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by Dr. Juliet Melville
Since the beginning of the year, there has been a sharp increase in international energy prices, mirrored in a similar movement in fuel prices here in Barbados.
This has been a source of much concern and angst among the population and has had led to strenuous calls for some relief.
The government in response, announced a cap on the VAT take from a litre of gasoline and diesel of $0.40 and $0.37 respectively for six months starting March 16, 2022 in a bid to cushion the effect of escalating fuel prices.
Since then, there has been a further jump in fuel prices and yet again this has attracted the ire of the public and has led to more calls for relief.
Since the end of last year, gasoline prices have increased by almost 27 per cent per litre, diesel by 37 per cent per litre and LPG by 14 – 16 per cent depending on the cylinder size in Barbados.
Spiralling fuel prices have also led to unfavourable comparison of fuel prices in Barbados relative to its neighbours. As at 4 April, 2022 GlobalPetroleum.com reported that around the world the price of gasoline averaged $2.74 per litre and diesel $2.64 per litre.
The average gasoline price in Barbados was 51 per cent higher than the world average and the average diesel price exceeded the world average by 31 per cent .
Information from this same source reveals that fuel is indeed much more costly in Barbados than in other regional countries.
Excluding, the region’s established oil producers, viz. Venezuela and Trinidad and Tobago, the average price of gasoline in Barbados exceeded its neighbours by between 34 – 123 per cent and diesel prices by 12 – 227per cent .
The prices of our energy supplies are undoubtedly tied to developments in the international market which we have limited or no control over, but the final prices in different countries are a function of the domestic market structure and more importantly the taxation policy of various governments. To gain a better understanding of the impact of government policy on the final price of fuel in Barbados, the retail price of gasoline, diesel and kerosene was disaggregated to identify the components contributing to this.
The Customs Tariff Amendment Order of 2019 sets out the duties, excise tax and fuel tax (ie. government charges) that apply to fuel imports into Barbados.
Industry sources indicated that the petroleum dealers apply an average mark-up of $0.25 per litre per product. Using the information on the government charges and the petroleum dealers’ mark-up, the base price (ie the estimated import price) and the share of the overall tax take in the final price of a litre gasoline, diesel and kerosene were estimated (Table 3). Of note, VAT is the only charge that varies directly with price. All other charges and taxes, including the mark-up, are levied on a per litre basis.
These charges are independent of price and constitute a fixed amount per litre of fuel irrespective of price. Even before VAT is applied, the government gets an estimated $1.50 on every litre of gasoline, $0.91 on a litre of diesel and $0.12 on a litre of kerosene. VAT is applied after all other taxes, charges and mark-up are added to the imported base price. This means that the only component that changes directly with price is the VAT.
In January, with gasoline retailing at $3.99, the imported (base) price was estimated at $1.64 while government charges accounted for 53 per cent ($2.10 per litre) of the retail price. With the introduction of the cap on VAT, the tax-take on gasoline fell to 49 per cent ($1.97 per litre) as the government absorbed the $0.13 increase in the imported price (through a reduction in its VAT take) in order to maintain the retail price at $3.99 per litre.
The cap on VAT moderated the most recent increase in gasoline price, and consumers are paying $4.13 per litre instead of $4.30 per litre.
The tax take as a share of the retail price fell by 1 percentage point to 48 per cent, but the government is still collecting $1.97 on every litre of gasoline sold. Even before VAT is applied, custom duties, excise taxes and the fuel levy account for over 37 per cent of the final price.
In the case of diesel, over 40 per cent of the final price consists of taxes, with the cap this now stands at 37 per cent ($1.28) at a retail price of $3.45/litre. The cap on VAT is saving the consumer about $0.17 per litre on the latest price rise.
Non-VAT charges make up more than 26 per cent of the final price of a litre of diesel in Barbados. Kerosene is the least burdened with government levies with the tax take averaging around 21 per cent and non-VAT charges accounting for less than 10 per cent of the final price.
Fuel prices in Barbados are indeed higher than the world average and its regional neighbours. Given countries face similar international prices, notwithstanding any action countries may take to source at better prices, government taxation policy does play a significant role in explaining the final price of fuel. Taxes and other government charges account for a sizeable swhare of the final price of all fuel.
The mark-up of the petroleum dealer, while contributing to the retail price, is relatively smaller by comparison. In a scenario of rapidly escalating prices, while seeking to purchase fuel at the best possible price, a re-examination of all statutory charges on fuel may be warranted.
The government has to perform a delicate balancing act of garnering badly needed revenue while trying to shield the population from the effects of rising energy cost and its adverse impact on disposable income and economic activity.
Dr. Juliet Melville is Independent Consultant, Former Chief Economist, Caribbean Development Bank and Former Lecturer, Economics Department, St. Augustine, UWI.
