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Commodity Price Insurance:A Keynesian Idea Revisited

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  • John Bower

    (Oxford Institute for Energy Studies)

  • Nawal Kamel

    (Oxford Institute for Energy Studies)

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    Abstract

    Keynes proposed that a ‘Commod Control’ agency be created after the Second World War to stabilise spot prices of key internationally traded commodities by systematically buying and selling physical buffer stocks. In this paper, the creation of a new Global Commodity Insurer (GCI) is discussed that would operate an international Commodity Price Insurance (CPI) scheme with the objective of protecting national government revenues, spending and investment against the adverse impact of short- term deviations in commodity prices, and especially oil prices, from their long-run equilibrium level. Crude oil is the core commodity in this scheme because energy represents 50% of world commodity exports, and oil price shocks have historically had a significant macroeconomic impact. In effect the GCI would develop a new international market, which is currently missing, designed to protect governments against the risk of declines in their fiscal revenue, and increases in the level of claims on that income especially from social programmes, brought about by short-term commodity price shocks. GCI would take advantage of the rapid growth of trading in derivative securities in the global capital market since the 1980s by selling CPI insurance contracts tailored to the specific commodity price exposure faced by national government, and offsetting the resulting price risk with a portfolio of derivative contracts of five-year or longer maturities, supplied by banks, insurers, reinsurers, investment institutions, and commodity trading companies, with investment grade credit ratings. The difference between the CPI and a buffer stock or export/import control scheme is that it would mitigate the macro-economic shocks posed by commodity price volatility, but not attempt to control commodity prices. The cost of the CPI scheme is estimated by simulating 5-year commodity price paths using a standard log price mean reverting model parameterised from an econometric analysis of commodity price time series.

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    File URL: http://128.118.178.162/eps/othr/papers/0504/0504012.pdf
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    Bibliographic Info

    Paper provided by EconWPA in its series Others with number 0504012.

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    Length: 50 pages
    Date of creation: 29 Apr 2005
    Date of revision:
    Handle: RePEc:wpa:wuwpot:0504012

    Note: Type of Document - pdf; pages: 50
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    Web page: http://128.118.178.162

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    Keywords: Commodity Price Insurance;

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    1. Robert S. Pindyck & Julio J. Rotemberg, 1988. "The Excess Co-Movement of Commodity Prices," NBER Working Papers 2671, National Bureau of Economic Research, Inc.
    2. Bleaney, Michael F & Greenaway, David, 1993. "Long-Run Trends in the Relative Price of Primary Commodities and in the Terms of Trade of Developing Countries," Oxford Economic Papers, Oxford University Press, vol. 45(3), pages 349-63, July.
    3. Paul Cashin & Hong Liang & C. John McDermott, 2000. "How Persistent Are Shocks to World Commodity Prices?," IMF Staff Papers, Palgrave Macmillan, vol. 47(2), pages 2.
    4. Gilbert, Christopher L., 1996. "International Commodity Agreements: An obituary notice," World Development, Elsevier, vol. 24(1), pages 1-19, January.
    5. Bevan, David & Collier, Paul & Gunning, Jan Willem, 1993. "Trade shocks in developing countries: Consequences and policy responses," European Economic Review, Elsevier, vol. 37(2-3), pages 557-565, April.
    6. Aizenman, Joshua & Marion, Nancy, 1999. "Volatility and Investment: Interpreting Evidence from Developing Countries," Economica, London School of Economics and Political Science, vol. 66(262), pages 157-79, May.
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