Journal #J-10/1999
Risk management in the oil industry: Can information on long-run equilibrium prices be utilized?
Ole Gjølberg & Thore Johnsen(1)
Department of Economics & Reesource Management Agricultural University of Norway PO Box 5033, N-1432 Ås, Norway http://www.nlh.no/ior/ e-mail: ole.gjolberg@ior.nlh.no

1) Thore Johnsen is at the Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration, Bergen (http://www.nhh.no/for/  )

Gjølberg, O. & T. Johnsen (1999): "Risk management in the oil industry: can information on long-run equilibrium prices be utilized?", Energy Economics, 21:517-527.

Abstract:
We analyze co-movements between the prices of crude oil and major refined products during the period 1992-98. Specifically, we explore the existence of long-run equilibrium price relationships, and whether deviations from estimated equilibrium can be utilized for predictions of short-term price changes and for risk management. The econometric evidence strongly supports the hypothesis that crude and product prices are co-integrated. Past deviations from long-term equilibrium are significant in an error correction specification of short-term product price changes. The results represent valuable information for hedging, particularly in integrated oil companies for which price risk is related to margin variations.

JEL classification: E32

Key words: Oil prices, risk management, error correction models.

To order: fax (+47) 6494 3012 or e-mail: ior@ior.nlh.no