Consumption and Hedging in Oil-Importing Developing Countries


  • We are grateful to an anonymous referee for his helpful comments and John A. Doukas, the EFM editor. We also thank Jonathan Berk, Matias Braun, Pierre Collin-Dufresne, Gonzalo Cortazar, Dwight Jaffee, Peng (Peter) Liu, Mara Madaleno and seminar participants at Pontificia Universidad Catolica de Chile, Universidad de Chile (CEA), UC Berkeley (brown bag seminar series), the 2007 Real Options Conference, the 2007 SECHI Meeting and the 2009 EFM Symposium on Risk Management in Financial Institutions. Casassus acknowledges financial support from FONDECYT (grant 1070688). Most of the work was completed while Casassus was at the Escuela de Ingenieria de la Pontificia Universidad Catolica de Chile. Correspondence: Jaime Casassus.


We study the consumption and hedging strategy of an oil-importing developing country that faces multiple crude oil shocks. In our model, developing countries have two particular characteristics: their economies are mainly driven by natural resources and their technologies are less efficient in energy usage. The natural resource exports can be correlated with the crude oil shocks. The country can hedge against the crude oil uncertainty by taking long/short positions in existing crude oil futures contracts. We find that both inefficiencies in energy usage and shocks to the crude oil price lower the productivity of capital. This generates a negative income effect and a positive substitution effect, because today’s consumption is relatively cheaper than tomorrow’s consumption. Optimal consumption of the country depends on the magnitudes of these effects and on its risk-aversion degree. Shocks to other crude oil factors, such as the convenience yield, are also studied. We find that the persistence of the shocks magnifies the income and substitution effects on consumption, thus also affecting the hedging strategy of the country. The demand for futures contracts is decomposed in a myopic demand, a pure hedging term and productive hedging demands. These hedging demands arise to hedge against changes in the productivity of capital due to changes in crude oil spot prices. We calibrate the model for Chile and study to what extent the country’s copper exports can be used to hedge the crude oil risk.