The cost of oil: implications for the Cayman Islands

| 04/06/2008

 By Nick Robson (The Cayman Institute)

3 comments

Goldman Sachs analysts have predicted $200 per barrel oil by the end
of the year. This would mean gas in the Cayman Islands approaching
$8.00 per gallon. I do very little driving in a four-cylinder vehicle
and spend $100 per month, and can only imagine what it costs the
family with numerous children, all active in numerous extracurricular
activities.

The problem in the Cayman Islands is that we have no choice; we have
to drive, we have no functional public transport system. Yes, we have
a bus system composed of independent operators, but this is not a
functional public transport system in the true sense of the word.

And not only are our transportation costs being effected by the cost
of oil, but all other goods and services are or certainly will reflect
the rising energy costs. Caribbean Utilities Company will obviously
pass through the rising energy charge; your Water Authority bills will
also reflect the increasing oil prices as all our water is produced
using electrical energy. One has to question where this ends?

President George Bush asked the Saudi’s / OPEC last month to increase
production and was basically to given a resounding NO. Yes King
Abdullah did agree to an extra 300,000 barrels per day, an
insignificant amount. Airlines are adding fuel surcharges, which not
only affects our travel it also affects tourists thinking of visiting
these islands. Where will this end?

Oil is a finite resource. It will eventually be depleted. And it is
not a renewable resource. The oil reserves of Saudi Arabia are a state
secret but are believed by those in the know to be less that the
Saudi’s would like you to think. There have been a few large finds
recently in places like Brazil and in extremely deep waters of the
Gulf of Mexico, but like the Canadian tar sands, this oil is very
expensive to extract and, as in the case of tar sands or oil shale, it
takes a lot of energy to extract. All of which makes it more expensive
for the consumer.

There is also the theory of Peak Oil. First propounded by geology
professor M. King Hubbert in 1949, it states that the fossil fuel era
would be of short duration. His prediction in 1956 that US oil
production would peak in about 1970 and decline thereafter was scoffed
at then but his analysis has since proved to be remarkably accurate.
This theory has since been applied to global petroleum reserves and
the outcome would suggest that we may be approaching a plateau in
world production. We are certainly seeing a tremendous surge in
demand, fueled in part by the rising affluence in China and India,
with the demand for private transportation, not to mention the
continued consumption in the United States.

How, you may ask, does this apply to the Cayman Islands? The answer is
of course obvious. We have no petroleum reserves of our own, no rivers
to produce hydro-electricity, no volcanic activity to give geo-thermal
energy. But what we do have is an unending source of energy, the sun
and wind (see Cayman Net News 4 June 2008 Article on Cayman Brac
Wind Power
). The Cayman Islands needs to start looking at
alternative energy very seriously. Our Energy Security is precarious
to say the least. The geo-political situation in the Middle East is
volatile to put it mildly and as has been made clear above we have no
Plan B.

We are now able, under the new franchise agreement between CUC and
Cayman Islands Government to install photovoltaic panels on our homes
and businesses as well as utilize wind and geo-thermal power and, if
we are creating more that we need to power our homes, sell the excess
to CUC. And think of the advantages besides lowering our electric
bills – in a blackout or in the aftermath of a hurricane one would not
be inconvenienced by a lack of electricity. Ground has just been
broken in the Cayman Islands for our first home powered entirely be
alternative energy. Naturally the home will be connected to the
electrical grid but the owner never envisions having to draw from it,
just the opposite in fact.

Not that many years ago all homes in the country were built with a
cistern or tanks to store rainwater. Your roof was your catchment area
that fed into the cistern providing free water. I would suggest that
anyone building a home give consideration to spending a little extra
money and putting in a cistern. It may also be the time to consider
whether you really need a lawn that needs artificial irrigation on a
daily basis. It may be time to return to an old Cayman tradition of
the sand yard. As an added bonus you do not have to mow it with
another petroleum burning piece of equipment!

Electric and Hybrid vehicles are ideal for this country as we do not
have far to drive nor are our speed limits particularly high. If one
were generating electricity at home with solar power and driving an
electric vehicle, not only would you be saving a considerable sum of
money but also your vehicular carbon footprint would be zero. The
legislation and policy to make use of these vehicles will hopefully
soon be in place to make this a reality.

I recommend that all residents of these islands start investigating
how they can economize on their consumption of energy. Think about
car-pooling, get together with your neighbors and take turns in
filling one car going to work rather than driving with only yourself.
Studies have shown that only 7% of the energy used to propel your
vehicle is moving you the driver.

Replace all the bulbs in your home and businesses with compact
fluorescent bulbs. They cost more to purchase but not only will they
last much longer than a incandescent bulb they will make a significant
difference in your utility bill.

Not only should we be economizing to save unnecessary expenditure, we
should be cutting our carbon footprint. Carbon Dioxide emissions from
our vehicles, from CUC and many other sources are contributing to
global warming, which is already having a serious impact in places
like Kiribati and Tuvalu, islands that are being inundated by rising
sea level.

Olivaire Watler: You make some excellent points in your article
as well as provide good tips for energy conservation. These are tough
times not simply for residents of Cayman but in every oil-
consuming country. It would be lovely if we could be
insulated from what the rest of the world is experiencing by
Government and CUC but that is neither realistic nor reasonable. 

However, we differ in one respect: you present the scarcity
of oil as the cause for spiraling oil prices. While it is true that
demand has increased significantly in places like Russia and China, I
believe the major influence on oil prices today is speculation in the
markets. The President of OPEC was recently quoted as saying
that the weak U.S. dollar, market speculation and the subprime crisis
are the causes for the spiraling price of oil. Add to that the effect
of the comments by an Israeli Cabinet Minister that suggested
Israel would attack Iran if it continues its nuclear-development
program and we have most if not all of the picture. 

Olivaire Watler: Gerry, you are right that demand and supply
theory of price is basic economics. I believe you are also right that
at these prices there is likely to be a reduction in demand for oil
which could reduce prices. However, in the real world the
influences on price are a little more varied and complex than demand
and supply and include such matters as speculation. That is
why the demand and supply theory has a qualification,
ceteris paribus (all other things being equal). For
example, even if demand and supply of oil remained constant, but
the value of the US dollar declined (as it has done over the past
several years), the price of a barrel of oil (in US dollars)
would be likely to increase. Also, if the market believes
(whether correctly or incorrectly) there will be a shortage of
oil in the near to medium term (but is not presently) this
will also cause prices to spiral.      

In 1999 the price of a barrel of oil was US$10.00. Since then supply
has actually increased, and while demand has increased
it certainly has not increased by 1300% to take oil to its
present price.

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