AN ANALYSIS OF UNCERTAINTY IN INVENTORY OF PETROLEUM PRODUCTS

Abstract

This dissertation studies the relationship between uncertainties and inventory management in the context of Thai’s petroleum market. The main objective of the study is to examine the effects of interested factors on inventory management, defined as an inventory to sale ratio; and on uncertainty in inventory management of petroleum products related to transportation purpose, including Gasohol (GSH), Unleaded Gasoline (ULG), and High Speed Diesel (HSD). The factors of interests include uncertainties in ex-refinery price, oil fund, futures price, and marketing margin. The analysis of the dissertation is divided into two parts regarding the factors being studied. The first part of this dissertation examines (i) the relationship between uncertainty and inventory management and (ii) the impacts of uncertainties in ex-refinery price, oil funds, and futures price on uncertainty in inventory management, measured as a conditional variance of the IS ratio. A Generalized Autoregressive Conditional Heteroskedasticity in Mean (GARCH-M) framework is employed and fitted with the monthly data from January 2008 to June 2013. The results indicated that uncertainty induces businesses to hold more of the IS ratio than required as expected. The sensitivity analysis reported that uncertainty in ex-refinery price contributes mostly to the uncertainty in inventory management, while the impact of uncertainty in the oil fund on uncertainty in inventory management is relatively small. Interestingly, the result indicated that uncertainty in futures price can help mitigate uncertainty in inventory management and give support to the existence of the futures market. The second part employs a system of simultaneous GARCH-M equations for inventory management and marketing margin to investigate how marketing margin and its uncertainty affect inventory management. The interrelationship of inventory management and marketing margin is incorporated into the analysis of uncertainties. Using weekly data, the results suggested positive interrelationships between inventory and marketing margin in general cases of GSH and HSD. For ULG, the interrelationship is reported to be negative and is expected to be as a result of the government promotion on the usage of GSH. Shocks in marketing margin positively affect uncertainty in inventory management that, in turn, gives rise to inventory holding. The effects of uncertainty in marketing margin on inventory management are found to be positive for ULG and HSD and negative for GSH. The policy implications involve the control of marketing margin within bands that required a periodic adjustment of taxes and/or oil funds. The model framework in this study allows for estimation of the uncertainty that helps the businesses to more efficiently manage and plan their inventory accordingly. The results of this study contribute to a better understanding of petroleum product inventory behavior in Thailand and also have implications for uncertainty management of oil.