Mon | Aug 21, 2017

Gov't advances pay down of loans used to purchase oil hedge

Published:Wednesday | January 6, 2016 | 1:00 AM

The Government will this quarter accelerate paying off sums that it borrowed to purchase hedging contracts taken out to insure against upward movements in the price of oil.

Minister of Finance and Planning Dr Peter Phillips told The Gleaner that the oil-hedge programme has proven to be a worthwhile venture for the country.

He said that increased revenue inflows from the special consumption tax (SCT) on petrol implemented by the Government in March of last year had resulted in advanced payments being made on the debt incurred to purchase the insurance.

The Government spent $2.32 billion in June of last year to purchase the first set of hedge contracts. The contracts covered six million barrels of oil imports.

Another $3.3 billion was spent in July to take out contracts to cover an additional two million barrels.

The hedge price varies across the contracts but averages US$66.74 per barrel, based on West Texas Intermediate pricing.

West Texas Intermediate averaged US$$36.76 per barrel yesterday.

The hedge contracts were purchased from Citibank.

Should the price of a barrel of oil exceed the average price that was hedged, Jamaica will be entitled to payouts to cover the purchase of eight billion barrels of oil. Phillips had announced that an energy stabilisation fund would be set up to receive any future payments from the hedge contracts.

Jamaica consumes 17 million barrels of petroleum products annually, nine million of which are crude oil imports, while the rest are finished products.

With the sustained decline in the price of oil, Phillips said that the insurance provided by the hedge programme would allow the Government to invest in additional alternative energy sources.

He disclosed that excess funds earned from the SCT would be used to purchase more energy-efficient equipment and light bulbs, which would be placed in government departments to bring down energy consumption.

 

INCREASE GAS TAX

 

The SCT on petrol was last year increased to $7 per litre to finance payment for the hedge. The SCT was expected to yield $6.4 billion.

The breathing space provided by the downturn in oil prices will allow the Government to increase spending on its energy-diversification programme.

Crude oil prices have been in free fall since last year, reaching lows of US$35 a barrel.

The downturn in oil prices has been caused by the increased production of shale gas in the United States and a decision by the Organization of the Petroleum Exporting Countries to sustain a glut on the world market in order to protect its market share.

While Phillips expects oil prices to remain suppressed in the short to medium term, he said that every effort must be made to prepare the country for when oil prices begin to climb again.