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Punting oil

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Published: November 18 2008 02:00 | Last updated: November 18 2008 02:00

Mexico does it, Russia probably wishes it had, oil companies almost never do. Perhaps they should? Agustín Carstens, Mexico’s finance minister, crowed like a rooster when he revealed last week that the country had hedged a full year of oil exports, some 300m barrels. The price of Mexico’s crude may have plummeted to $45 a barrel. But Carstens’ punt secured Mexico a minimum price of $70, profiting the country $10bn at current oil prices.

Oil majors rarely hedge, rightly believing investors prefer unhedged exposure. Still, any company that forward-sold oil two months ago would have locked in prices twice today’s. The only exception to this general corporate rule is deals. If a takeover makes economic sense at a current oil price, but not if the price falls, one solution is to hedge. The trouble is if prices rise. Hedging losses can then cause the chief financial officer to fall on his sword.

Similar risks prevent most energy ministries from hedging their country’s oil exports. Predicting crude prices, after all, is a mug’s game. Stabilisation funds, where money saved during boom years is spent in lean ones, are a better approach. They also avoid the cost of buying options, although so-called “costless collars” can help. If a country buys puts at, say, $70, while selling calls at $100, the national budget is protected from extreme price swings.

Mexico foreswore this approach. Allow for the $1.5bn spent on puts, and the deal washes its face so long as Mexico’s oil price is lower than $66 – below which the extra revenue from selling crude at $70 offsets the puts’ cost; or above $74 – when extra revenues again cover the costs. If the price is anywhere between those levels, Mexico loses out and Carstens risks a tarring and feathering in Mexico’szocalo . The idea is unlikely to catch on.

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