An investigation of inventory behavior in the United States fossil fuel industries: Coal, crude oil, and natural gas

This study investigates inventory movement in the three United States fossil fuel industries, coal, crude oil, and natural gas. This task is conducted by investigating short-run interactions between production, sales, and inventories. The main focus is on the short-run responses of production and inventories to stochastic sales fluctuations. This study employs variance/covariance investigation and partial stock-adjustment models with lagged sales. It also adopts error-correction models, which provide dynamic equilibrium between the variables in question.;The empirical test results from the three models based on seasonally adjusted monthly data from 1980 to 1994 indicate that production smoothing is an important motive for inventory holding for the three industries, which is consistent with a traditional view of inventories. Production is cointegrated with sales, but not multi-cointegrated. Nonetheless, error-correction equations for changes in production can be formed and used to examine the short-run responses of production to unanticipated sales surprises.