Hedging oil price risk by governments
In this part we would like you to read the following research papers:
- “Hedging government oil price risk” by James A. Daniel, The Journal of Energy and Development 27(2), pp 167-178, published in 2002.
- “Managing oil price risk in developing countries” by Julia Devlin and Sheridan Titman, The World Bank Research Observer 19(1), pp 119-140, published in 2004.
After reading the papers, please critically address the following discussion topic:It is now a common practice among the oil and gas companies to use derivatives in order to hedge oil price risk. This is, however, not the case for governments of the countries in which the oil industry is one of a major GDP contributor.
- Can you give the reasons, and critically assess why relevant governments do not use available derivative instruments to manage oil price risk?
- Discuss the benefits of using market-based derivatives for hedging oil price risk for the governments and through that, for society.
- Explain your views on the current development and state of the derivatives markets (both exchanges and OTC) for appropriate management of oil price risk by governments? Substantiate your opinion in the light of the reasons aforementioned in the first point.
