Hedging Alberta Government's Oil and Gas Revenue: Is Acting Like a Farmer a Viable Strategy?

Abstract

The provincial government of Alberta in Canada experiences significant annual revenue variability arising from changes in crude oil and natural gas prices. This research evaluated whether Alberta’s non-renewable revenue risk could be managed using a derivatives hedging program. Results from a historical hedging simulation approach suggested that such a program would not have been the most effective method of managing revenue risk over the period of 1995-96 to 2003-04. Total impacts of hedging would have varied from Can-$8 Billion to Can$6 Billion over this time period. These results suggest the Alberta government explore alternative methods to manage non-renewable resource revenue risk