Oil price instability, hedging, and an oil stabilization fund : the case of Venezuela
The Venezuelan government and PDVSA (Venezuela's state oil companies) are both exposed to oil price instability. Given the existing tax structure, PDVSA has a higher exposure than the government, especially when prices drop below $18-20 a barrel. The authors show that the volatility of prices for crude oil is higher (but not significant) than the volatility of prices for refined oil products. And both prices are highly correlated. So, there is not much strength to the argument that Venezuela, being now mainly an exporter of refined products, faces less volatility than when it was exporting mainly crude oil. The basis risk for hedging Venezuelan crude oil was founded to be higher than for other crudes of comparable quality in the region. One explanation could be the pricing policies Venezuela follows, which leads Venezuelan crude oil prices to deviate for long periods from international prices. The basis risk in Venezuelan refined products is much lower and at acceptable levels for risk management. The issue of liquidity is concentrated in contracts for periods of less than a year. For products, the liquidity is concentrated in the nearest 4-5 months. So, for short-term hedges (6-9 months ahead), there is sufficient liquidity for Venezuela to hedge a substantial part of its exports. For longer-term hedges, the over-the-counter market is the more appropriate vehicle. In either case, it will not usually be the case that all production or exports should be hedged. The authors also examined the issue of an oil stabilization fund. For an oil stabilization fund to be effective several preconditions must be met. Most notably: oil prices should not follow a random walk; financial markets are incomplete; and there are large adjustment costs. These conditions do likely apply in Venezuela. Venezuela's best strategy would be to remove as much short-term oil price risk as possible by using short-dated hedging instruments (such as futures, options, or short-dated swaps) and to also do some longer term hedging (using mainly over-the-counter options and long-dated swaps). They also find that an oil stabilization fund should be complemented by using market-based risk management tools. The oil stabilization fund could then be used to manage any remaining interperiod oil price risk to the extent considered necessary.
|Date of creation:||30 Apr 1994|
|Contact details of provider:|| Postal: 1818 H Street, N.W., Washington, DC 20433|
Phone: (202) 477-1234
Web page: http://www.worldbank.org/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Larson, Donald F. & Coleman, Jonathan, 1991. "The effects of option hedging on the costs of domestic price stabilization schemes," Policy Research Working Paper Series 653, The World Bank.
- Williams,Jeffrey C. & Wright,Brian D., 2005.
"Storage and Commodity Markets,"
Cambridge University Press, number 9780521023399, December.
- Hanson, James A., 1992. "Opening the capital account : a survey of issues and results," Policy Research Working Paper Series 901, The World Bank.
- Deaton, Angus, 1991.
"Saving and Liquidity Constraints,"
Econometric Society, vol. 59(5), pages 1221-1248, September.
- Claessens, Stijn & Coleman, Jonathan, 1991. "Hedging commodity price risks in Papua New Guinea," Policy Research Working Paper Series 749, The World Bank.
- Deaton, A.S., 1992. "Commodity Prices, Stabilization, and Growth in Africa," Papers 166, Princeton, Woodrow Wilson School - Development Studies.
When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:1290. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi)
If references are entirely missing, you can add them using this form.