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OIES Seminar
25 February 2003
John Bower Nawal Kamel
John Bower
Finance their purchase with gold released from the Bank of England
Sell / Buy stocks when prices rise 10% above / below true long run equilibrium level
Buffer stock may run if prices rise is strong or finance may run out if prices fall
May cause under consumption if central stabilisation price is set above true equilibrium price
John Bower
Free Market
Export Control
$20
$10
Q
Q
P
Buy Stockpile
$20
$20
Q
John Bower
Price Control
Q
4
Dec. 1998
$bn
18011
12063
2253
3695
50015
5756
36262
7997
1488
146
1342
415
10389
OTC
Exchange Traded
Dec. 2001
Change
Dec. 1998
Dec. 2001
% Change
$bn
%
$bn
$bn
%
16748
-7.0%
80.9
93
15.0%
10336
-14.3%
31.7
65.6
106.9%
3942
75.0%
2470
-33.2%
49.2
27.4
-44.3%
77513
55.0%
12654.9
21758.1
71.9%
7737
34.4%
8031.4
9265.3
15.4%
58897
62.4%
10879
36.0%
4623.5
12492.8
170.2%
1881
26.4%
1200
1946.9
62.2%
320
119.2%
292.1
341.7
17.0%
1561
16.3%
907.9
1605.2
76.8%
26.3%
598
44.1%
N/A
N/A
265.1%
14375
38.4%
N/A
N/A
John Bower
John Bower
An increasing need
Almost all global commodity price stabilisation mechanisms established since WWII failed
INTERNATIONAL COMMODITY PRICE STABILISATION SCHEMES
1. Sugar Agreement (1954-1983)
2. Tin Agreement (1954-1985)
3. Coffee Agreement (1962-1989)
4. Cocoa Agreement (1972-1988)
5. Rubber Agreement (1979-1999)
6. OPEC (1961-today) and IEA (1974-today)
John Bower
An increasing need
Energy now dominates the world commodity export trade with
NEW IMF TRADE WEIGHTED (1995-1997) COMMODITY PRICE INDEX
21.7%
Food Index: Cereals, vegetable oils, protein
meals, meats, seafood, sugar, bananas and
oranges
Index of Beverages, Coffee, Cocoa, and Tea
3.1%
47.8%
Metals index
11.3%
Energy Index: Crude oil, Natural Gas and Coal
16.1%
John Bower
An increasing need
Developed and Developing economies having similar long term debt liabilities
DEVELOPED AND DEVELOPING WORLD ECONOMIC INDICATORS
Economic Groups
Developed Countries
Developing Countries
OPEC Members
Other Developing Countries
Eastern Europe
GDP Consumption
Public
Private
16%
13%
15%
13%
16%
GDP Investment
59%
61%
58%
61%
58%
Public Debt/GDP
25%
25%
20%
25%
21%
4.0%
1.3%
3.1%
1.2%
2.1%
Source:UNCTAD Handbook of Statistics 2002 (GDP) and Bank For International Settlements (Public Debt)
Note: GDP Consumption + GDP Investment = Exports - Imports
Public Debt = Internationally Issued Public Debt Securities
+ Domesticly Issued Public Debt Securities
+ Consolidated Bank Claims on Public Sector
John Bower
An increasing need
with Developed and Developing world now reciprocally exposed to an oil price shock
GLOBAL COMMODITY EXPORT TRADE BY ECONOMIC GROUP
Economic Groups
All Food Items
Agricultural Raw Materials
Ores and Metals
Fuels
Total Primary Commodities
Total Manufactured Goods
Total Exports
Economic Groups
All Food Items
Agricultural Raw Materials
Ores and Metals
Fuels
Total Primary Commodities
SITC
0+1+22+4
2-22-27-28
27+28+68
3
0+1+2+3+4-68
5+6+7+8+9-68
SITC
0+1+22+4
2-22-27-28
27+28+68
3
0+1+2+3+4-68
Developed
16.5%
9.8%
6.5%
5.5%
38.3%
61.7%
100.0%
1955
Developing
Socialist
36.5%
19.2%
20.5%
13.2%
9.9%
7.8%
25.2%
12.0%
92.1%
52.2%
7.9%
47.8%
100.0%
100.0%
World
21.8%
12.9%
7.5%
11.2%
53.4%
46.6%
100.0%
Developed
7.6%
1.9%
2.5%
3.3%
15.3%
84.7%
100.0%
1999
Developing
E. Europe
8.5%
4.9%
2.1%
3.2%
3.5%
6.9%
14.3%
18.6%
28.4%
33.6%
71.6%
66.4%
100.0%
100.0%
World
7.8%
2.0%
3.0%
7.2%
20.0%
80.0%
100.0%
Developed
43.0%
25.7%
17.0%
14.4%
100.0%
1955
Developing
Socialist
39.7%
36.7%
22.2%
25.2%
10.8%
15.0%
27.4%
23.0%
