The Impact of Global Oil Prices on our Cost for Electricity
It is not Mr. Dickon! proving the impact of the heavy reliance on imported oil on the price we pay for electricity
Dr. John N. Telesford
In a letter/article published in the Grenada informer (26 August 2022, p. 18 Online), the writer wrote: “Mr. Dickon, why do our GRENLEC and NAWASA bills keep going up since you became the Prime Minister of Grenada?” With a focus on GRENLEC only, the answer to the question asked may need some political decision, but Mr. Dickon’s or for that matter any other PM’s influence on the rising prices paid to GRENLEC for electricity is minimal, to say the least.
Herein lies the main reason and thus the answer to the writer’s question.
The impact of the price we pay for imported oil on the cost of local electricity and other energy services, such as mobility, is proven. Using electricity prices as an example, what we pay for electricity on a monthly basis is strongly related to what we pay for oil on the global market. Therefore, the rise and fall in electricity prices (price volatility) or impact, is highly influenced by the global prices for oil. This is very problematic for our economic growth and development and has caused a number of social stresses for the energy impoverished. It does not take much to see, that when electricity prices are high, business and home owners need to spend much more for electricity. Additionally, the fluctuations in local prices for electricity also hinders effective planning for businesses and investments.
To consider these fluctuations, I have been tracking for the last two decades, form 1996, the electricity prices in Grenada. This short paper provides a glimpse of some of that work and demonstrates that the main cause of price rises and falls in local electricity prices are due mainly to the influence of global oil prices. Although the mechanism that is used to calculate the electricity rate or tariff may be aiding this influence, once the dependence on imported oil is not significantly reduced, we may be hard pressed to achieve robust economic growth and development.
The electricity rate has two basic components, a fuel rate and a non-fuel rate. The non-fuel rate remains almost fixed over time and has only been increased by a few cents over the last five or so years. However, in recent times (early 2022) this has been drastically reduced by about 25% to ease the price of electricity to the consumer. A political decision. Notwithstanding this cut, a look at your most recent electricity bills shows that the price you pay is rising even if your average monthly consumption remains the same or close to that. The main reason for this is our high dependence on imported oil to generate electricity. To demonstrate, I provide a few graphs.
Graph 1 shows the fluctuation in the local fuel rate compared to the global prices for Brent crude oil in the period, 1996 to 2022. The upper line shows the prices for crude oil on the global market and the lower one the local fuel rate. Note the close match in the fluctuations between the two lines, suggesting that the fuel rate that goes into the electricity bill may be related to the price we pay for imported oil to generate the electricity.
Graph 1
Date sources: GRENLEC and Statistica (For my mathematical friends, I have removed the vertical axes for ease of reading, the intent is to demonstrate the similarity in trends)
Graph 2 further demonstrates this relationship between the fuel rate on our electricity bills and the price we pay for imported crude oil. With fear of becoming to mathematical but not wanting to oversimplify a complex issue, the close fit of the dots on and the upward trend of the graph suggests that there is a strong positive relationship between the two variables. In other words, if global oil prices increase, then so to will the fuel rate for electricity prices, and vice versa.
Graph 2
Data sources: GRENLEC and Statista
However, what is more alarming about this relationship, is what we see in graph 3. In 1996 the average annual fuel rate was EC$0.17, which has spiraled upwards to EC$0.63 in August of 2022. More interestingly, we also see that although there are periods of relatively low rates, the straight line that goes through the graph is tending upwards. This systematically increasing trend is going to continue well into our future if we do not take drastic and well-thought-out decisions to wean our society and economy from the ‘full’ dependence on fossil-fuels for providing energy services such as electricity.
Graph 3
Data source: GRENLEC Website
To take a peek into the near future, I have also created a very simple linear model using this data that allows me to predict local fuel rates based on the predictions of the price for global oil. The model was able to predict the actual fuel rates since 1996 with some degree of accuracy. Therefore, if the prediction of approximately USD95.00 for oil prices on the global market turns out to be true, my own little linear model, suggests that on average our 2023 fuel rate will be about EC$0.56. This is still relatively high, suggesting further the systematically increasing nature of the fuel rate and by extension the prices for electricity.
In conclusion, taking short-term political decisions, as we saw with the cut in non-fuel rate in the beginning of 2022 did not work. In that time my own electricity bill continued to rise. But if the global oil prices were lower, it may have worked. Therefore, the influence and the impact of imported oil on the local electricity rates needs to be controlled. We cannot continue to take short cut, politically expedient, measures that will have temporary fixes and even failed fixes, as we wait for oil prices to drop again. We need strong and decisive action now, for long-term secure, reliable and affordable energy services! Here is where Mr. Dickon and his Ministers come in!
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