How the islands are tackling high fuel costs

Robert Keith-Reid

Back in 1998 Pacific Islands countries, all heavily dependent on imported petrol and diesel fuel, paid for it based on the then prevailing world price of a low of US$10 a barrel.

Two years later, crude oil jumped to US$35 a barrel. That caused a global petroleum pricing shock and impacted badly on small Pacific Islands companies by lifting fuel costs by up to 30 percent of their total annual import bill.

In April, the oil prices had soared beyond US$50 a barrel, a devastating burden for the region's weak economies. There were predictions it might rise shockingly to above US$100.

From 2001, attempts by the main oil producers cartel OPEC to try to control oil prices in the range of US$22-28 were partly successful. This changed when the United States invaded Iraq, creating prolonged regional instability. This, together with a growing world demand, has ultimately driven oil prices much higher.

Oil prices were exceeding US$58 per barrel by mid-April. A respected energy analyst, Goldman Sachs, predicted that crude oil prices could spike to the previously unheard of levels of US$105, or in the event of a global supply disruption, US$135.

The huge increases will be passed on to lift the cost of every aspect of life, including transport, shipping, basic foods, canned goods, imported goods, bus and taxi fares, electricity, fishing, air travel, tourism, communication, refrigeration, cooking, clothing, and bread as everyone recovers higher business costs.

According to Alan Bartmanovich, until mid-2004 the petroleum adviser at the Pacific Islands Forum Secretariat and now an independent consultant, not all the news is bad.

His seven years at the secretariat showed that most islands countries can make significant savings, he says. They actually produce savings of about US$13 million a year for them, and there is scope for saving another US$20 million to US$30 million, he says.

“It can be done through consolidating shipping and storage, independent fuel terminal ownership, vigilant fuel price regulation, increasing international competitive pressures, and often simply through direct negotiations with existing multi-national oil company suppliers.

Bartmanovich says the three companies that supply fuel to the Pacific Islands, Shell, Mobil and British Petroleum, often imply that being small and remote, the islands should pay “extravagant premiums”.

At US$28 a barrel, the imported value of fuel was US$700 million with an estimated retail value of US$2 billion, he says.

“Now that crude oil is more than US$50 and products exceed US$65, the regional imported value of fuel exceeds US$1.5 billion. Although the Pacific islands countries have limited resources, they will need to find the money to pay the increased cost, perhaps at the expense of other, less essential commodities and services.”

Bartomanovich says Pacific islands countries pay very high fuel prices and in many cases, unnecessarily. “Literally, tens of millions of dollars per year worth of fuel cost savings are available.

Significant effort needs to be made to achieve this, but as we have formally proposed on many past occasions, it would seem reasonable that these savings be applied, at least partially, through the establishment of a substantial and well funded Pacific Region Disaster Relief Fund.

Bartmanovich doubts whether some islands governments are serious about tackling high fuel costs.

“The most progressive islands countries have already established independently owned fuel terminals and now purchase their fuel using an internationally competitive tender process. Other countries have gone part of the way by adopting robust fuel pricing regulations and systems reviewed annually.”

Some countries still accept the price dictated by multi-national oil companies, he says.

“They experience the economic pain of fuel price rises, but often never feel the relief of cyclical fuel cost decreases. They wait in vain for those theoretical but non-existent market forces to come to their assistance.

Bartmanovich believes that lobbying by oil companies led to a decision to replace his former position at the secretariat with an officer briefed to deal not only with fuel but a wide range of other import management issues. The job was so complex that it called for a dedicated full-time specialist, he says.

“We know the oil companies weren't happy because we were reducing their profits. They themselves complained to us at various times. We had some very acrimonious discussions with Shell in Tonga for example, Mobil in Guam, and British Petroleum in Tuvalu, which basically refused to give us any information.

“More importantly, we started getting approaches by Australian diplomats after 2001 saying, 'why are you limiting the profits of Australian oil companies?'

“The answer to that is, which Australian oil companies were they talking about-Royal Dutch Shell, Exxon Mobil, the big American giant, British Petroleum? Those are the so-called Australian oil companies they are worried about.”

He says that at an Australia/PNG business council meeting a Forum Secretariat official heard an oil company official ask: “Why is the petroleum adviser sitting in Fiji limiting the profits of oil companies in the Pacific. Why is this happening? We are not very happy about it.

“In another instance, a European Union official attending a meeting in Melbourne in 2002 was told by an oil company executive: 'We're worried about the petroleum adviser in Fiji, but we've taken care of that issue. It's no longer going to be a problem. He won't be reappointed to the job.'”

Subsequently, New Zealand stopped funding the position while Australia “co-incidentally stopped funding the project.”

Japan and China stepped in with funds, but the Forum Secretariat decided to abolish the position and use the money for the new expanded import adviser's position, Bartmanovich says.