The investment-uncertainty relationship in the oil and gas industry

Maryam Ahmadi, Matteo Manera () and Mehdi Sadeghzadeh

Resources Policy, 2019, vol. 63, issue C, -

Abstract: Recent studies of the oil market demonstrate endogeneity of the oil price by modelling it as a function of consumption and precautionary demands and producers’ supply. However, studies analysing the effect of oil price uncertainty on investment do not disentangle uncertainties raised by underlying components which play a role in the oil market. Accordingly, this study uses a new approach to investigate the relationship between investment and uncertainty for a panel of U.S. firms operating in the oil and gas industry. We decompose oil price volatility to be driven by structural shocks that are recognized in the oil market literature, over and above other determinants, in order to study whether the investment uncertainty relationship depends on the drivers of uncertainty. Our findings suggest that oil market uncertainty lowers investment only when it is caused by global (consumption) oil demand shock. Stock market uncertainty is found to have a negative effect on investment with a year of delay. The results suggest no positive relationship between irreversible investment and uncertainty, but interestingly, a positive relation exists for reversible investment. This finding is in line with the option theory of investment and implies that the irreversibility effect of increased uncertainty dominates the traditional convexity effect.

Keywords: Oil market; Investment; Uncertainty; SVAR-GARCH (search for similar items in EconPapers)
JEL-codes: C3 G11 Q41 Q43 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Working Paper: Investment-Uncertainty Relationship in the Oil and Gas Industry (2018)
Working Paper: Investment-Uncertainty Relationship in the Oil and Gas Industry (2018)
Working Paper: Investment-Uncertainty Relationship in the Oil and Gas Industry (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jrpoli:v:63:y:2019:i:c:52

DOI: 10.1016/j.resourpol.2019.101439

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