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Investment spikes and uncertainty in the petroleum refining industry

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  • Timothy Dunne
  • Xiaoyi Mu

Abstract

This paper investigates the effect of uncertainty on the investment decisions of petroleum refineries in the US. We construct uncertainty measures from commodity futures market and use data on actual capacity changes to measure investment episodes. Capacity changes in US refineries occur infrequently and a small number of investment spikes account for a large fraction of the change in industry capacity. Given the lumpy nature of investment adjustment in this industry, we empirically model the investment process using hazard models. An increase in uncertainty decreases the probability a refinery adjusts its capacity. The results are robust to various investment thresholds. Our findings lend support to theories that emphasize the role of irreversibility in investment decisions.

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  • Timothy Dunne & Xiaoyi Mu, 2008. "Investment spikes and uncertainty in the petroleum refining industry," Working Papers (Old Series) 0805, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwp:0805
    DOI: 10.26509/frbc-wp-200805
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    Investments; Uncertainty; Petroleum industry and trade;
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