The Tribune

• Sir Franklyn: Claims of quick fix ‘defy me’

• But government gasoline taxes ‘wild card’

• ‘No fiscal headroom’ to ease coming pain

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas has no short-term solutions for combating soaring energy and gas prices, a major fuel supplier’s chairman warned yesterday, adding that tax cuts were likely “off the table”.

Sir Franklyn Wilson, FOCOL Holdings chairman, told Tribune Business that there was little to nothing that The Bahamas can do to offset forces outside its control as global oil prices as measured by the Brent crude index at one point struck $139 per barrel yesterday.

That mark, which was reached on fears that the US, Europe and the western world might impose an embargo on Russian oil and gas supplies over the latter’s invasion of Ukraine, was just shy of the all-time high of $147.50 per barrel achieved in July 2008.

While prices scaled back after German and UK leaders dampened down concerns of a Russian cut-off, Bank of America analysts were reported as projecting that global oil prices could strike as much as $200 per barrel - record, uncharted territory - if Vladimir Putin’s major industry and economic earners was to be sanctioned.

While Bahamian businesses and households, already struggling to revive from COVID-19’s economic devastation, are bracing for the worst, not all will be negatively impacted by soaring gasoline and energy prices. The Public Treasury, in particular, could see a revenue windfall given that the gasoline industry’s tax structure is based on a percentage rather than fixed mark-ups.

While wholesale suppliers such as FOCOL (which operates as Shell) and gas station operators have their price-controlled margins fixed at $0.33 and $0.54 respectively, per gallon, the Government’s percentage-based tax structure means it earns more as the price of fuel rises.

Pre-VAT analysis showed that the Government used to earn $1.06 per gallon in duty, and then 7 percent Stamp Tax on landed supplies as measured by CIF (cost, insurance and freight). That structure has now changed with VAT’s introduction, and the Government is now thought to be earning over $1.50 per gallon of gasoline sold.

Sir Franklyn, while unable to recall how much the Public Treasury is earning, described the Government’s gasoline taxes as a “wild card” and the only thing that could be adjusted to mitigate the impact of soaring oil prices on Bahamian consumers.

However, he acknowledged that The Bahamas’ fiscal crisis, with a $10.6bn national debt and $859m deficit projected for the current 2021-2022 fiscal year, meant cutting other taxes - especially after the recent VAT slash to 10 percent - was likely not feasible.

“It defies me,” the FOCOL Holdings chairman said, when asked whether there was anything The Bahamas can do in the short-term to offset global developments. “Someone smarter than me may be able to figure out something, but the fact of the matter is that the first cost is regulated by pricing on global markets.”

With shipping, freight, insurance and logistics costs added to the mix, Sir Franklyn pointed out that wholesale and retail margins are fixed and regulated by government price controls. “So I don’t see what else we can do,” he argued.

The Davis administration has made multiple noises in recent weeks about steps it plans to take to ease the pain of skyrocketing energy and gas prices. The Prime Minister promised to “brainstorm” when he returned from Belize, and there has been talk of purchasing oil direct from Saudi Arabia and the use of liquefied natural gas (LNG). Those, though, are long-term efforts, not short-term fixes.

However, when it came to the Government’s gasoline taxes, he told Tribune Business: “That is, of course, the wild card. The Government could reduce the tax on gasoline but where is that money going to be made up and come from? 

“The oil companies, the major oil companies, we’re a revenue collector for the Government. It’s an easy one for the Government to collect; we do it for them and there’s not a bunch of civil servants involved. But I don’t see that as an option. 

“We have the deficit the way it is. We have reduced VAT, and reducing taxes on gasoline, I don’t see that as realistic. I don’t even put that on the table as an option.” Sir Franklyn also asserted that rising global oil prices were “not helpful” for either wholesalers such as FOCOL, or petroleum dealers, given the impact on cash flows and liquidity.

Higher prices mean both have to come up with more money upfront to pay for their fuel supplies. “Higher gasoline prices means you need to pay the oil suppliers more, and you need more money for working capital. That’s an additional cost,” he added.

“The petroleum dealers need more working capital for gasoline. That’s an additional cost. The impact is very, very significant, and considerably adverse. The fact is you have to cover your costs and ways to manage them. It’s a tough environment. We are managing as close as we can. This is part of the reason for the strategy of FOCOL going into renewables.”

Higher oil prices will also pressure The Bahamas’ foreign currency reserves, which support the one:one peg with the US dollar, to pay for the country’s fuel import bill. Sir Franklyn said he recalled being on a ‘talk show’ with the late Sir William Allen, former finance minister, who said fuel imports typically consume 25 percent of this nation’s foreign exchange earnings.

And he added that all this was happening at a time when the Government has little room for financial manoevere due to the debt blow-out produced by Hurricane Dorian and COVID-19. “Hubert Ingraham used to use the term about headroom; how much headroom the Government had,” Sir Franklyn recalled.’

“The tragedy for The Bahamas now is that, as a result of policies pursued in the recent past, during a significant part of the Christie administration and for much of the Minnis administration, the headroom has gone. It’s a tragedy.”