100.0%
100.0%
World
40.9%
24.1%
14.1%
21.0%
100.0%
Developed
49.7%
12.4%
16.3%
21.6%
100.0%
1999
Developing
E. Europe
29.9%
14.6%
7.4%
9.5%
12.3%
20.5%
50.4%
55.4%
100.0%
100.0%
World
39.0%
10.0%
15.0%
36.0%
100.0%
Source: Handbook of International Trade and Development Statistics 1969 (1955 data), UNCTAD Handbook of Statistics 2002 (1999 data)
John Bower
10
An increasing need
and interdependence increasing as Developed country oil (coal + gas) reserves decline
GLOBAL COMMODITY EXPORT TRADE BY ECONOMIC GROUP
Economic Groups
World
Developed Countries
Developing Countries
OPEC Members
Other Developing Countries
Eastern Europe
Agriculture
2%
14%
15%
13%
7%
GDP By Activity
Other Primary
Manufacturing
23%
4%
11%
24%
22%
18%
11%
25%
27%
9%
Services
71.0%
51.0%
45.0%
51.0%
57.0%
* Major Petroleum Exporting Countries include 11 OPEC countries for Export-Import data columns but top 20 oil exporting countries for GDP by Activity columns
Source: UNCTAD Handbook of Statistics 2002 (1999 data)
John Bower
11
An increasing need
Not surprisingly the OPEC and IEA oil buffer stocks are the only schemes to endure
OPEC STATUTE
Article 2.
B.
Source: www.opec.org/Publications/OS/OS.pdf
John Bower
12
Index Constituents
Oil; Average of U.K. Brent, Dubai, and West Texas Intermediate
John Bower
Index
Weight %
Equilibrium
Prices
39.9
20.32
Strike Prices
CPI-Max
CPI-Min
22.35
18.28
CPI Values
CPI-Max
CPI-Min
1.00
0.61
13
Price ($/bbl)
$30
$25
$20
$15
$10
$5
Fe
bM 03
ay
A 03
ug
N 03
ov
Fe 0 3
bM 04
ay
A 04
ug
N 04
ov
Fe 04
bM 05
ay
A 05
ug
N 05
ov
Fe 05
bM 06
ay
A 06
ug
N 06
ov
Fe 06
bM 07
ay
A 07
ug
N 07
ov
Fe 07
bM 08
ay
A 08
ug
N 08
ov
Fe 08
bM 09
ay
A 09
ug
N 09
ov
-0
9
$0
Equilibrium + $2
14
Price ($/bbl)
30
25
20
15
10
5
John Bower
LR Equilibrium
CPI-Min Strike
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
CPI-Max Strike
15
3.2
2.8
Reversion
Reversion
Ln Price ($/bbl)
3.4
Reversion
Reversion
3.6
2.6
2.4
2.2
John Bower
CPI-Max Strike
LR Equilibrium
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
CPI-Min Strike
16
Issues to be resolved
GCI initially could be CPI contract market maker but then gradually withdraw
GCI STRUCTURE
CLIENT ORGANISATIONS (CPI BUYERS)
Governments, NGOs, World Bank, IMF, Multinationals
CPI
CPI
CPI
BROKER
EXCHANGE
INSURER
Core
Functions
Core
Functions
Core
Functions
CPI
CPI
Options
17
Issues to be resolved
its role determines the type of risk and amount of risk capital required
GCI STRUCTURE
CLIENT ORGANISATIONS (CPI BUYERS)
Governments, NGOs, World Bank, IMF, Multinationals
No
Risk
No
Risk
Market
Risk
BROKER
EXCHANGE
INSURER
Core
Functions
Core
Functions
Core
Functions
No
Risk
Credit
Risk
Credit
Risk
18
Speaker
John Bower is Senior Research Fellow at the Oxford
Institute for Energy Studies. His research interest is in
the emergence and evolution of cross-border
electricity and gas markets. Specifically; the
development of efficient pricing and investment
mechanisms for transmission capacity, integration of
energy markets, and energy price / credit risk
management.
Johns previous career was in the commodity industry
and his experience ranges from energy trading, at
Marc Rich & Co, to risk management consultancy,
with Coopers & Lybrand, advising commodity
traders, producers and processors in base metal,
precious metal, softs and energy markets. Before
joining the PhD programme he was Global Controller
Metals/Commodities at Deutsche Morgan Grenfell.
John completed his PhD at London Business School
in 2000. He also has an MBA from London Business
School and an MA in Biochemistry from Oxford
University.
John Bower
19