A Risk-Hedging View to Refinery Capacity Investment in OPEC Countries

Hamed Ghoddusi and Franz Wirl

The Energy Journal, 2021, vol. 42, issue 1, 67-92

Abstract: Should oil-rich members of OPEC invest in the oil refinery industry? This is a crucial energy policy question for such economies. We extend theoretical models for a vertical integration strategy within an oil-producing economy, based on a risk-hedging view. The first model highlights the trade-off between return and risk-reduction features of upstream/downstream sectors. The dynamic model demonstrates the volatility of the total budgetary revenue of each sector. Our theory-guided empirical analysis shows that though the average markup in the refining sector is significantly smaller than the profits in the upstream, downstream investment can provide some hedging value. In particular, the more stable and mean-reverting refining margins provide a partial revenue cushion when crude oil prices are low. We discuss the risk-hedging feature of the refinery industry when the crude oil market faces supply versus demand shocks.

Keywords: Refinery Industry; Hedging; Vertical Integration; Downstream Investment; Export Diversification (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://journals.sagepub.com/doi/10.5547/01956574.42.1.hgho (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:sae:enejou:v:42:y:2021:i:1:p:67-92

DOI: 10.5547/01956574.42.1.hgho

Access Statistics for this article

More articles in The Energy Journal
Bibliographic data for series maintained by SAGE Publications ().