Oil Industry Structure and Evolving Markets

Abstract

Of all the changes in the oil industry over the past 20 years, the most radical have taken place in the market, and in theformation of prices. These are both a response to and a cause of changes in industry structure. From plannable supplies at relatively stable prices, companies have had to learn to handle short-term supplies in condition of extreme volatility. Management of the resulting price risk has become a central role of the companies' supply departments, and the use of paper markets (forward, futures and derivatives) has become an integral part of price formation. It is not impossible that the changes would be reversed, if the conditions that brought them into being—surplus production and de-integrated supply structures—were reversed in conditions of scarcity, but it is highly unlikely. Far more likely, is that risk management and the use of paper markets will increase in importance.