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The implications of risky hedging


HALLAM HOPE

The implications of risky hedging

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DISCUSSIONS HAVE BEEN ONGOING quietly for authorisation to be given to Barbados Light & Power Company (BL&P) to hedge on the international oil futures market.

This can be a positive approach but is also fraught with financial landmines and consumers could end up paying more in more ways than one. There are potentially positive but also potentially negative economic implications.

Information reaching me shows there is a robust series of initiatives on hedging. So what are the pros and cons and implications?

Hedging, in a perfect world, is used by skilled analysts to buy a commodity or good, in this case oil, at a price when it is low, lock in that price for a quantity of the commodity at a low price with the expectation the price may rise, perhaps considerably, and the purchaser makes a huge saving on their investment.

That’s fine when it comes to an individual trading with their knowledge knowing full well that they risk it all or some. The old adage? You only gamble with money you are prepared to lose.

In this case we are talking about seeking permission to engage in a potentially risky venture which the consumer could lose.

Additional information to hand shows BL&P is claiming oil prices are rising, suggesting this is an upward trend. But my own research suggests while the Saudis would like to see an oil price of around US$60 dollars a barrel there is no certainty that this would be sustainable.

Who is right and who is wrong would take us into a complex discussion involving not only shale oil in the United States, but the strategies of Russia and China.

Authoritative sources hold the view that the intense hedging lobby is associated with a counter approach by BL&P to lock in a renewable energy rate at a figure that is extremely low, which would support the logic of hedging, but not from the consumer’s perspective. Insiders say a carrot is being waved to suggest consumers would benefit and a proposal by the Barbados Renewable Energy Association for a price floor to stimulate a sector that is approaching a comatose state would be detrimental to their, the consumers’, interests.

This is a complex matter for the Fair Trading Commission. The model and pricing proposed does not have the interest of consumers, installers or the national economy at heart. The regulated monopoly has all the data which the Commission has no access to, so one would not be surprised if the Commission was to repeatedly request information.

There are common sense estimates which anyone familiar with the Barbadian environment and installation costs can make to question whether the data supplied by the regulated company is inaccurate. Perhaps the modelling was not produced in Barbados.

Perhaps hedging can work. But from where I sit and the local and international information I draw on, allowing BL&P to hedge would be a risk which authorities with the power but who are not trained in such matters should shy away from.

Hallam Hope is a student of renewable energy regulation and policy. Email: [email protected]

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