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27.11.2007 Business & Finance

Hedging crude oil not the best - Baah-Wiredu

Hedging crude oil not the best - Baah-Wiredu

he Ministry of Finance and Economic Planning is presenting two options for the consideration of Cabinet on how to minimise the impact of world-wide increases in crude oil prices on the Ghanaian consumer.

Speaking exclusively to the Daily Graphic in Accra Monday, the Minister of Finance and Economic Planning, Mr Kwadwo Baah-Wiredu, said the options were either to reduce the tariffs on petroleum products or reduce the funds allocated to other sectors of the economy to provide for subsidy on petroleum products.

Mr Baah-Wiredu said hedging, which was a third option being proposed in certain quarters, was not, in the interim, a viable alternative to the increasing crude oil prices on the international market.

The minister said much as the government appreciated the impact of the increasing crude oil prices on petroleum products in the country, hedging entailed a risk which it would not want to take unless a more critical analysis was done.

Hedging is the practice whereby the price of a commodity is negotiated, and fixed by two parties buyer and seller against a future rise in the price (buyer and seller) against a future rise in the price of the commodity. The aim is to minimise the risk of financial loss from price fluctuations.

Monday, crude oil prices reached $99 a barrel, close to the $100 a barrel which experts had predicted it would hit before the end of the year.

New York's main contract light sweet crude for January delivery, struck as high as $99.11, not far off its record high of $99.29. London's Brent North Sea crude for January delivery hit a historic peak of $96.55 a barrel.

In reaction to calls by some experts on the need for the government to hedge in the face of the increasing prices of crude oil on the international market, the Finance Minister said, "Should we hedge today and the prices begin to fall, who will bear the cost?"

He said the price increases were mainly as a result of high speculations and so anything drastic could happen because it had happened before, hence the need to exercise extreme caution, particularly when it came to hedging as an option.

Mr Baah-Wiredu said from the trend so far, crude oil prices were likely to hit and exceed the $100 mark and noted that should that happen, "something must be done to it and the options will be to either reduce the tariffs levied on petroleum products or cut the budget to certain sectors to cover the cost."

Following the increase in crude oil prices, new prices of petroleum products, the second upward adjustment within a month, took effect throughout the country last Friday.

From an initial price of 97.78Gp per litre of premium petrol announced early this month, the product is now selling at l03.92Gp per litre, making it the fifth consecutive increment since the beginning of the second quarter of the year.

Gas oil has also moved from 95.28Gp per litre to 102.75Gp per litre, while kerosene has also jumped from its previous price of 75.60Gp per litre to 94.29Gp per litre.

According to the National Petroleum Authority (NPA) which gazetted the new prices, Liquefied Petroleum Gas (LPG) has also moved up from 97.9Gp per kilogramme to 100.96Gp per kilogramme, while the price of premix fuel has been pegged at 73.40Gp per litre.

Mr Baah-Wiredu described the situation as worrying but noted that there was the need for a critical analysis of the issues to identify the best option. "We have discussed among ourselves at the ministerial level but the final decision will be taken at the Cabinet level and that will soon be done," he indicated.

Explaining the impact of a reduction in petroleum taxes, for instance, the Finance Minister said each tax item went to support the enhancement of the development of a sector and, therefore, the reduction or scrapping of any was likely to affect the progress of that sector.

He said it was also equally important to note that the levels at which the prices were going up could not match the taxes so when the taxes were reduced, the impact on the general public would not be felt.

Mr Baah-Wiredu said the budget to each sector had also been finalised and wondered which sector would be sacrificed to subsidise the increasing prices of petroleum products on consumers.

"All these are issues that will be tabled before Cabinet for a decision to be taken," he added.