Table 2 Residual Fuel Oil Consumption SOURCE: Source: U.S. Energy Information Administration. (1998). Monthly. Energy Review(October).

By their very nature, operations in the energy industry are characterized by high risk. Operating an oil well, a power plant, or petrochemical plant is considerably more complex and costly than running most other operations. Losses may be infrequent, yet when they occur they could be substantial. The risks involved in these kinds of operations can be classified under two categories—technical (engineering) risk and financial (price) risk. This article focuses on Financial Risk.

Price Risk

The price risk can be defined and understood in alternative ways. One can view the risk as the probable fluctuation of the price around its expected level (i.e., the mean). The larger the deviation around the mean the larger is the perceived price risk. The volatility around the mean...