The larger les­son of the oil hedge

Jamaica Gleaner - - NEWS -

IT IS not just the Hol­ness ad­min­is­tra­tion’s em­brace of the eco­nomic re­form project that was un­der way when it came to of­fice – in­clud­ing its de­ci­sion to en­ter into a new agree­ment with the In­ter­na­tional Mon­e­tary Fund – that is shoring up our con­fi­dence in eco­nomic pol­i­cy­mak­ing and the coun­try’s prospects for long-term eco­nomic growth. For the Gov­ern­ment is hav­ing to con­sume hunky fork­fuls of po­lit­i­cal crow and swal­low hard in this show of grow­ing ma­tu­rity.

The lat­est ex­am­ple of this was last week’s ap­pear­ance be­fore Par­lia­ment’s Pub­lic Ad­min­is­tra­tion and Ap­pro­pri­a­tions Com­mit­tee by Fi­nan­cial Sec­re­tary Ever­ton Mc­Far­lane and cen­tral bank gov­er­nor, Brian Wyn­ter, to tell leg­is­la­tors that the Gov­ern­ment will be seek­ing money for a new oil hedge, es­sen­tially smooth­ing the path for the politi­cians.

Hedges of this kind are, es­sen­tially, in­sur­ance poli­cies. You pay a pre­mium and, if the price of the com­mod­ity against which you hedge rises above an agreed rate over a de­fined pe­riod, you are com­pen­sated the dif­fer­ence. You, there­fore, have a cush­ion.

The ex­ist­ing oil hedge con­tract, for 15 months, was ini­tially en­tered into by the pre­vi­ous ad­min­is­tra­tion last June with Citibank NA. It cov­ers Ja­maica’s pur­chase, over sev­eral con­tracts, of eight mil­lion bar­rels of oil for which the Gov­ern­ment was to pay pre­mi­ums to­talling US$27.9 mil­lion, or US$3.48 a bar­rel. The strike price, or the weighted av­er­age price to which oil would have to rise for Ja­maica to trig­ger a com­pen­sa­tion pay­out, was US$66.53 per bar­rel. At the time, the price of oil was dip­ping to the mid-50s range, hav­ing dropped from more than US$106 in the first quar­ter of 2014.

NOT FOR THE DEAL

Ini­tially, the then op­po­si­tion Ja­maica Labour Party was for the hedge via Aubyn Hill, the eco­nomic ad­viser to its leader and cur­rent prime min­is­ter, An­drew Hol­ness, un­til Mr Hill was not for the deal when prices be­gan to fall, to end 2015 at a lit­tle over US$37, and dip­ping fur­ther to un­der US$33 in this year’s first quar­ter. In­deed, Mr Hill has said that the pre­mium from the oil hedge would be used by this ad­min­is­tra­tion to help fi­nance per­sonal in­come tax give­backs.

It was not only Mr Hill who crit­i­cised the deal. It was also ridiculed by the cur­rent fi­nance min­is­ter, Aud­ley Shaw, who de­clared it to have been “ill-ad­vised” and sug­gested the hedge pay­ments would have been bet­ter spent else­where in the econ­omy. Mr Shaw, it seems, when he ta­bles sup­ple­men­tary es­ti­mates to the cur­rent Bud­get, will have in them a yet-undis­closed amount to pay for a new hedge at an unan­nounced strike rate. Yet, we sup­port the idea, in prin­ci­ple and in fact.

Oil is back above US$50 a bar­rel and is pro­jected for fur­ther up­ward move­ments in 2017 on the like­li­hood of an 800,000 bar­rels-a-day gap between pro­duc­tion and de­mand, as pro­duc­ers limit out­put to sta­bilise prices, stocks de­cline, and, hope­fully, there is growth in the global econ­omy. But things could hap­pen oth­er­wise, lead­ing to a fall in prices. These things are risks to which pol­i­cy­mak­ers ap­ply the best anal­y­sis and ad­vice and pru­dent judge­ment, with­out be­ing fear­ful that ra­tio­nal eco­nomic ac­tions will be politi­cised.

This move by the ad­min­is­tra­tion, sim­i­lar to its re­treat from its ridi­cul­ing of the buy-back of the PetroCaribe debt, and the dump­ing of its orig­i­nal in­come tax plan, is a good les­son to all of us about the need to ap­ply ra­tio­nal­ity to eco­nom­ics. We are heart­ened.

Newspapers in English

Newspapers from Jamaica

© PressReader. All rights reserved.