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20.05.2008 General News

To hedge or not to hedge

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Until March 2000, OPEC adopted and operated a price band of $22 to $28 on the crude oil market. This meant that there was a controlled policy where crude oil prices could only move back and forth within the set price band of $22 to $28. However, since the year 2005, with limited spare production capacity, OPEC abandoned its price band and has been powerless to stem the surge in oil prices ever since. Anytime OPEC had attempted to set production quotas low enough to stabilize prices, the attempt was defeated, as various members of OPEC produced beyond their quotas.

Crude oil prices behave as any other commodity with wide price changes in times of shortage or over-supply. This market phenomena has been accentuated by the booming crude oil demand in the Asian Pacific region, especially with increasing demands from China and India, who between them command some 35 percent of the world's population. This has been exacerbated by geo-political tensions and the instability of the Middle East region. This situation is obviously beyond the control of any one country, and not even the United States of America has been able to sanitise the chaotic market trends of crude oil. It is therefore incumbent on a Developing country like Ghana, to take drastic measures to protect our fragile economy from being torn apart.

We have once again decided to revisit the issue of Hedging, as a possible alternative for government to consider in minimising the country's economy from the risk of exposure to the escalating and vulnerable crude oil prices on the world market. With crude oil prices hitting the roof at $127 per barrel, the repercussions on the economy and the excruciating effect on the ordinary Ghanaian, is like the sword of Damocles, hanging around our necks.

Yesterday, on Accra-based Citi Fm's morning show programme, experts in the energy industry seem to have unanimously proclaimed that it is about time that Ghana explored this financial policy of Hedging, as an alternative to prevent the strong current of the unstable crude oil prices from washing away the little gains that the economy has chalked.

Hedging is a financial instrument that can be used to minimise the risk of exposure to commodity prices and interest rates among others. In simple terms, it involves an additional top-up on the actual price in the form of an insurance premium, where the payment outlay is locked over a period of time.

It seems what government is running away from is the gambling image of Hedging, where a failure will be calculated as causing financial loss to the state, and the media will be ever ready to take whoever is responsible to the cleaners.

But for how long will government continue to pass on every increment on the crude oil price onto Ghanaians? The Chronicle believes that it is about time that government bites the bullet and takes the hard decision for the country to progress

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