AMMAN — Continued increases in global oil prices are placing growing pressure on Jordan’s domestic fuel-pricing mechanism, as the gap between actual international costs and locally approved prices widens amid the government’s gradual approach to passing global price changes on to consumers and economic sectors.
With Brent crude exceeding $107 a barrel during Tuesday’s trading and the most actively traded futures contracts rising to around $100, the domestic pricing mechanism has taken on greater importance in absorbing shifts in global markets. Keeping local prices at their current levels effectively means that an increasing portion of higher external costs is not passed on to consumers, with the Treasury absorbing part of the difference.
According to data from the Fuel Derivatives Pricing Committee, cumulative price differences borne by the Treasury as a result of not fully reflecting actual costs in domestic prices reached around JD224 million from the beginning of the crisis through the end of August, including support for household gas cylinders.
The figure highlights the financial cost of maintaining the gradual pricing policy, while local fuel prices remain unchanged despite fluctuations in global markets. The committee has kept the price of 90-octane gasoline at 1,000 fils per liter, 95-octane gasoline at 1,310 fils per liter, diesel at 850 fils per liter and kerosene at 550 fils per liter. The price of a household gas cylinder has also remained fixed at JD7.
Jordan’s pricing mechanism is based on average international prices over the 30 days preceding the pricing date, creating a natural time lag between movements in global markets and their impact on domestic prices.
However, when the gap persists for an extended period, particularly when global prices are rising, the issue shifts from a simple time lag in price transmission to a financial cost borne by the Treasury. This highlights the distinction between the temporary impact of the monthly averaging mechanism and the difference resulting from a decision not to pass the full cost on to consumers.
The pricing equation is becoming more sensitive as global oil prices remain elevated, driven by concerns over crude supplies from the Middle East, higher shipping costs and transportation challenges, as well as uncertainty surrounding the course of US-Iran talks and maritime traffic through the Strait of Hormuz.
Despite signs of improved crude exports from the region, markets continue to approach supplies with a high degree of caution. Preliminary data from commodities data provider Kpler showed that crude oil exports from major Middle Eastern producers recovered in September to 12.8 million barrels per day, their highest level since February, driven by increased shipments from Saudi Arabia and the United Arab Emirates.
However, higher exports do not necessarily mean that supply costs have returned to normal levels. Part of the increase relies on alternative transportation arrangements, including ship-to-ship transfers, which Tim Waterer, an analyst at KCM Trade, described as less efficient and more expensive than conventional operations.
This factor is important when assessing global oil prices, as the price of crude is determined not only by production levels but also by the cost of transporting, insuring and delivering oil to markets. Continued increases in shipping and transportation costs could therefore keep upward pressure on prices even if the volume of crude available for export improves.
From this perspective, rising global oil prices are placing Jordan’s domestic pricing policy before a more complicated equation. On one hand, not fully passing on price increases helps limit their immediate impact on consumers and economic sectors. On the other, continued absorption of the differences increases the financial burden on the Treasury.
The JD224 million in accumulated differences through the end of August indicates that the gradual pricing policy comes with a cost, effectively shifting part of the price shock from consumers to public finances. The longer global prices remain elevated, the more important it becomes to determine how long this policy can continue, particularly if oil prices remain high or rise further.
With global prices continuing to exceed previous levels, the monthly pricing mechanism has become increasingly important in determining the size of the gap between global and domestic markets. Each increase in the global average during the 30-day calculation period raises the theoretical cost of petroleum products, while the extent to which that increase is reflected in domestic prices depends on decisions by the pricing committee and the government’s policy toward consumers and the Treasury.
Accordingly, continued stability in domestic fuel prices while global oil prices rise effectively means that price differences will continue to accumulate unless global prices fall sufficiently to narrow the gap or domestic prices are gradually increased in line with changes in costs.
The issue becomes even more significant if geopolitical factors continue pushing oil prices higher, particularly because any additional disruption to supply flows or maritime traffic through the Strait of Hormuz could raise the risk premium in global markets and increase the cost of importing petroleum products.
Conversely, successful US-Iran talks and a return of supply and transportation flows to more normal levels could ease pressure on global prices, giving the domestic pricing mechanism greater room to absorb accumulated differences without imposing large increases on consumers.
