This year, Petrojam Limited, Jamaica’s sole oil refinery, proudly celebrates 40 years of dedicated and reliable service to our country. Established in 1982 after the Government of Jamaica purchased the Esso Kingston Refinery, Petrojam has certainly proven its resilience throughout the years, ensuring that at all times we fulfill our mandate of reliably supplying Jamaica with petroleum products at internationally competitive prices.

Despite the many challenges or adversities, we have remained a viable entity that is compliant with local and international industry standards, in some instances exceeding the required specifications and serving as a model for some industry players. This year, as we look to commemorate 40 years of service to our nation, it is not without concern about the impact that the recent rise in pump prices is having on the population. This situation is not unique to Jamaica, but rather, a global issue that is similarly affecting countries across the world, and one that is outside of our control. The steep increase in fuel prices is, in part, fuelled by external factors including, COVID-19, geopolitical events such as the Ukraine-Russia border crises, the Iran-US situation and OPEC output decisions.

As we traverse this challenging situation, I wish to highlight Petrojam’s continued commitment to delivering the highest quality products at the most competitive prices to the Jamaican market. Throughout these past weeks, our prices have remained consistent with movements in the US petroleum retail market, to which our prices are indexed.

Frequently, whether in the media or otherwise, we are posed questions such as “How does Petrojam price its products?”, “Why does Petrojam use a pricing index? What is the pricing methodology used by Petrojam?

Why do we use the United States Gulf Reference Prices as the main component of our product prices? “Why aren’t the cost of inputs and operational costs included in the final cost of the product to the consumer?”

Through this medium, I hope to provide clarity on questions raised regarding the rationale for our pricing methodology.

Crude oil and finished products are traded in two separate markets and are priced using different market indices. The US Gulf Coast (USGC) represents reference prices for finished products and West Texas Intermediate (WTI) and Brent are reference prices for crude oil.

There are different reference markets or benchmarks for crude oil. Europe’s Brent Crude Oil, the WTI in the United States, and Dubai Crude are the three main benchmarks used by traders as a reference for crude oil. The reference price used, largely depends on the location of the seller or buyer of the commodity. For example, most traders in the European region use the Brent Crude index. Petrojam purchases oil using the WTI or Brent Crude index as the pricing reference.

In order to meet local demand, Petrojam does a mixture of refining and importation of finished petroleum products. Our products prices are based on the USGC pricing index, which is widely used to price finished products such as gasoline, diesel and others within Jamaica and the Caribbean region.

For commodity processors of oil, sugar, lumber and metals such as bauxite, input costs are not factored into the final product price. They (commodity processors) are all considered price takers. This is the same for Petrojam. The product prices published weekly by the company are independent of our production costs. They are therefore not “Cost-Plus.”

Our pricing formula is based on the principle of import parity, which serves to establish the least cost of supply of a product. It is based on the cost of importing the commodity into a location and is calculated as the cost of the commodity in the source location, plus the logistics cost of delivery to the destination, that is, the relevant fees and taxes.

This pricing methodology is not unique to Petrojam – it is used by refineries globally and is consistent with the long-established petroleum pricing policy (1988) of the Government of Jamaica and ensures transparency in domestic pricing. To be profitable, the refinery output must be competitive with other import options.

Petrojam’s Ex-Refinery prices are based on the USGC prices for finished products, which change daily and for which Petrojam uses the weekly average. The pricing methodology, therefore, starts with the weekly average of the USGC price for each product, to which logistics costs such as transport, storage, and other related costs, import fees, and Government taxes are added. The final price to the consumer also includes mark-ups by both the marketing companies, (who are our direct customers) and retailers.

Petrojam has always sought to be transparent in the pricing of its petroleum products, which reflects the pricing methodology used by refineries worldwide. The upward pressure on fuel prices globally is of great concern to us as individuals and to the commercial and transportation sector. We too are hopeful for the earliest ease in the current geopolitical situations and a reduction in fuel prices.

Winston Watson is general manager of Petrojam Ltd.