Why Do Firms Hold Oil Stockpiles?

34 Pages Posted: 18 Feb 2012

See all articles by Charles F. Mason

Charles F. Mason

University of Wyoming - College of Business - Department of Economics and Finance

Multiple version iconThere are 2 versions of this paper

Date Written: January 1, 2012

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.

Keywords: Petroleum Economics, Stochastic Dynamic Optimization

JEL Classification: Q2, D8, L15

Suggested Citation

Mason, Charles F., Why Do Firms Hold Oil Stockpiles? (January 1, 2012). Available at SSRN: https://ssrn.com/abstract=2006760 or http://dx.doi.org/10.2139/ssrn.2006760

Charles F. Mason (Contact Author)

University of Wyoming - College of Business - Department of Economics and Finance ( email )

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