The Malta
The difference between
crisp fresh salad and trash is timing. In life, it is not only important to make
the right decisions but also to make them at the right time.
Two clients holding exactly the same investment portfolio could look at its performance quite contrastingly. The one who invested at the peak of the tech bubble in March 2000 will still be nursing losses, whereas the one who moved into the market at the bottom of the trough in March 2003 is smilingly considering whether it is time to lock in the profits and move to safer grounds.
This particularly applies to the issue of the oil price and its inevitable bad consequences on the economy in general and the consumer in particular, which has been the flavour of the week since the minister responsible for Enemalta put the proposed price hike bombshell on the MCESD table.
Before coming to the substance one must necessarily condemn the style with which the minister placed the issue in the public domain. It smacks of political opportunism in creating as dark a picture of the international background as possible, so that the eventual decisions taken, painful as they will be, will, in comparison to the needlessly dark black background, feel like a sweet balsamic cure. It is an insult to our intelligence.
The price of oil did not go above the $50 benchmark, which was used at the last budget to justify the 17 per cent surcharge on utility bills, last week. It has been almost consistently above this mark for most of the year. In any event, Enemalta does not buy crude oil but refined products, the price for which has a tenuous link to the crude oil price.
Why has the government neglected taking timely corrective adjustments, thus giving us the illusion that while the Americans and Europeans are having to pay much higher prices for utilities and for fuel at the pump, we were blessed with a superhero government that could insulate us from such harsh realities? The rude awakening to reality is as much due to the pain of the proposed price increases as to the realisation that our superhero is in fact fragile and fallible, capable of disguising reality for a short time rather than offering long-term painless solutions.
Much is being said about the cure of hedging. Hedging is a commendable risk management technique that has to be used with care and professionalism. But timing with hedging is of the utmost importance. Hedging at the peak of the market could involve additional pain and buy security very dearly. In the current circumstances, it is very doubtful if hedging is a timely solution, given that the oil price is well above its long-term average price and the US dollar is fundamentally overvalued.
Tactical short-term hedging in small quantities could be resorted to at any time, as a risk-spreading measure, but long-term hedging should only be considered when both the price of oil, as well as the price of the US dollar, reverts to within the long-term price trends.
I know that in the market there are always two contrasting opinions about future price developments, and this, in fact, is why a market exists. If everybody shared the same opinion there would be no market. A market needs buyers and sellers, rather than only sellers or only buyers.
However, one of the most credible market views is that while the price of oil will continue to hover between $60 and $70 for the next few months, once the Northern hemisphere’s demand for heating during the cold months are behind us, the hurricane disruption is repaired and demand adjusts to the reality of the price rises and alternative energy sources are resorted to much more widely, we could, over the next 24 months – save for natural or terrorist disasters threatening stability of supplies – see the price of oil draw back to around US$40.
Before the government can come up with firm decisions about how to pass on the pain of the oil price increase to consumers, it must form a long-term opinion about the market, with all the risks and uncertainties that this will involve.
Because only by forming such a long-term view, which will of course need to be re-evaluated and validated from time to time, can the government come up with solutions that do not break our social fabric and our international competitiveness. If, for example, the government forms a view that the long-term price of oil is $40, it should price energy products for sensitive sectors on this basis, irrespective of the current spot price of oil, in order to avoid damaging shocks. Sensitive sectors would, in my definition, include household utility rates up to average consumption levels, tourism operators, manufacturing operators, public transport and small retail establishments.
The difference between the spot or hedged price and the basic underlying price used for pricing energy supplies to the sensitive sectors would have to be carried by the non-sensitive sectors which would include household utility rates above average consumption levels, retail prices of fuel at the pump and utility rates for large retail and service establishments.
Such a system has to be implemented with clinical promptness, with prices for the non-sensitive sectors being adjusted monthly while prices for the sensitive sector being reviewed annually and changed only if the underlying base price assumption proves incontrovertibly outdated by new market realities.
It has the benefit of avoiding permanent subsidies and helps to smooth out the impact of exaggerated price fluctuations on the sensitive sector, leaving the impact on the less sensitive sector. This is socially just, as there is more discretion of energy use in such sectors. We would thus create a flexible market mechanism to promote energy conservation without disrupting our social fabric or compromising our international competitiveness.
As part of its input, the government has to agree to use the extra revenue generated by ad valorem taxes on energy supplies to subsidise public transport, to promote its usage in preference to private transport, and to give one-off price compensation adjustments to social cases.
Under this mechanism the environment might be a hidden beneficiary of the oil price hike through reduced traffic-generated contamination. Those who are sufficiently well off to continue using their private transport in spite of hiked pump prices will at least benefit from calmer traffic conditions.
Clearly there are no perfect or painless solutions to long-neglected problems. But whining and complaining will not deliver. Only practical and sensible solutions will, while bearing in mind that timing is everything.
