Oil price hedging plan still relevant to Ghana -NPA

With Daniel Nonor

The National Petroleum Authority (NPA) has dismissed suggestions that the price increases in petroleum products make government’s hedging initiative useless.

Government on January 3, 2011 announced an upward review of most fuel prices, effective January 4, 2011, arguing that it had been forced to increase the prices due to the rise in the price of crude oil on the international market. Whilst a gallon of petrol and diesel have both seen a price increase of GH¢1.60p each, Liquefied Petroleum Gas (LPG) has also been increased by almost GH¢1. Prices of Kerosene and Premix fuel however remain unchanged.

As part of moves to ensure the efficient management of fuel prices in the country, Government last year entered into a hedging contract to cover the period from October 2010 to March 2011, with the cost pegged at $90 per barrel compared to the current price of $95 per barrel.

Against this background, there have been suggestions the fuel price increases render the hedging irrelevant in government’s bid to secure the country against price fluctuations on the world market. The Chief Executive of the NPA, Alex Mould however told CITI BUSINESS the effect of hedging in the regulation of fuel prices is limited but maintains it remains crucial.

“The hedging is only for 50 percent of our domestic consumption so if prices go up there will still be a review upwards because we only hedge 50%.

“Hedging remains relevant because it is the government that will decide to absorb (the price increase) or not, and when the government absorbs the question is, how does government get paid for that, does it have any relief from somewhere? The relief comes from hedging. If you do not hedge you have the whole brunt of the price increase. If you hedge you have part relief coming from the benefits of the hedge.”

The hedge is an arrangement that enables a buying party (in this case Ghana) to buy a product (crude oil in this instance) at an agreed rate in future by paying a premium now to international insurance and oil companies based on a pre-determined maximum rate at which the country would buy the product.

By this arrangement, when prices rise in future above that pre-determined rate, the country will still buy the product at the agreed rate (which will be lower than the going market rate).

This means that consumers in Ghana can always buy the crude oil below that ceiling price but not above it and so, if such an arrangement were in place, Ghana would not have suffered the ravaging effects of paying high prices for petroleum products when prices skyrocketed to $147 per barrel in September 2007.

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