Why do Firms Hold Oil Stockpiles?

Charles Mason

No 2011.100, Working Papers from Fondazione Eni Enrico Mattei

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.

Keywords: Petroleum Economics; Stochastic Dynamic Optimization (search for similar items in EconPapers)
JEL-codes: D8 L15 Q2 (search for similar items in EconPapers)
Date: 2011-12
New Economics Papers: this item is included in nep-bec, nep-cwa and nep-ene
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