Editorial | The residue of war

The downward drift in oil prices since the United States and Iran halted hostilities ahead of negotiations to end their war, is good news for Jamaica.

The island’s economy will hopefully get a respite from higher energy costs and its potential impact on domestic inflation.  But policymakers and domestic consumers should avoid becoming overly ecstatic, given the many uncertainties that surround the matter. For it is unlikely that oil prices will fall back to their pre-war levels anytime soon. 

In fact, they  could, though not at the same levels as during the war, face upward pressures if, and when, China aggressively returns to the market to bolster its commercial  reserves, which it   tapped during the conflict.     

Further, domestically, the government’s recent policy decision to protect the balance sheet of the State-owned Petrojam oil refinery and prevent it from becoming a burden to the national treasury, will affect consumers beyond those who drive diesel-powered vehicles, like  the SUVs the administration  tends to assign to ministers.

According to the government’s Fiscal Policy Paper for the current financial year (1 April, 2026-31 March, 2027), the administration projected Jamaica to buy oil at around US$60 per barrel, or up to 17 per cent below the average for the previous fiscal year.

After the United States and Israel bombed Iran in February,  Tehran responded by attacking US bases/allies in the Gulf region and closing  the Strait of Hormuz, through which a fifth of the world's oil transported by sea passes. During the fighting, oil prices peaked at US$126 a barrel, more than 70 per cent above pre-war prices. On average, though, oil traded around  54 per cent higher.

With the United States and Iran preparing to sign an MOU ahead of broader negotiations for a permanent end to the war, benchmark Brent crude, at US$80.78 a barrel on Tuesday, was just shy of 11 per cent higher than at the war’s start.

Even that moderation could still have a significant impact on Jamaica, which depends on fossil fuels for over 90 per cent of its energy needs and imports more than 20 million barrels of crude and other petroleum products annually.  An 11 per cent increase on last year’s oil bill would mean forking out another US$192 million (J$30 billion) for the commodity.

But that isn’t the entire story. Markets could be roiled by Donald Trump’s threat that he could return to war if he is dissatisfied with Iran’s approach to imminent negotiations on its nuclear programme.

The China factor also hovers.

  Before the start of the war, analysts say, China imported approximately 11.6 million barrels of oil per day, equivalent to roughly 82 per cent of the 14 million barrels a day the world lost when the Iranians closed the Strait of Hormuz.  As oil prices rose, Beijing reduced its oil imports by about a third. Which it could do without the pressure faced by other countries to ration energy consumption.

China  could tap into an estimated one billion barrels of commercial reserves (its 1.23 billion barrel of strategic reserves remains untouched);  depend on coal;  and rely on renewable energy sources, such as wind and solar, in which it is the world leader. 

In other words China’s huge investment in renewables, its  aggressive foray into electric-powered vehicles, and its long-term strategic planning,  proved their worth. 

The China effect is, from a market perspective, just as important.  Beijing’s slower oil purchases during the war helped to moderate prices.

It is likely to resume higher purchases as prices retreat. But that could also drive prices upwards - helping to keep them above what they were before the war.  

These considerations affect Jamaica and its strategic decision-making around oil.

Last week, the government allowed Petrojam, the state-owned oil refinery, to raise the cap - from J$4.50 to J$12.50 (178 per cent) -  the price of fuels it supplies to the market could either rise or fall. Before the adjustment of the cap, according to the energy minister, Daryl Vaz, the J$4.50 per litre in price movements had, over a month, cost Petrojam J$1.3 billion in subsidies to consumers. The company was projected to lose US$9.6 million this fiscal year, after a deficit of US$27 million in 2025.

It was initially implied  that the adjustment would be applied across the board. When the adjustment was rolled out, it was limited to diesel fuel - presumably the petrol used in vehicles mostly driven by better-off Jamaicans. This approach, apparently, was aimed at protecting poorer consumers.  

At the same time, the initiative would prevent or limit the losses by the refinery, which could become a liability for the government.

However, the major portion of Jamaica’s haulage fleet is diesel-powered trucks and trailers, which will face higher operating costs. There is likely to be a pass through impact on consumers.

Notably, any effect of this increase won’t be captured in the inflation number until those for June and July appear, but the 1.5 per cent (annualised at 19.56 per cent) jump in the consumer price index (CPI) for May is cause for notice.

Both the central bank, among whose critical role is the management of inflation, and the finance ministry, should have much to say on these matters.