Using crude oil: how it all began

Everyday, millions of people worldwide purchase thousands of oil-related products. Oil is used to manufacture everything from plastics, detergents and drugs to preservatives, clothing and appliances. For instance, lipstick, candles and shoes are all made from oil-derived products, and they are not alone.

In 1990, Curoil introduced the correction factor system to calculate the price of oil products like gasoline, gasoil (diesel), kerosene, and cooking gas. The correction factor system was proposed by Curoil with the aim to maintain prices constant for a period of three months (one quarter). The reason for introducing this system is that international oil product prices, which Curoil has to pay to its supplier Pdvsa, change frequently and sometimes even rise or fall considerably within a short period of time. This causes many fluctuations and price instability.

With the correction factor system however, these fluctuations are absorbed by Curoil during the quarter, and the consumer does not notice any price changes, because prices are kept constant at the local gas pumps for three months. Thus the correction factor system leads to price stabilization and aims to avoid sharp rises or drops in oil product prices. This is advantageous for both consumers and businesses, since it facilitates budgeting, because everyone knows that oil product prices will remain stable for three months. Thus there is no need to consider new prices every week or every day, as prices change on the international market.

At the end of a quarter Curoil evaluates the international price changes that took place during that quarter, to determine if prices will rise, fall, or remain the same for the local market during the next three months. If prices rose on the international market during the quarter, local prices will rise in the next quarter. If international prices decreased during the quarter, local prices will also be decreased during the next three months. In both cases, the local price adaptation will take place after the three months have passed. The system for price calculation functions in such a way that in the end the customer neither pays too much nor too little for gasoline or other oil products.

After completing the necessary calculations, taking into consideration how prices fluctuated in the previous three months, Curoil formulates its proposal on prices for the next quarter. After being audited and approved by Curoil’s accountants, this proposal is submitted to the Curaçao government’s department of Economic Affairs (DEZ), which also reviews and audits it. Next, DEZ sends its recommendation on the proposal to the Curaçao government, and the government makes the final decision as to how the price will be set.

The organizations involved in setting prices for oil products in Curaçao are:

As can be clearly noted, Curoil is not the organization that sets oil product prices for the Curaçao community, because the Island Government of Curaçao is the organization in charge of this, and the only institution that has the authority to set prices.

From 2003 until the first half of April 2005, there have been only five gasoline price changes at the gasoline pumps in Curaçao, while there were supposed to have been nine price changes during this period, according to the correction factor system of changing prices every three months. In 2003 there were three price changes, in 2004 only one price change, and also one price change during the first quarter of 2005. Of these five changes, the first two were price decreases, followed by three price increases. Thus, when comparing January 1, 2003 to February 1, 2005, we can conclude that in two years the gasoline price in Curaçao has risen by a total of 5.5 cents per liter, an increase of only 3.6%, from 154.50 cents per liter to 160.00 cents per liter for Super gasoline.

On the other hand, the international crude oil prices have risen by 83.6% during this time period, from $31.20 per barrel in January 2003 to $57.27 per barrel in April 2005. Similarly, international gasoline prices, that Curoil has to pay to purchase gasoline from its supplier Pdvsa, have risen by 42.9% in the much shorter time period of December 2004 to April 2005.

Considering the above information, it can be concluded that local gasoline prices at the gas stations in Curaçao must rise, because in the past few months and years, the international gasoline prices that Curoil must pay (to Pdvsa, in order to buy the gasoline), have risen considerably, while the prices that Curoil charges for gasoline at the local gas pumps have hardly risen at all. A rise in prices at the gas stations would enable Curoil to collect (part of) the money that it has not charged its customers at the pump during the past months. In other words, this will permit Curoil to collect the money that it has absorbed so far, since local gasoline prices have not been adapted as they should have been. The amount absorbed by Curoil has risen over the past few years to a total of 26 million guilders as of March 2005. At some point, this money has to be re-collected.

In the case that international oil and gasoline prices begin to drop, Curoil can begin to collect the accumulated outstanding balance of 26 million if local prices remain the same. This means that if local gasoline prices do not rise nor drop, but remain constant at the current level, while international gasoline prices drop (that is, Curoil’s purchase price), the balance of 26 million will start to diminish. Thus, under current circumstances, a drop in international prices will not automatically translate into a drop in local gasoline prices, because of the outstanding balance that Curoil must re-collect.

If international prices continue to decrease however, and the balance is completely recovered, there will come a point when local prices must also decrease. The reason is that if there is no outstanding balance, and international prices drop, this means that at that particular point, Curoil will be charging a high sales price at the pump while it pays a low purchase price to its supplier Pdvsa. This means that Curoil in such a case will be overcharging the customer, and in order to pay back to the customer the overcharged amount, local gasoline prices will have to be dropped, so the customer will get his or her money back and will be neither paying too much nor too little for gasoline or other oil products.

The prices that Curoil pays for oil products to its supplier Pdvsa, are international product prices based on the publication Platts Oilgram. Platts is an independent publication that publishes daily oil product prices for different areas of the world. These prices form the basis for most negotiations to determine oil product prices in the regions of the Caribbean, South and North America, and Curaçao is no exception to that.

On different occasions both Curoil and the Island Government of Curaçao have negotiated with Pdvsa in order to reach preferential prices for oil products for Curaçao. In the past, there have been at least three instances where this topic was discussed among the Central and Island Governments, Curoil executives, and the President of Pdvsa. Even via diplomatic channels involving the Dutch ambassador and Venezuelan President Hugo Chavez, the issue of oil distribution and oil product prices was discussed, but neither of these encounters has produced much result with regards to preferential oil product prices.

Pdvsa officials reason that the cause of high gasoline prices in Curaçao is the high excise (locally known as "akseins") and taxes levied by the two levels of government. To illustrate: the cost of Super gasoline (purchase price paid to Pdvsa) is 71.02 cents per liter. In contrast, the final price of Super gasoline paid by the customer at the gas station is 180.10 cents per liter. This means that the cost of gasoline (Curoil’s price to be paid to Pdvsa) is 39.4% of the total price of gasoline at the gas pump. In other words, even if Curoil would obtain a discount from Pdvsa for the cost of the gasoline, this would lead to only a minor reduction in the price of gasoline for consumers at the pump.

The gasoline price consists of several components. These are:

Some of the above components are fixed and others are variable. The fixed components do not change when the gasoline price changes at gas stations. These fixed components are the excise tax, the profit margin for Curoil, and the profit margin for gas stations. No matter how much or how little the price of gasoline rises or falls, these fixed components remain exactly the same, in absolute numbers, not percentages. The other set of components are variable components, meaning that they do change when the gasoline price changes at the pump. These components are the cost of gasoline, the O.B. and the correction factor. To illustrate, the price of Super gasoline is set at 180.10 cents per liter. The components that make up this total are:

Excise tax 63.00

Profit margin for gas stations (COPDA) 12.35

Profit margin for Curoil 6.00

These components do not change

Cost of gasoline 71.02

O.B. 14.97

Correction factor 12.76

These components do change

Total: 180.10 cents per liter

Since the fixed components are absolute and not percentages, this means that the excise tax always remains fixed at 63.00 cents per liter, no matter what happens to the final price of gasoline. In the same way, the Curoil margin is always fixed at exactly 6.00 cents per liter, while the gas station margin always remains the same at 12.35 cents per liter, no matter if the gasoline price for the consumer rises or falls. This means that the only components that can actually influence a change in the price of gasoline are the variable components which are the cost, O.B., and correction factor. Thus if one or more of these components change, this will bring about a change in the final price of gasoline, be it an increase or a decrease.