Environmental Engineering Reference
In-Depth Information
Energy sources - chiefly oil but also gas, coal and electricity - are
relatively recent additions to the list of commodities, predominantly
agricultural, that have long been traded. It is no surprise that energy has
come to be traded as a way of matching supply and demand on the spot
market (for immediate delivery), and of reducing the risk of future price
changes on the futures market (for future delivery). Energy is fairly easy
to standardize, making it easier to trade on an exchange, and (except for
electricity), it is easy to store and therefore hold for future delivery. But the
reasons why it should have become such a major feature of commodities
trading lie in other developments in the history of energy.
Oil
When internal oil exchanges among the Seven Sisters disintegrated under
the impact of OPEC nationalizations, they were replaced by an open trad-
ing system. Up until the 1970s, most of the world's oil had flowed through
the Western oil majors, which were vertically integrated operations: from
upstream concessions, via mid-stream refineries, to downstream petrol
stations. This vertical integration was blown apart when OPEC govern-
ments nationalized the Western companies' upstream concessions, leav-
ing them short of crude for their refineries and petrol stations. Eventually
they found new sources of crude outside OPEC, from new fields in the
North Sea, Gulf of Mexico and Russia. But now the big difference was
that, instead of the connections between the upstream and downstream
being in secretive telexes between the Seven Sisters, they took place in
trading pits on the New York and London oil futures exchanges. Oil had
always been traded in some form ever since it was discovered 150 years
ago, so this was nothing new. But what was once private became very
public.
Gas and electricity
From the 1990s, liberalization has had a similar impact on the traditional
vertical integration of utilities in many parts of Europe and America.
Liberalization - encouraging everyone to compete against everyone
else - destroyed the old certainty of vertical integration. Up until then,
companies could always be sure that no one would poach their retail
customers, and therefore found it relatively easy to match supply to
these customers' demands. But liberalization tended to throw supply and
demand out of kilter - and so the need to re-balance supply and demand
with trade grew.
 
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