The pervasive impact of high fuel costs

Following last week’s discussion on the impact of the electricity rate increase on firms and consumers, the cost of fuel will engage our attention this week due to its pervasive impact on the cost of doing business and by extending the high cost of living in Barbados.

Several factors contribute to high costs in the country; utilities and fuel are arguably the most prevalent as all stakeholders in the society are users of these resources. Every effort, therefore, should be employed by the government to make these affordable for citizens through the use of the regulatory and policy apparatus available.

Economists and development specialists will continue to analyse the contributors to the cost of living and what is required to reach a state of equilibrium where prices are affordable. For sure, the current price point of various utilities is not affordable thus the state of austerity being experienced in the society.

Citizens already complain about the VAT rate of 22 per cent applied to telephone bills. Compound this with the anticipated increase in the electricity rate, the sewage tax on water rates, and current fuel costs, and this produces a perfect storm of utility taxation.

The government, through its regulatory powers, can bring some relief to consumers.

It is with consternation that we consider where Barbados is globally relative to its fuel costs.

According to globalpetrolprices.com the current average cost of gasoline worldwide is US$1.24 per litre. The site further states that Barbados’ current fuel price is 157.82 per cent of the world average gasoline price. Understandably the price of gas will differ amongst countries due to various taxes and subsidies a country may introduce based on its policies and overall fiscal approaches. Barbados’ fuel prices are projected to be the fourth highest globally, recorded by Global Petrol Prices, following the likes of Hong Kong – US$3.30 per litre, Monaco at US$2.26 and Iceland at US$2.18 per litre. Barbados is at the unenviable position of US$2.09 per litre. The closest Caribbean country is the Cayman Islands with a rate of US$1.46 per litre.

Appreciatively, Trinidad & Tobago and Guyana are lower, due to their oil reserves, with rates of US$1.14 and US$1.02, respectively. Jamaica on the other hand, similar to Barbados, has no significant oil resources but has a rate of US$1.27 per litre.

Why is Barbados’ rate so high?

Some of the major issues affecting the cost of fuel include:

1. Crude oil supply

Crude oil is what makes up gasoline. As the laws of supply and demand go, when the supply of crude oil decreases, the cost of petroleum-based products, i.e. gas, increases.

2. Geopolitical events

The conflict between Ukraine and Russia has made an impact on global oil production, as Russia is one of the world’s largest crude oil exporters.

3. Demand increase

When there is an increase in the demand for oil, the price of crude oil increases.

The cost of crude oil per barrel, understandably, will fluctuate and has been hovering around US$100-$110. This is the largest component of the retail price of gasoline. Other components include taxes, subsidies, and the cost of refining and transporting. What appears to differentiate Barbados’ rate from neighbours in the region and the world, is the level of taxes and subsidies imposed by the government. A reduction in these can equate to an ease in the cost of doing business and the cost of living.

Small businesses are not left out and feel the impact of continued high fuel prices on their operations:

Increased transportation costs: Businesses such as delivery firms, manufacturers and those who export and import goods, and rely on transportation, will experience a rise in the cost of doing business. They are challenged in determining whether to pass the costs to consumers or to absorb them.

Consumer purchasing power: An increase in cost will lead to a decrease in consumer demand.

Costs passed to small businesses: The rise in costs will impact the global supply chain with costs being passed on to small businesses.

Good business management practices will necessitate small firms trying to do all within their power to adjust to withstand these increased costs. Am Trust Financial posited some solutions, which include:

1. Reducing the number of trips: Small business owners may wish to combine multiple trips into one, which can reduce fuel costs. Many short outings use more fuel while one longer trip reduces the gas used.

2. Navigating Traffic Times: Being in traffic for long amounts of time burns more gas than a steady drive. Business owners should schedule their deliveries, or trips outside of traffic times as much as possible.

3. Managing Speed Limits: Maintaining the speed limit ensures a more efficient running vehicle.

4. Load: When a vehicle is heavier, it uses more fuel. It is important that small business owners remove unnecessary items from their vehicles, to avoid the use of additional fuel.

While these are admirable attempts to better manage the cost of operations, not all the suggestions can be implemented. A more sustainable and long-term solution is needed, which must be found in the kind of business environment available for firms to operate. It is therefore incumbent on the government to revisit the cost of utilities in Barbados and bring some relief to citizens, small and great. 

The Small Business Association of Barbados (www.sba.bb) is the non-profit representative body for micro, small and medium enterprises (MSMEs).