Editorial

Enemalta has adopted the view of the fuel procurement advisory committee not to go for long-term hedging of oil purchases, given current prices and market volatility, but instead to opt for short-term forward buying in order to maintain price stability, according to Public Investments Minister Austin Gatt.

The committee suggested that Enemalta should hedge 75 per cent of its fuel oil purchases for six to nine months at a time, in addition to catastrophe cover for 24-36 months.

Constituted bodies are now calling on the government to consider hedging in the purchase of fuel.

It is quite a momentous decision, coming in the wake of a long-drawn political controversy on whether to hedge or not to hedge. The words of the announcement were carefully chosen: the committee had advised against long-term hedging but in favour of short-term hedging. Of course, most affordable hedging is short-term anyway.

Clearly, the decision to hedge against rises in the price of oil is a huge responsibility, financially and politically. The stakes, as former committee member Joe Falzon made clear in his interview to the business section of The Times (March 29), are high. So high that the issue should have never been allowed to end up in the political arena.

With the benefit of hindsight, Malta could have saved as much as $111 million (Lm40 million) in under 18 months up to autumn 2000, when the price of oil rose from $15 to $30. It does not take much to work out what the savings would have been over the ensuing six years, with oil now at over $70 a barrel.

But given that prices can go down as well as up, hedging is a double-edge blade and that is why deals should be short term. Accountability should therefore apply both where no hedging is made as fuel prices soar and also when long term contracts are entered into, meaning the country pays rates beyond the actual market prices.

It would have been so much more reassuring for Enemalta to have come out in public with a regular, serious risk analysis weighing up the various costs of hedging and the potential gains or losses at different oil price scenarios. Then, at least, the public would have had its mind at rest that an informed decision was being made, which is far harder to fault.

The price of fuel oil went from just under $150 per metric tonne in January 2001 to over $320 now. Over that period, the price did fall too, sometimes for months at a time, but overall, the trend has always been upwards.

Will it continue going up? Analysts across the world cannot agree so it is most unfair to expect Enemalta to be able to predict the future accurately. Luckily, there are institutions willing to offer financial instruments that charge a premium in return for peace of mind. The key is stability in preference to unexpected shocks. Of course, there is more to it than just the price of fuel - fluctuations in rates of exchange and in demands for the commodity being two crucial aspects.

Prof. Falzon compared hedging to the Lm850,000 Enemalta spends insuring the power station. No one blames Enemalta for having wasted Lm850,000 if the plant does not blow up!

The opposition, not surprisingly, patted itself on the back for having recommended hedging.

One can only hope it will now step back from the political platform so that the right decisions can finally be made without fear of retribution.