Two clients holding exactly the same investment portfolio could look at its performance quite contrastingly. The one who invested at the peak of the tech bubble in March 2000 will still be nursing losses, whereas the one who moved into the market at the bottom of the trough in March 2003 is smilingly considering whether it is time to lock in the profits and move to safer grounds.
This particularly applies to the issue of the oil price and its inevitable bad consequences on the economy in general and the consumer in particular, which has been the flavour of the week since the minister responsible for Enemalta put the proposed price hike bombshell on the MCESD table.
Before coming to the substance one must necessarily condemn the style with which the minister placed the issue in the public domain. It smacks of political opportunism in creating as dark a picture of the international background as possible, so that the eventual decisions taken, painful as they will be, will, in comparison to the needlessly dark black background, feel like a sweet balsamic cure. It is an insult to our intelligence.
The price of oil did not go above the $50 benchmark, which was used at the last budget to justify the 17 per cent surcharge on utility bills, last week. It has been almost consistently above this mark for most of the year. In any event, Enemalta does not buy crude oil but refined products, the price for which has a tenuous link to the crude oil price.
Why has the government neglected taking timely corrective adjustments, thus giving us the illusion that while the Americans and Europeans are having to pay much higher prices for utilities and for fuel at the pump, we were blessed with a superhero government that could insulate us from such harsh realities? The rude awakening to reality is as much due to the pain of the proposed price increases as to the realisation that our superhero is in fact fragile and fallible, capable of disguising reality for a short time rather than offering long-term painless solutions.
Much is being said about the cure of hedging. Hedging is a commendable risk management technique that has to be used with care and professionalism. But timing with hedging is of the utmost importance. Hedging at the peak of the market could involve additional pain and buy security very dearly. In the current circumstances, it is very doubtful if hedging is a timely solution, given that the oil price is well above its long-term average price and the US dollar is fundamentally overvalued.
Tactical short-term hedging in small quantities could be resorted to at any time, as a risk-spreading measure, but long-term hedging should only be considered when both the price of oil, as well as the price of the US dollar, reverts to within the long-term price trends.
I know that in the market there are always two contrasting opinions about future price developments, and this, in fact, is why a market exists. If everybody shared the same opinion there would be no market. A market needs buyers and sellers, rather than only sellers or only buyers.
However, one of the most credible market views is that while the price of oil will continue to hover between $60 and $70 for the next few months, once the Northern hemisphere’s demand for heating during the cold months are behind us, the hurricane disruption is repaired and demand adjusts to the reality of the price rises and alternative energy sources are resorted to much more widely, we could, over the next 24 months – save for natural or terrorist disasters threatening stability of supplies – see the price of oil draw back to around US$40.
Before the government can come up with firm decisions about how to pass on the pain of the oil price increase to consumers, it must form a long-term opinion about the market, with all the risks and uncertainties that this will involve.
Because only by forming such a long-term view, which will of course need to be re-evaluated and validated from time to time, can the government come up with solutions that do not break our social fabric and our international competitiveness. If, for example, the government forms a view that the long-term price of oil is $40, it should price energy products for sensitive sectors on this basis, irrespective of the current spot price of oil, in order to avoid damaging shocks. Sensitive sectors would, in my definition, include household utility rates up to average consumption levels, tourism operators, manufacturing operators, public transport and small retail establishments.
The difference between the spot or hedged price and the basic underlying price used for pricing energy supplies to the sensitive sectors would have to be carried by the non-sensitive sectors which would include household utility rates above average consumption levels, retail prices of fuel at the pump and utility rates for large retail and service establishments.
Such a system has to be implemented with clinical promptness, with prices for the non-sensitive sectors being adjusted monthly while prices for the sensitive sector being reviewed annually and changed only if the underlying base price assumption proves incontrovertibly outdated by new market realities.
It has the benefit of avoiding permanent subsidies and helps to smooth out the impact of exaggerated price fluctuations on the sensitive sector, leaving the impact on the less sensitive sector. This is socially just, as there is more discretion of energy use in such sectors. We would thus create a flexible market mechanism to promote energy conservation without disrupting our social fabric or compromising our international competitiveness.
As part of its input, the government has to agree to use the extra revenue generated by ad valorem taxes on energy supplies to subsidise public transport, to promote its usage in preference to private transport, and to give one-off price compensation adjustments to social cases.
Under this mechanism the environment might be a hidden beneficiary of the oil price hike through reduced traffic-generated contamination. Those who are sufficiently well off to continue using their private transport in spite of hiked pump prices will at least benefit from calmer traffic conditions.
Clearly there are no perfect or painless solutions to long-neglected problems. But whining and complaining will not deliver. Only practical and sensible solutions will, while bearing in mind that timing is everything.
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