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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.

Suggested Citation

  • Charles F. Mason, 2011. "Why do Firms Hold Oil Stockpiles?," Working Papers 2011.100, Fondazione Eni Enrico Mattei.
    • Handle: RePEc:fem:femwpa:2011.100
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    References listed on IDEAS

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    More about this item

    Keywords

    Petroleum Economics; Stochastic Dynamic Optimization;

    JEL classification:

    • Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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