Managing Resource Price Risk: Futures Markets, Sustainability and Efficiency
Posted: 10 Oct 1998
Markets for resource futures contracts and cash forward contracts experience a rapid growth. According to theory, this should result in more efficient resource depletion, meaning that deviations from the Hotelling price path should decline. Using a very simple model, we show that empirical support for this claim appears to be small. The implications for sustainability are briefly discussed, and a condition is derived that links the issues of efficiency and sustainability. Whether this condition is satisfied will depend on certain characteristics of the resource stock under consideration. In contrast to these (potential) social benefits, reduced price fluctuations bring on a cost for risk neutral resource owners, and resource owners that have a low level of risk aversion. Their expected revenues and utility will decline, which may be considered a negative externality of applying resource price risk management instruments.
JEL Classification: G13
Suggested Citation: Suggested Citation