Why war in Iran impacts fuel prices in Cayman

When the US bombs Iran, or Russia invades Ukraine, it sets off a chain of consequences that drive up the costs of everything from fuel to food in Cayman.

The connection between the closure of a shipping strait in the Middle East and the price at the local pumps is a sign of how dependent the Cayman Islands remains on global supply chains.

The Cayman Compass talked to regional security expert Anthony Clayton and Dow Travers, owner of the Refuel gas stations, and reviewed reports from OfReg and the National Energy Policy, to explain those impacts.

Cayman does not buy oil from the Arabian Gulf, so does it matter here?

Because oil is priced globally. Crude is valued against international benchmarks. When supply is disrupted anywhere, those benchmarks move, and every barrel tied to them moves too.

Though Cayman does not get any of its fuel supply from the Persian Gulf countries, the war affects the global price of oil. Major economies in Asia, which do buy from those sources, are forced to look elsewhere, many of them sending ships through the Panama Canal to buy refined oil from the US, for example.

“It doesn’t matter if you don’t buy your oil directly from Iran. What matters is the world price of oil,” said Clayton. He estimates oil was around US$61 a barrel in January, before the conflict began, and is now above US$100.

How big is the disruption?

According to Clayton, about a quarter of the world’s oil and a fifth of its liquefied natural gas passed through the Strait of Hormuz before the war. After Iran closed it, traffic fell close to zero. He says it has since recovered to around 80% of pre-war levels, but only with US military escorts and alternative routes.

Houthi forces in Yemen have also disrupted the Bab al-Mandab Strait at the entrance to the Red Sea. Drone strikes have hit pumping stations on Saudi Arabia’s east-west pipeline, which was built to bypass Hormuz. The situation fluctuates weekly, but supply interruption has been constant since the war began.

This exacerbates an issue of globally constrained supply, because of restrictions on supply out of Russia.

Where does Cayman’s fuel come from?

A 2021 market study from Cayman’s fuel regulator OfReg found that “essentially all fuels consumed in the Cayman Islands are imported in a refined state, and the vast majority of imported refined fuels are sourced from refineries in the United States.”

OfReg CEO Sonji Myles says Cayman relies on supplies from the US Gulf Coast.

Travers, CEO of independent fuel retailer ReFuel, said that since the United States is the world’s largest exporter of oil and refined products, the fuel in a Cayman gas tank most likely started as crude drilled in the Gulf of Mexico and refined on the Gulf Coast. Since they are globally traded commodities they could potentially be sourced from anywhere, he said.

Aside from the global trading benchmarks which dictate price, refining capacity is an issue.

Travers says there are only a handful of major refining regions in the world – the US Gulf Coast, Russia, the Middle East and China. Before the wars, there were only around 800 refineries globally.

With Middle East supply disrupted and Russian exports constrained, more of the world’s demand falls on the remaining refiners. That pushes up the “crack spread,” the price difference between a barrel of crude oil and a barrel of diesel oil or gasoline. “It’s just astronomically high,” Travers said.

As a result, the price of US Gulf Coast ultra-low sulphur diesel, a key benchmark for Cayman, has risen 77% since the conflict began in February, the Compass reported on 25 Sept.

How does the fuel get here?

Most of Cayman’s fuel arrives on tankers and is pumped ashore through a pipeline to the bulk storage facilities at Jackson Point. Some of those ships arrive via regional hubs, such as St. Croix, but the OfReg study found the vast majority of the refined fuel comes from US refineries.

Two companies, Rubis and Sol, import in bulk. They sell to service stations and to CUC, which uses diesel to generate electricity. Refuel imports smaller quantities in ISO shipping containers through the cargo port for its own stations.

Along the way, the fuel can be traded several times, between refiners, brokers and storage depots. Shipping and logistics add further cost.

Travers says Cayman is around two-and-a-half days’ sailing from Miami. That makes it hard to share the multi-island “milk run” deliveries that spread shipping costs across the Eastern Caribbean.

Why don’t pump prices change the day oil prices rise?

The fuel in Cayman’s tanks was bought weeks earlier. Travers estimates the main importers receive one to two shipments a month of various fuel products.

Depending on how each company accounts for its stock, higher costs either feed through gradually or arrive in a single jump once the cheaper fuel runs out. “It’s usually a couple months for it to be fully reflected,” he said.

How much of the pump price is the oil itself?

The OfReg study broke down the price of regular gasoline in March 2020, putting crude oil at around a quarter of the price. That share will have increased since then, given the higher price of oil and the waiver of customs duty in place since June this year.

Travers, who imports his own fuel in shipping containers, said the larger importers’ prices reflect the high fixed costs of running big storage depots in a market too small to spread the costs.

Does anyone regulate fuel prices or profit margins?

Not directly. OfReg publishes the prices charged at individual service stations and marinas around the Cayman Islands for regular and premium gasoline and diesel, updated weekly.

Travers argues there could be much more publicity around this data, and that it could be updated in real time and published on social media.

He said consumer habits were hard to change, and that many people, while they talk a lot about gas prices, still pay more than they need to for fuel. He said Refuel is often significantly cheaper than most of the other gas stations on island.

“Our regular and diesel fuel is consistently 30-50 cents per gallon below the national average. You could save over $5 a fill-up depending on your tank size … and yet most people don’t,” he said.

“People are willing to pay a premium for convenience, habit, and not having to think about this.”

OfReg says it wants more powers. Myles said the regulator wants the ability to influence pump prices, reduce price swings and tackle trading practices that add unnecessary cost per gallon. These include fuel being bought and sold between intermediaries, and single companies controlling several stages of the supply chain.

He described the current fuel laws as “a patchwork,” never designed to give the regulator a say over prices.

Couldn’t Cayman lock in cheaper fuel in advance?

The price of oil briefly fell below zero during the COVID-19 pandemic, though only for buyers able to collect it from the main US storage hub at Cushing, Oklahoma. More commonly, buyers can hedge against future shocks by locking in a price on the futures market, and some Caribbean islands do.

But Travers warned that hedging has its own costs and can go wrong as often as it goes right. To do it properly, he said, a buyer would effectively need its own in-house hedge fund.

“If one could predict oil markets, those people probably wouldn’t be in the oil operations game,” he said.