- A good decision at the right time
As the coronavirus pandemic rages on, claiming lives and inflicting serious damage to an already struggling economy, there are certain silver linings that if identified early on, can be used to one’s advantage. Historically low oil prices owing to a glut caused by excess supply and low demand is such an opportunity for Pakistan, which is one of the most oil dependent countries in the world as it makes up close to 29% of our total merchandise imports, one of the highest in the region. Thankfully, owing to some sensibility and attentiveness at the petroleum ministry, a summary has been moved to the Economic Coordination Committee (ECC) to allow hedging of 15 to 20 percent of the country’s total oil import exposure. International prices have touched the bottom of the market and are bound to start increasing in the coming months as countries start lifting restrictions to restart their respective economies. By purchasing oil today at relatively higher prices by paying a premium on top of the spot price (prevalent price), Pakistan will gain in the long-term when oil prices eventually rise. Although this would mean consumers do not get the full benefit of lower oil prices right away, they will in the long run, provided the hedge is successful and the government passes on those gains through lower fuel prices. A lack of storage options and capital means a financial instrument of the sort that is being considered is the best way to buy cheap oil for an extended period of time.
It is a relatively complicated transaction that has not been executed previously, making it all the more important for finance and commodities experts to be consulted and multiple quotes for the pricing are appraised before any decision is finalized. It would be unfortunate however if any cumbersome bureaucratic red tape and unnecessary politicking delays decisions and a good price for the call options is missed. The ECC’s past decisions are being scrutinized currently with regards to the sugar and wheat probe. In order to avoid similar controversy in the future, it should do its best in taking all relevant stakeholders on board by explaining the possible advantages of the hedge and all the inherent risks involved.
