Market should control gas prices

| 11/08/2008

The government’s decision to have oil distributors notify the Chief Petroleum Inspector before increasing their prices goes against the principles of a free market, is biased against the oil companies and will not address the problem of escalating fuel costs, says Alan Neesome, Country Manager of Esso. “Competition is to the benefit of all consumers and Governments must promote equal treatment among market players, industries, technologies and favour policies that enhance competitiveness,” said Neesome on Friday.

Responding to the government announcement that they would be making changes to the Dangerous Substances Handling and Storage Law (2003) to regulate the process by which the wholesale distributors of gasoline and diesel products can increase their wholesale prices, Neesome made it clear this was not a welcomed move. "It is evident from comparing regulated oil markets with free markets that consumers are best served by allowing market forces to determine fuel prices. Government policies that minimise interference in the free market system are the best course to ensure adequate supplies,” added Neesome.

He explained that while many people assume wholesale or retail regulations protect consumers from higher prices, more often than not such market distortions undermine service, supply and reliability by encouraging gasoline consumption and discouraging investment. But above all the government would not prevent international price variation from impacting local prices.

Neesome said that Esso already looks for the most economic sources of supply based on well-known public and transparent reference pricing systems, which include the cost of products, service fees for the coordination of supplies, quality inspections, insurance and marine transportation.  

“These efficiencies, obtained in a free market system, have been transferred to wholesale prices. If the government is planning to relate just international prices with wholesale prices, they could well be higher as the competitive element is being removed.  The petroleum business is a very complex industry and these changes must be discussed with the oil industry,” Neesome noted.

He believed that Esso could help government by bringing its experience and international best practices to the table to work with the authorities in their efforts to look for the best solution for all Caymanians, given the global volatility. Profit margins were always adversely affected in times like these and the government’s regulations could have the opposite effect to the stated intent by causing higher pricing, as has happened in many regulated markets around the region, he said.

Leader of Government Business Kurt Tibbetts said on Thursday, 7 August, that while the government couldn’t control the global oil problem they could at least examine the local situation. However, Neesome noted that as international price variations are not under the control of the Cayman Islands Government and that is what controls the price at the pumps, price regulation in Cayman could not prevent the price volatility. If international prices continue to increase, the regulation can’t stop the corresponding impact being passed on to end-consumers. With many other national governments seeking to deregulate their petroleum industries, Neesome said consumers in those countries have benefited by having adequate fuel supplies at competitive prices to support economic growth.  

“Governments should not backtrack on these important gains as a political response to recent volatility in crude oil and finished product prices,” Neesome added.

He also sought to remind government that Esso has long been a good corporate citizen in Cayman, committed to contributing to the development of the islands and that the facilities had been continuously improved, with important investments like a new vessel anchoring system in 2000, new submarine pipelines in 2003 and the major redevelopment after Hurricane Ivan in September 2004.

“In this reconstruction Esso incorporated the latest technology available. Promptly  after Hurricane Ivan, Esso sent an emergency team to Grand Cayman with many  pieces  of equipment and spare parts, including several  power generators to resume activities at the terminal, supply CUC immediately  and put back into operations several service stations in order to  provide energy to the people of Grand Cayman,” Neesome noted, adding that any attempt from the government to limit profit margins would limit Esso’s availability to make necessary investments, which in the long run would be detrimental for the country and consumers.

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