Abstract
Energy is critical for all human activity. Many countries import a major proportion of essential energy resources such as oil, for which the ability to substitute alternative inputs is difficult in both the short and long run. A possible response to the prospect that energy prices can fluctuate is for governments to negotiate long-term contracts with suppliers to mitigate sudden price shocks. This strategy is, however, not cost-free. It is equally rational for suppliers to negotiate high prices which protect them from the prospect of having to supply their oil at a lower price than they could anticipate in the future. A country seeking long-term protection from unstable oil prices via long-term contracts, therefore, faces higher current prices.
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