Dr Gatt was replying to opposition questions during Question Time in parliament.
He first answered with a one-liner to a Leo Brincat question as to whether hedging is done, and replied that yes, it is done.
Then he latched on to a further question by Jeffrey Pullicino Orlando and explained the situation as regards hedging.
On Sunday, Labour leader Alfred Sant attacked the government and the incoming higher charges for electricity by complaining that government had removed hedging.
Hedging, Dr Gatt explained, is when a percentage of fuel oil that is to be purchased is purchased at a price which is guaranteed months before it is available.
Guessing what the price of oil will be in six months’ time, he explained, is guesswork. If everyone agreed that the price of oil will be cheaper, no one will buy on the spot market and all will buy on the forward market.
Dr Gatt said hedging was done under the Labour administration, and he does not condemn it. But it is also a fact that while in 1997 the price of oil increased and government saved money through its hedging agreement, the situation was reversed the following year and the price of oil fell as a result. Malta ended up losing money in the latter part of 1998 and in 1999.
Air Malta has long been carrying out hedging and sometimes it ends up saving money while at other times it loses money. Hedging in itself is not a bad thing, the Minister said, but it is always risky.
Taking yesterday’s price per barrel, at $55.6, all futures would be above $50. Should we take the risk of futures, the Minister asked. If the price of oil goes up to more than $70 a barrel, we would do well. But if Lukoil starts production again or if the oil-producing companies in the Gulf of Mexico solve their post-typhoon problems, the price of oil could easily go down to $35.
If, by Dr Sant’s reasoning, the whole world should change back to hedging, there would be no one left who buys oil on the spot
market.
Dr Gatt appealed: Let us remove hedging from the political arena. Are we ready to allow the state corporations to do hedging and take the risk?
Air Malta has a very good hedging unit but even so it has had to bring in two, possibly three, fuel surcharges.
A year ago, the price of oil was $28 a barrel. Today, it has practically doubled. Compared to last March, the price of oil has risen by 70 per cent. Hedging is no magic formula: you can lose big money through it.
Malta’s problem, the Minister added, is that it is so small that the adverse effects of hedging cannot be spread around on other items. For a country the size of Malta, a $4 million loss is a big thing.
Dr Gat said he does not think that full-blown hedging is the right thing to do. At most one must consider hedging on up to 60 per cent of the requirements. But even so it is an educated guess and one may easily lose money.
Joe Mizzi asked the minister to list the varying prices of oil, but the minister, somewhat surprisingly, took out a paper which he had just read out to the Nationalist Party parliamentary group and gave the list of oil prices over the past few years.
1996: average price $20.71
1997: $19.04
1998: $12.5
1999: $17.51
2000: $28.26
2001: $22.95
2002: $24
2003: $28.05.
With these figures in mind, the Minister said, had we hedged in 2000, we would have lost money in each of the next three years. One cannot foresee what will happen in the future.
Mr Brincat said he was happy to note that Dr Gatt was being more pragmatic on this issue than was his predecessor, Josef Bonnici. It was Prof. Bonnici who had politicised the issue. He (Mr Brincat) took note of what Dr Gatt had just said and now is not the right time for hedging.
Dr Gatt replied that he had discovered that Enemalta did not have an oil purchasing committee, and this is unacceptable.
Today, Enemalta’s financial controller, Pippo Pandolfino, is a person who came from Air Malta’s hedging unit and he has been a big help to Enemalta, together with the help of foreign experts.
As far as he knows, the minister said, only 20 per cent of the purchase of oil is hedged and not always, either.
Finally, Dr Gatt explained that although we hear the price of oil on a daily basis, the purchase price of oil is not linked to a price on a particular day, but to an average price for the month, on top of which the seller adds his percentage.