Banking on Short Memories

The Malta Independent on Sunday

In announcing the harsh hikes in utility and energy prices, a government wrapped in guilt of mismanagement, is attempting to get away with it banking on short memories. In doing so it is well assisted by accommodative media and 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 government for taking too long to wake up to its responsibilities, duping us along the way that we are immune of the oil price plague that has tortured consumers in most other countries throughout this year.

Ultimately government’s responsibility is to procure our energy supplies at the cheapest possible price, manage its use and distribution efficiently in order not to load unnecessary costs on it, promote consumer education and give incentives for economisation in the use of energy, and finally charge the consumer a fair price which recovers costs and leaves commercial profits necessary to service past and future investments so as to ensure reliability of future energy supplies.

If 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 layer of society, with its limited capacity to carry further loads, does not get crushed by such harsh developments, we are not stupid and we can understand.

But 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 government was massaging public opinion to accept the surcharge that was shortly to be introduced at 17% level. Last year such a surcharge was justified by government on the basis of the explosion in the cost of crude oil from some USD 35 per barrel a year earlier.

 Writing in my Friday column in The Malta Independent of 3^rd 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%. On the contrary the cost of Fuel Oil, one of the main refined products imported by Enemalta to generate electricity, went down by 15% in case of the High Sulphur version and by 4% in case of the low sulphur version.

Dollar depreciation in the meantime means that every Lm1, one gets 17% more US dollars now than one used to get in August 2003. So in Maltese lira terms the Fuel OiI that Enemalta burns to generate electricity is cheaper than it was in August 2003. It is also cheaper though by a lesser margin than the price levels for such fuel oil in Lm terms as at January 2004.

So why on earth are we being fed false information forcing to us accept utility rate increases on the basis of increased acquisition cost of crude oil which we do not import, when in fact the finished refined products we do import are cheaper than they were last year?

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% more expensive (approx. US dollars 50 more per metric ton), and this on its own runs up an increased import bill of some Lm7 million more.

If government were to keep the same tack as last year the price of crude oil went up from USD 55 this time last year to somewhere just over USD 60. How can one justify, using last year’s logic, that the surcharge should increase from 17% to 102%?

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. So this year 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.

In doing so government has failed to explain why it is using the spot price to justify its case. If this means that government has been sleeping over 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 consent that with energy prices at such high level, long term strategic hedging is inadvisable and risky. But short term technical hedging for at last 50% of our procurement needs is an essential risk spreading tool.

Government has now informed 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 oil fell below USD 10 but the then responsible Minister refused to consider the suggestion outright, much to Malta’s loss.

Government is playing on short memories again in trying to wipe out from our brains the way it behaved when it was in Opposition in 1998 when Labour government had announced much smaller utility rates increases. It is fair to say that 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 been raised 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 times 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. May be the media and the unions are more docile to 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 may be some would argue that Labour’s price hikes were much more unsocial than the PN price hikes. I grossly beg to differ. The utility rates announced this week are much more unsocial than Labour ever dreamt of doing. What is social about keeping the price of diesel at the pump untouched, allowing owners of expensive SUV and luxury pleasure boats, to party at the expense of middle income families that will face some 30% 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 person 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 prices of fuel 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 transport pooling system 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 do without hot water, freezer, tumble drier or washing machine.

Government may be extending itself beyond prudent limits of self confidence in banking on short memories to assume that while Labour was tortured for burdening us with a kilo it could walk away with honour for burdening us with a ton.