When it announced the harsh hikes in utility and energy prices, a government wrapped in guilt of mismanagement tried to get away with it by banking on short memories. In doing so it is well assisted by an accommodating media and the government’s own ability to manage expectations. But for those who refuse to be manipulated by rhetoric and public relations, I will attempt to refresh memories so that government’s decisions can be judged on their true merits.
Let me make it clear that I am not in any way in favour of government incurring debts or raising taxes in order to hide the reality of high oil prices from energy users. On the contrary, I blame the government for taking too long to wake up to its responsibilities, duping us along the way that we were immune to the oil price plague that has tortured consumers in most other countries throughout this year.
If the government is open and frank with us – and explains clearly and honestly why it is necessary, for macro-economic reasons, to create cross-subsidies to keep the productive sector stable and competitive, as well as to ensure that the bottom strata of society, which is unable to carry further loads, does not get crushed by such harsh developments – we are not stupid and we can understand.
But the government is manipulating us and people like me revolt at being treated like idiots. I invite you to flash back to this time last year. Oil was hitting a peak of USD 55 per barrel and the government was massaging public opinion to accept the surcharge that was to be introduced shortly. Last year, on the basis of the explosion in the price of crude oil from some $35 per barrel a year earlier, the government justified such a surcharge – a 17 per cent surcharge – and quarterly revision of fuel prices at the pump.
Writing in my Friday column in The Malta Independent of 3 December 2004, I had stated: “The oft quoted price of crude oil is irrelevant to our case. Enemalta does not import crude oil. Enemalta imports refined products. The correlation between the prices of crude oil and the prices of refined products is tenuous. For example, between August 2003 and November 2004 the cost of crude oil increased in US dollar terms by 48 per cent. On the contrary, the cost of fuel oil, one of the main refined products imported by Enemalta to generate electricity, went down by 15 per cent in the case of the high sulphur version and by four per cent for the low sulphur version.
“The truth, for those who want to know the truth, is that because of EU regulations we are being obliged to burn low sulphur fuel oil which is far less environmentally offensive than high sulphur fuel oil. The problem is that low sulphur fuel oil is about 40 per cent more expensive (approximately $50 more per metric ton), and this on its own runs up an increased import bill of some Lm7 million more.”
If the government were to keep the same tack as last year, the price of crude oil went up from $55 this time last year to somewhere just over $60 at present. How can one justify, using last year’s logic, a surcharge increase from 17 per cent to 102 per cent?
The government could not use this logic that suited it fine last year to introduce a surcharge to cover, not the pretended market increase in the price of oil, but EU environmental obligation to burn higher quality oil. This year the government could not make its case based on the price of crude oil, as it conveniently and erroneously did last year, but on the cost of refined oil for our energy needs. Given that refined oil prices react with delay to crude oil price movements we are facing the full increase in basic crude oil this year from $35 two years ago to $60 at present.
In doing so the government has failed to explain why it is using the spot price of refined oil products to justify its case. If this means the government has been asleep for the last year and just took the spot market price as it comes, than where is our supposed skill to procure energy at the cheapest possible price? I readily agree that with energy prices at such high level, long-term strategic hedging is inadvisable and risky. But short-term technical hedging for at least 50 per cent of our procurement needs is an essential risk spreading strategy.
The government now informs us that it has started to use hedging techniques. As I wrote recently, timing is everything and it could very well be a case of too little too late. For Malta’s sake I hope that the hedging now being undertaken is the tactical short-term type and no long-term hedging is being entered into at such high price levels. Long-term hedging was advisable in 1999 when the spot price of crude oil fell below $10 per barrel, but the then responsible Minister refused outright to consider the suggestion, much to Malta’s loss.
The government is relying on short memories again by trying to erase from our brains the way it behaved in Opposition in 1998 when Labour government had announced much lighter utility rates increases. It was the beginning of an early end for Labour government as the PN Opposition marshalled all forces, in and out of Parliament, to obstruct a democratically elected Labour government in doing what was clearly necessary and in the national interest.
Unlike the present, utility rates then had not risen for a full 17 years (indeed they were reduced twice in the interim) and the price of oil had increased in 1997 to make the upward price revision unavoidable. Nobody could foresee in November 1997, when the utility rate increases were announced, that the price of oil would revert to a downward trend from mid-1998 to well into 1999.
What is so acceptable and unavoidable in the multiple much harsher increases announced this week that was not similarly acceptable and unavoidable in 1998? Granted a PN government has much better skills in massaging people’s expectations before announcing drastic measures but price hikes remain price hikes whichever way expectations are managed. Maybe the media and the unions are more docile with a PN government than they were prepared to be with a Labour government. Or probably such measures needed a parliamentary majority much greater than one, which the district gerrymandering bestows freely to the PN but was very scarce with an MLP government in 1996.
Or maybe some would argue that Labour’s price hikes were much more unsocial than the PN price hikes. I beg to differ. What is so social about keeping the price of diesel at the pump untouched, allowing owners of expensive SUVs and luxury pleasure boats, to party at the expense of middle income families who will face some 30 per cent overall increase in utility bills?
What would have been wrong if utility rates were kept steady for average consumption (which could easily be calculated on a per capita basis to exclude all luxuries such as air-conditioning, and multiple use of freezers and water heaters) and have such consumption cross-subsidised from high marginal rates for excessive consumption and fuel prices at the pump?
Hikes in fuel prices at the pump are much less socially offensive as by and large they involve discretion of use. People can choose to change from private to public transport or pool transport to move around. But there is absolutely no discretion in the use of average household utility consumption. Most houses use gas or kerosene for heating purposes already and one cannot easily do without an electricity powered freezer, tumble drier or washing machine.
At the end of the day the problem of increased energy prices is being felt more here than abroad because unlike other economies that are growing faster almost everywhere, we are forced to implement price hikes of essential items on an economy that has not grown for the last five years. The burden of higher oil prices is falling upon us without the compensating factor of a growing economy that makes the burden less heavy in competitor countries. And who has been managing our economy for the last five years?
The government may be extending itself beyond prudent limits of self confidence if it is banking on short memories to assume that, while Labour was tortured for burdening us with a kilo, it can walk away with honour for burdening us with a ton.
www.alfredmifsud.com