The accusation that the government is stealing from the public due to the high price of fuel is not only hollow but, indeed, unworthy of the person making it.

I am sure that Opposition leader Simon Busuttil knows well enough how hedging works and that, sometimes, it doesn’t.

Hedging is a financial tool that, if managed correctly, can help maintain the cost of imported fuel within reasonable levels.

Certain quarters tend to treat the term ‘hedging as if it were a dirty word. This is not correct because all banks, including those in Malta, continually and on a daily basis hedge their transactions in foreign currencies.

First of all, one must admit that hedging involves an inherent risk but the risk is just as great, or even greater, when one does not hedge.

Hedging is not meant to be used to reduce prices because that would involve a degree of speculation but, rather, to even out the abnormal fluctuation in prices.

It is also incorrect to chide someone for having ‘got it wrong’ immediately prices work against a hedge because the result of hedging needs to be seen over a long period of time.

Naturally, with hindsight, everybody is a genius.

When one places a hedge, one is expected to have taken a number of aspects into consideration such as demand and supply, geopolitical matters globally but, particularly, in the main oil-producing countries and also the level of speculation in the market, which is a huge price driver.

Unfortunately, not even the best of world experts on the subject can come up with a formula which ensures that the hedge always works in favour of the party placing the hedge.

Indeed, the counter party (the bank) would be betting on precisely this: that matters will work out differently from what the fuel hedger is expecting.

Hedging is not meant to be used to reduce prices

Sometimes, fuel prices, like most other things, do not follow the usual pattern one is expecting, especially since nobody has a crystal ball that is able to tell the future. When the Gulf war broke out, everybody expected fuel prices to rise, however they did not, in fact they plummeted.

There are various financial instruments that one can use to decide on how to hedge and these depend on what one wants to attain from hedging.

If one wants to be speculative, then one would probably fix a price for a number of months in the future. However, if one is simply trying to maintain a budget price, then one would probably hedge a price within a maximum and a minimum (known as a collar). This would mean that one would not make any profit but would neither lose out as long as the purchasing price remained within the stated levels.

One must also understand that hedging is not an easy subject and needs to be tackled by an experienced team of three or four people who, together, would discuss the best course of action and, later on, would all be on the phones with the foreign banks to obtain the best possible prices.

It also helps to engage an expert (most major airlines hedge and have experts in this field) at least to attend monthly meetings where the purchasing committee would have the benefit of his advice.

Moreover, it is not in the least fair to compare the prices of fuel in Malta with those of other bigger countries like Britain, Italy and Germany.

Such countries buy and commit themselves to volumes of fuel that are very much larger than those this country deals in and, therefore, are in a much better position to negotiate better prices.

Hedging for fuel prices may be rather complicated but this simple concept of economics is understood even by any layman, let alone by people who are aspiring to lead our country.

So far, Busuttil has not come out and condemned ‘hedging’.

He is still hedging (excuse the pun) his position, knowing that, if someday he would be wearing the prime minister’s shoes, he too would have to decide whether to hedge or not to hedge.

Anthony Chircop is a former group head, treasury at Air Malta.