Oil Pricing

Govt Continues to Mull Over Oil Hedge

It’s uncertain whether the government will enter into another agreement to hedge oil.

It’s done to protect the country from dramatic increases in the price of oil on the world market.

Yesterday, Bank of Jamaica Governor Brian Wynter and Financial Secretary Everton McFarlane defended the need for another hedge.

This, when they appeared before Parliament’s Public Administration and Appropriations Committee, PAAC.

However, Nationwide News understands the proposal from the technocrats does not yet have the go-ahead from the Minister of Finance.

The USD$20-million oil hedge contract expired last month.

The government — under then-Finance Minister Dr. Peter Phillips, purchased a sort of insurance policy from Citibank — which would’ve saved the country if oil prices went over USD$66 a barrel.

They didn’t. And so, that USD$20-million – or JMD$3.3-billion – was lost on what was essentially a bet.

A bet the-then Opposition JLP was against from the beginning. But the BOJ Governor and Financial Secretary are insisting that it’s still necessary.

Governor Wynter told the PAAC yesterday that half of the country’s foreign reserves could be wiped out if oil prices rise to levels they were two years ago.

However, Nationwide News understands that the Finance Minister, Audley Shaw, has not approved a proposal to take out a new hedge.

His approval would depend on the terms of the deal, which include the cost, and most importantly, a lower strike price.

US Crude is trading today at USD$50.43 a barrel. But analysts say prices are trending down, as China’s growth slows, among other factors.

It would only be a good deal for the government if it’s able to secure a lower strike price at which the returns to Jamaica become effective.

At least one government insider says 66-US dollars a barrel is a bad deal, which would likely result in the government again losing its money.

Nationwide News understands the government is being advised not to take another hedge. Last year’s deal was paid for by an extra $7 Special Consumption Tax on fuel.

The JLP had proposed to re-allocate those funds toward its $1.5-million tax break.

However, after the election, Finance Minister Audley Shaw, was forced to revamp that plan after finding that the Energy Stabilization Fund into which the SCT was supposed to be lodged, was empty.

The funds had instead been subsumed into the consolidated fund, which is the government’s general account.

There’s no indication how the new proposed hedge would be financed, if approved by the Minister.

And Opposition Spokesman on Finance, Dr. Peter Phillips, still supports the idea of an oil hedge. But he says he’d have to see the details of the agreement.

Dr. Phillips says several of the risks associated with oil prices when he was Finance Minister still exist.

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