Want the truth about fuel prices? Here it is in one simple graph. So much is being said about the price of automotive fuels that sometimes we miss the wood for the trees. While it does make sense to hedge against heavy fuel oil and gas oil prices as very large quantities of fuel are needed for the power station, the amount of diesel and petrol Malta needs to buy is relatively small and hedging simply doesn’t make a lot of sense.
The current government might have offered a so-called ‘price stability’ when it locked the prices of petrol and diesel for most of the year but when, in November, the Budget was announced and the prices stayed more or less the same it was clear there was going to be a backlash.
At the end of the day, what is the worth of such so-called price stability to the common person, or the economy, for that matter, if the prices are so much higher than the market, leading us to the road of competitive disadvantage?
Hedging has always been a risky business and the Energy Minister’s advisers should have known that, with such small quantities, the risk of hedging prices far outweighs the advantages of price stability. It is true that Enemalta has previously been very successful in its hedging of heavy fuel oil and gas oil, primarily by taking a cautious approach with multiple short-term hedges, but there were occasions where losses were made too.
The reason why the HFO and gas oil hedges were ultimately deemed successful is because the approach was a flexible one, unlike the full quantity hedge over a period of a few months for automotive fuel, which the government is practising.
Back in November, when the government had already fixed the prices for the first few months of 2015, there were already clear indications that the price of crude oil and, consequently, the price of fuel was going down and that the free fall was only going to continue.
The only reason Malta is paying such high prices for fuel today is because of a wrong decision that was taken back in October/November. At this point, it is only fair to ask ourselves whether we prefer a ‘stability in prices’ or whether it would make more sense going back to the old model and have a more fluid buying structure similar to the model found in most of the EU where the price of fuel at the pump changes regularly.
During the previous administration, the price of petrol and diesel kept going up but so did prices elsewhere and, in reality, we were not disadvantaged by this as a country.
The amount of diesel and petrol Malta needs to buy is relatively small and hedging simply doesn’t make a lot of sense
Furthermore, with Malta being such a small country with limited storage capability, we simply don’t have the option of buying stock when prices are favourable, offsetting any small fluctuations there might be between certain months.
It needs to be remembered what kind of market the previous administration had to face. It was a recession scenario, with great worldwide instability (with civil wars and trade embargoes) and tragedies such as the Fukushima meltdown that continued pushing up the price of oil.
So the price of oil was in continuous fluctuation but, that being said, Malta was always below the EU 27 average. That is, until now, as can be clearly seen from the graph.
The graph illustrates unleaded prices inclusive of taxes in the EU for the past three years. In the past six months, fuel prices in Cyprus fell by 13.65 per cent, in the UK by 7.73 per cent and the EU average fell by 8.76 per cent. In Malta, prices fell by 1.41 per cent until January 2015.
As can also be seen from the graph, Malta’s prices went up and down, on trend, with the rest of the EU. Bar Cyprus (which has very low taxes on fuels, hence the lower prices), Malta always had some of the lowest fuel prices in the EU. Apart, that is, from the past few months, when this government continued with the ‘price stability’ stance costing the public more than a few euros.
Unfortunately, the government has not even admitted that a mistake was made when hedging over a long term (months) without retaining the flexibility of shorter term hedges, albeit at a lower potential gain.
The hedging of automotive fuels was a mistake but there is every indication that the government will continue sticking its head in the sand and probably continue trying to hedge on the small amounts Malta consumes, all this in its pursuit of ‘price stability’ and without taking into account market realities.
The recently-announced reduction in the price of fuel by 4c a litre is, quite frankly, insulting given the prevailing circumstances and prices throughout Europe. It clearly shows the government is in panic mode and struggling to respond to the criticism levelled at it by the Opposition and constituted bodies.
Mel Hart is a former communications coordinator at Enemalta Corporation.