Dissecting Panama’s fuel pricing system

PANAMA. Trying to understand Panama’s oil business is a hard feat. It is enveloped in a maze of calculations that does not allow even the most experienced engineer to know where the cost of a gallon of fuel and the net income of Chevron, the Shell Company (WI) Ltd. Panama, Esso Standar Oil, S. A. Limited, Petroleos Delta and ACCEL, come from.

These companies are protected under Cabinet Decree 36, which establishes an import parity price derived from an indexed price in the United States Gulf Coast (USGC). This index varies daily and includes all of the oil derivatives that are imported.

Panama does not produce or refine oil, which only Chevron, Shell and Esso import. The other companies are their clients.

According to the Vice-Minister of Internal Commerce, Manuel Jose Paredes, Panama uses as a reference the USGC price, because it is used in its main supplying countries--Venezuela, Curacao, and Trinidad and Tobago.

Harry Quinn, of Quinn Oil, believes the use of the USGC index is beneficial, because it is the most acceptable international index, but the government —through the Secretary of Energy— is currently discussing with the oil companies the possibility of using other references, which might guarantee better prices, due to the possibility of big price distortions in the market.

The parity formula, calculated by the Hydrocarbons Directorate, besides being derived from the USGC index, adds a series of fixed and variable costs, which encompass maritime transportation, fleets, insurances, land transportation, and evaporation losses, among others.

Many of the calculations seem to be based on secret variables such as the 60° Fahrenheit, of which little information is available, except that it has to do with the temperature at which fuel is distributed.

During nationalization, when the fuel leaves the storage tanks and passes to the trucks, taxes (60 cents per gallon for gasoline and 25 cents for diesel) are applied. Then “we enter an open market system where each (company) can add the profit that the business can sustain,” said Paredes, adding another element which affects prices.

Other sensitive factor is storage, which influences supply and Panama’s fuel reserve.

In Panama, most of the domestic market’s storage tanks are owned by Chevron, which keeps some empty, affecting supply and potential prices.

According to Rafael Jaen Willianson, Chevron regional manager, “there are more than 35 tanks in operation right now with a capacity of 84 million gallons, 50% of the nominal capacity.”

He argues that for their “strategic plans, the empty space has more value than leasing it to someone who is going to move 630 gallons per day.” He also claimed they already have expansion plans, mentioning that 36 million dollars have been invested on unused tanks to turn the terminal into a regional fuel redistribution hub.

According to Harry Quinn, another oil chain dilemma is ships. “Sometimes there aren’t available ships and when there are, it is not the one you need.” When there is a shortage of ships, an additional cost is added to the process.

After this run-through we can see that the oil business in Panama is not easily understandable. There are many elements in the supply chain and in each one of them there are factors that can affect price and which are not always compatible among companies. This is why some support dropping the parity formula or adopting a simpler one. However, not everyone agrees, and for consumers it would only make sense if it leads to lower prices.