more money to spend or save, as well as businesses that utilize vehicles and motorized equipment a great deal, including contractors, delivery services, taxis and buses. “We been hit hard by the price (of gasoline). It’s about time it started coming down,” a Nevis taxi driver said. In the U.S., the national average price for a gallon of gas fell to US$2.04, about EC$5.44. That is the lowest level since March, 2005 Falling oil prices have also reduced the fuel surcharge Nevlec customers pay for electricity. Currently, electricity on Nevis is generated by using diesel-powered generators. In late 2005, Nevlec began adding a fuel surcharge to the monthly bill of commercial customers to offset the costs of diesel. In January, 2008, a fuel surcharge was added to the monthly bill of domestic customers. The fuel surcharge rate for domestic customers is half the rate charged to commercial customers. As oil prices rose, so did the fuel surcharge rate. That trend has reversed as the price of oil dropped. In September, the commercial fuel surcharge rate per kilowatt hour was $0.53 and $0.26 for domestic customers. In October, the commercial fuel surcharge rate per kilowatt hour was $0.49 and $0.24.5 for domestic customers. In November, the commercial fuel surcharge rate per kilowatt hour was set at $0.41 and $0.21 for domestic customers. The impact of the reduction has been felt by all Nevlec customers, perhaps none more than Gillian Smith, the proprietor of the Caf” D”Arts in Charlestown and Bananas Restaurant. “My electricity bill at Bananas has gone down by more than half,” Ms. Smith said. The question of possibly eliminating the surcharge if oil prices continue to fall could not be answered by a Nevlec employee, who said the matter would have to be taken up with the general manager, who is currently on vacation. The outlook for food availability and food prices is a bit less clear. An informal survey of several stores shows that prices for many items that rose earlier this year as oil prices shot up appear to have stabilized. In addition, the fear of widespread food shortages has somewhat abated, according to the United Nations Food and Agricultural Organization: “The previous (June 2008) issue of Food Outlook foresaw world prices of major agricultural commodities declining from the record levels they had just reached, amidst favourable prospects for global supplies. Since then, prices have indeed fallen, but farther and faster than can be explained through production gains alone. Underlying the price slide, in excess of 50 percent from their recent peaks, are other important factors, including the financial crisis, the halving of world crude oil prices and the appreciation of the US dollar. And uncertainty is emerging as a dominant feature of world agricultural markets, as many of them are entering or about to enter a new season. . . From a supply perspective, the global response to the high prices recently witnessed was uneven. This was evidenced in this year’s cereal production recovery, nearly all of which was concentrated in the developed countries, whereas the response was much weaker in the developing countries. Under the current gloomy prospects for agricultural prices, high input costs, and more difficult access to credit, farmers may cut their plantings, which might again result in a tightening of world food supplies. If, indeed, production falls sharply next year, episodes of riots and instability could again capture the headlines. “Lower food prices are good news for consumers but cannot be sustained if they only are an indication of market oversupply. Unless they reflect consolidated cost efficiency gains, low prices would only deter much-needed investment in the agricultural sector.” After a year of rising and falling oil prices, the question is: What does the future hold? “Future price levels will primarily depend on the magnitude and duration of the economic downturn as well as OPEC and non-OPEC behavior.” Our current expectation of future oil prices assumes that the OPEC production cut may limit, but not reverse, the recent sharp fall in oil prices,” according to the U.S. Energy Information Agency. “We project oil prices to remain relatively flat, averaging $60 to $65 per barrel throughout 2009.” The condition of the global economy is expected to remain the most important factor driving world oil prices.”
