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Why do Firms Hold Oil Stockpiles?

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  • Charles F. Mason

    (H.A. True Chair in Petroleum and Natural Gas Economics, Department of Economics & Finance, University of Wyoming)

Abstract

Persistent and significant privately-held stockpiles of crude oil have long been an important empirical regularity in the United States. Such stockpiles would not rationally be held in a traditional Hotelling-style model. How then can the existence of these inventories be explained? In the presence of sufficiently stochastic prices, oil extracting firms have an incentive to hold inventories to smooth production over time. An alternative explanation is related to a speculative motive - firms hold stockpiles intending to cash in on periods of particularly high prices. I argue that empirical evidence supports the former but not the latter explanation.

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Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2011.100.

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Date of creation: Dec 2011
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Handle: RePEc:fem:femwpa:2011.100

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Keywords: Petroleum Economics; Stochastic Dynamic Optimization;

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  1. Chow, Gregory C & Lin, An-loh, 1971. "Best Linear Unbiased Interpolation, Distribution, and Extrapolation of Time Series by Related Series," The Review of Economics and Statistics, MIT Press, vol. 53(4), pages 372-75, November.
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  5. Slade, Margaret E., 1988. "Grade selection under uncertainty: Least cost last and other anomalies," Journal of Environmental Economics and Management, Elsevier, vol. 15(2), pages 189-205, June.
  6. Dixit, Avinash, 1993. "Choosing among alternative discrete investment projects under uncertainty," Economics Letters, Elsevier, vol. 41(3), pages 265-268.
  7. Mason, Charles F., 2001. "Nonrenewable Resources with Switching Costs," Journal of Environmental Economics and Management, Elsevier, vol. 42(1), pages 65-81, July.
  8. Brennan, Michael J & Schwartz, Eduardo S, 1985. "Evaluating Natural Resource Investments," The Journal of Business, University of Chicago Press, vol. 58(2), pages 135-57, April.
  9. Pindyck, Robert S, 1993. "A Note on Competitive Investment under Uncertainty," American Economic Review, American Economic Association, vol. 83(1), pages 273-77, March.
  10. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, December.
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