Publications: Notes at the Margin

The Key to Survival: Hold No Inventories, Make No Commitments (October 23, 2023)

 

The current turmoil in global oil markets offers a potent reminder that firms that supply fossil energy to consumers should follow two rules. First, hold no inventories. Second, avoid agreements to provide fuel in the future at fixed prices. Today, hedging using forwards or futures is not an option except for the largest firms. These two rules reverse the recent advice from financial advisers and economic consultants. The evidence is clear, though: holding hedged inventories and entering forward fixed-price contracts can put a company on a fast track to bankruptcy.

 

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