<<Print>>The former Minister of Finance, Dr. Kwabena Duffuor has expressed displeasure with the government for the discontinuation of Ghana’s oil hedging program initiated in 2010.
Independently, The Chronicle gathered that the state lost GHc2.7 billion as a result of the discontinuation of the policy in 2013 when the former finance minister had left office. This singular inaction has dangerously exposed the country to avoidable risks and that the drop of GHc2.7 billion in the 2015 expected oil revenue is a huge financial loss that could have been avoided.
Speaking at the 2015 Natural Resource Governance Institute on the theme- ‘Falling Prices, Rising Risks’, at St Catherine’s College at Oxford in the UK, Dr. Dufuor added that ineffective hedging regime against unstable oil prices resulted in Ghana missing an opportunity to make millions. He said Ghana would have gained a lot of revenue if the decision to hedge the country’s oil was not revised by the government.
“I believe that this time, we have lost or missed an opportunity, in the sense that Ghana was going to be in a win-win situation because the consumption of crude was going to be a big bonus for us,” he said.
“If we were buying at $100, it is now $40 or $50, we would have made huge savings, so for consumption you have made savings there. At the same time if we had put the put option in place and we had sold the oil at that price because of the put option, we would have also gained, so Ghana was going to win on the consumption side and win on the export side”, Dr. Dufuor added.
“Unfortunately”, he continued, “it didn’t happen because the government was looking at the hedging issues again and while they were looking at the issues the prices crashed and it affected everything in the country, especially the budget. “So our situation is different and very sad, it is a missed opportunity, we would have made millions out of this but it didn’t happen,” Dr. Dufuor said.
Recently, the Executive Director of Institute of Fiscal Studies (IFS), Prof Newman KwadwoKusi questioned: “Why did the government stop using the hedging program that was successfully implemented between 2010 and 2012 to mitigate the losses?
The Accra based economic think-tank questioned what influenced the decision to discontinue the hedging of Ghana’s exposure to crude oil prices in 2013. At the time the hedging programme was discontinued, oil was trading at around $100 per barrel and by July 2014 the price had jumped to $115 per barrel.
However, by the second week of January 2015, the price of this same commodity had dropped to below $50 per barrel-the most dramatic drop since the 2008 crisis. In view of the negative macro-economic implications of the continuous fall in the crude oil prices, IFS suggested to the government to undertake the required adjustments now to ensure that the fiscal consolidation objectives are not undermined.
Ghana’s hedging program was tremendously successful and together with other prudent policy measures pursued by the government, it brought about one of the longest periods of monetary and fiscal stability in the history of the country’s economic management.
In the first two months of the hedging program, marginal losses were made, but thereafter the program recorded significant net surpluses, which rose to US$98.4 million (net of premium costs of $63.7 million) in August 2011. The success of Ghana’s program played an important role in publicizing oil hedging to the African continent.
For example, Marc Mourre, Vice-Chairman, Commodities and Managing Director of Morgan Stanley had this to say: “Following Ghana’s example, a few other countries in north, west and central Africa have been looking at the same thing”. But Dr. Bhamy Shenoy, an economist disagreed, saying buying or selling options is not as easy it sounds. “Yes, when oil prices have fallen, it looks as though one should have sold options at high prices. But did we know it will fall and to what level”.
Let us take the current market. What policy should government adapt? Should it sell options because there are some experts who are predicting oil will fall? If the price goes up then there will be criticism of the government for selling oil at lower prices”.
Who has the perfect crystal ball? This is not hedging. It is pure speculation. It is hedging only when you buy and sell and fix the margin. But when a producer sell options, it is not hedging, he argued.
Meanwhile, prices of petroleum products have gone up by 15%. The Chronicle has, however, established that in line with the National Petroleum De-regulation policy, retail prices vary at the various filling stations.