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Working Paper

Investment Spikes and Uncertainty in the Petroleum Refining Industry

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This paper investigates the effect of uncertainty on the investment decisions of petroleum refineries in the US. We construct uncertainty measures from commodity futures market and use data on actual capacity changes to measure investment episodes. Capacity changes in US refineries occur infrequently and a small number of investment spikes account for a large fraction of the change in industry capacity. Given the lumpy nature of investment adjustment in this industry, we empirically model the investment process using hazard models. An increase in uncertainty decreases the probability a refinery adjusts its capacity. The results are robust to various investment thresholds. Our findings lend support to theories that emphasize the role of irreversibility in investment decisions.
07.01.2008ISSN 2573-7953 WP 08-05DOI 10.26509/frbc-wp-200805
Keywords investment,uncertainty, irreversibility, discrete hazard models
JEL Classification Codes L0, L6, Q4

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Dunne, Timothy, and Xiaoyi Mu. 2008. “Investment Spikes and Uncertainty in the Petroleum Refining Industry.” Federal Reserve Bank of Cleveland, Working Paper No. 08-05. https://doi.org/10.26509/frbc-wp-200805