A Risky Business?


Council to decide whether to buy oil on the futures market

Hammersmith and Fulham council is considering a proposal to join together with other public sector bodies to buy oil in bulk on the futures market, in a bid to keep rising fuel costs under control.

 

The plans, put forward by Kent County Council, would see local authorities clubbing together to buy oil when prices appear to be at a low; the oil would then be delivered for use when needed. 

 

But, according to the Financial Times, traders have warned that public sector bodies, funded by taxpayers’ money, could suffer embarrassing losses if they buy now and oil prices continue to go down.

 

“Local authorities would have reduced their fuel bills by a third if they had bought on the futures market a year ago, for delivery this month,” the Financial Times says.

According to research carried out by the Local Government Association, the rising costs of oil, petrol and diesel mean councils now pay £239m more than they did two years ago to provide local services.

The Taxpayers’ Alliance says it has its doubts about the proposed scheme for oil: “Oil has gone up and councils have missed the boat,” the organisation says. “Government departments, public bodies and local authorities are completely useless at getting good value for taxpayers out of their purchases. Remember Gordon Brown selling gold at the bottom of the market? Is it so silly to imagine councils buying oil at the top?”

Under a similar scheme, known as LASER and managed by Kent County Council (KCC), electricity and gas are bought in bulk for around 80 local authorities, including on the futures market. 

KCC’s Director of Commercial Services, Kevin Harlock, says LASER has been running successfully for around 15 years.

“There is a risk, of course, but I think there is a greater risk in doing nothing,” he said of the plan to buy oil in the same way. “There will be occasions when we get it wrong but we know the industry and we’ve got our own internal experts. You watch the markets and constantly minimise your exposure,” he told ShepherdsBushW12.com.

Hammersmith and Fulham is already part of the LASER consortium and the council says it agrees in principle with buying oil in the same way, arguing that it is safer to be part of a consortium: “By clubbing together with other councils like this, we are able to keep the cost of the fuel we use low and ultimately pass this saving on to taxpayers," a council spokesperson said.

The Taxpayers’ Alliance says it would like to see local authorities economising in a simpler way: “There really is little substitute for saving money on fuel the way ordinary families are having to right now: reducing unnecessary car journeys and turning the heating down. Is that too much to ask from our local authorities?”

In the 1980s, Hammersmith and Fulham Council lost large sums of money after making £6billion of speculative interest rate swaps in order to manage its debt. After a lengthy court case, the Court of Appeal ruled that the agreements were illegal as the council was not allowed to trade speculatively.

Yasmine Estaphanos

 

12 September 2008

 

 

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