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A Time-Series Analysis of U.S. Petroleum Industry Inventory Behavior

This paper examines inventory behavior in the U.S. petroleum industry. Inventories of crude oil and its three major products-gasoline, distillate and residual fuel oil-are studied. Earlier empirical studies of inventory behavior have been unable to provide evidence of the production smoothing role of inventories emphasized in the theoretical literature (see Blinder, 1984). We suggest that these results are due to a tradition of relying on a partial-adjustment model to explain inventory behavior. We feel that the partial-adjustment model ignores potentially significant relationships between lagged values of explanatory variables and inventories implied by dynamic analysis. This leads us to investigate the time-series properties of petroleum inventories using the vector autoregression(VAR) methodology developed by Sims (1980).

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Energy Specializations: Petroleum – Markets and Prices for Crude Oil and Products; Energy Modeling – Energy Data, Modeling, and Policy Analysis

JEL Codes:
L13 - Oligopoly and Other Imperfect Markets
E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination

Keywords: Oil industry inventory behavior, Time series analysis, VAR models

DOI: 10.5547/ISSN0195-6574-EJ-Vol8-No4-6

Published in Volume 8, Number 4 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.