Jamaica and the case for energy abundance

Noah Smith did an interesting post just before Christmas on what’s worked and what hasn’t for Jamaica’s economic development. The country is doing a lot better than many, but its growth of living standards seems to have stalled out in the 21st century, while other countries (mostly in Asia, but also the nearby Dominican Republic) have raced ahead. And the tl;dr is that Jamaica hasn’t really managed to get on the manufacturing train to supplement and complement their tourism sector (which is a notorious development dead end) and natural resource exports.

I don’t know a lot about Jamaica, but this saga does seem to me to intersect with an obsession of mine: energy abundance.

All the islands of the Caribbean are blessed with a great deal of natural beauty but face serious problems in their energy sectors, which is a big impediment to developing a manufacturing economy. And I think that more than just about anyplace else in the world, Jamaica would be well-suited to try to leverage its ties to the United States into a solution to its — and the world’s — energy problems by being the place that’s willing to say yes to advanced nuclear designs.

All this bauxite and no aluminum

Something Noah Smith mentions is that development success stories tend to feature export discipline, with domestic companies encouraged to compete in global export markets.

What’s Jamaica’s problem here? Well, a majority of their exports are made up of bauxite, a material that’s used to make aluminum. This is lucrative enough to keep the value of Jamaica’s currency high and make it a bad place from which to do very low-end globally competitive manufacturing. But the blessing of even the lowest-end manufacturing is that it gets you on the path of export discipline where you can move up the value chain from apparel to light goods to more advanced products. Bauxite mining, by contrast, is a road to nowhere.

But if the point of bauxite is to make aluminum, how come bauxite mining isn’t a step on the road to manufacturing aluminum? According to Esther Figueroa, they don’t make aluminum in Jamaica because they don’t have enough electricity:

Smelting requires 13,500 kWh of electricity per ton of aluminum, more energy than any other metal. Jamaica has never smelted aluminum because the industry requires cheap electricity (usually hydro electric, coal or more recently liquid gas), and Jamaica has relatively high electricity costs. But Jamaica has for almost 70 years exported bauxite and processed alumina. And new mining leases have been awarded for the next 30 years which would project Jamaica into at least a century of extraction.

If Jamaica had abundant electricity, it would be natural to make aluminum there rather than just shipping out the bauxite. And once you’re making aluminum, you could become a place that manufactures things that are made out of aluminum.

But right now Jamaicans are paying $0.39 per kilowatt-hour of electricity while prices in the U.S. range from $0.075 in Louisiana to $0.28 in Hawaii. And it’s not a coincidence that Hawaii is the most expensive state — this is a common issue for islands. On the mainland, prices max out in Connecticut at $0.19 per kilowatt-hour.

Beyond manufacturing, this is just a big issue for living standards. If Jamaica could achieve Connecticut’s electricity prices, that would still be way too expensive to anchor an aluminum industry. But ordinary families could afford to light and cool their homes at a lower cost, with more money flowing into consumption of locally produced services rather than lining the pockets of foreign oil producers.

Small island problems

According to the U.S. National Renewable Electricity Lab, “more than 94% of the island’s electricity is generated from petroleum-based fuels.”

These fuels flow through Petrojam — a state-owned enterprise that serves as the island’s only oil refinery — making gasoline, kerosene, diesel, and even liquified petroleum that you can use in a gas stove where Americans would use natural gas (because Jamaica is an island, it’s not convenient to deliver natural gas via pipelines). As you might expect of a government-run monopolist, Petrojam doesn’t seem to be particularly well managed and was recently involved in a huge scandal. At the same time, you can see why the island wouldn’t want its population to be at the mercy of a privately owned oil refining monopoly.