Adjusting to Volatile Energy Prices

by Philip Verleger Jr.

Overview

Oil price volatility has been highly criticized on many fronts, from the top-level official to the average consumer. Authorities for both producing and consuming nations have called for mechanisms to restore order to a chaotic market.The author traces the development of petroleum commodity markets, then examines the quest by producers and consumers for stability in world oil markets. He finds that modest producer and consumer gains can be realized through negotiations that achieve removal of barriers to trade, elimination of hurdles to foreign investment, and strengthening of financial institutions.Verleger reviews previous attempts to stabilize price fluctuations of other commodities and finds that these efforts have invariably failed. He argues that the very size of the oil market makes it unlikely that an effort to stabilize oil prices would succeed. Moreover, he shows that an oil price stabilization agreement would impose large costs on consumers.

Product Details

ISBN-13:	9780881320695
Publisher:	Peterson Institute for International Economics
Publication date:	11/01/1994
Series:	Policy Analyses in International Economics Series , #39
Pages:	262
Product dimensions:	6.00(w) x 9.00(h) x (d)
Age Range:	18 Years

About the Author

Philip K. Verleger Jr., former visiting fellow, specializes in the study of energy markets and is president of PKVerleger LLC and a senior adviser to The Brattle Group, a Cambridge economics consulting firm.

Table of Contents

	Preface	ix
	Acknowledgments	xiii
	Introduction	1
1	Why a Dialogue?	11
	Early Efforts at Energy Cooperation	11
	The Goals of Economic Policy	16
	The Views of the Protagonists	17
	The Economic Importance of Oil	19
	The Petroleum "Problem"	21
	Is There an Oil Price Problem?	28
	A Better Justification for a Dialogue	36
2	Petroleum Markets: Function, Nature, and Performance	41
	The Function of Petroleum Markets	42
	Types of Petroleum Commodity Markets	50
	Measuring the Performance of Petroleum Markets	67
	Conclusion	82
3	The Objectives of the Participants	85
	Price Stability and Market Regulation	88
	Reducing the Uncertainty of Demand Projections	90
	The Issue of Investment	91
	Reform of Contracts	91
	Security of Supply and Strategic Stocks	92
	Distribution of the Rents	94
	Environmental Questions	95
	Downstream Integration	96
	The Role of New Financial Instruments	98
	Conclusion	99
4	Price Stabilization Schemes: Bad and Probably Impractical	103
	The Theoretical Background	103
	Is There an Externality?	106
	The Value of Buffer Stocks	109
	Experience from Actual Stabilization Schemes	109
	Proposals to Stabilize Oil Prices	120
	Implications of Surplus Capacity	123
	Costs of a Pure Buffer Stock Agreement	125
	Conclusion	131
5	The Market Alternative to Price Stabilization	133
	Application of Alternative Instruments	135
	Applying New Instruments to an Old Problem	139
	Impediments to Hedging	159
	Conclusion	165
6	Framing a Dialogue	167
	Barriers to Foreign Direct Investment	168
	Removal of Barriers to Trade	184
	Maintaining Open Markets	194
	Strategic Stockpiles	201
	Petroleum Taxation in Consuming Countries	204
	The Environmental Dimension	208
	An Agenda for Negotiations	217
7	Conclusions	219
	Trade and Investment Negotiations: Not an Agreement to Fix Prices	221
	The Key Elements of an Agreement	223
	Economic Benefits of an ETI Agreement	235
	Conclusion	239
Appendix A	Potential Gains to Oil-Producing Countries from Hedging 1991 Sales of Oil During the Fourth Quarter of 1990	241
	References	247
	Index	253