Energy Finance: The Case for Derivatives Markets

Abstract

For several years, the number of energy derivatives markets has been increasing at a tremendous rate. The same is true for the prices and the transactions volumes of energy futures contracts, with the noticeable exception of the recent crisis, in 2008–9. Such sustained growths naturally give rise to questions. What are the real dangers of such a development? Are derivatives markets always characterised by a high leverage effect, by opacity and liquidity problems? Do all these markets and transactions really respond to a need? Should the regulating authorities restrain further the transactions of speculators in such markets, before they introduce excess volatility, capable of destabilising the underlying physical markets? This chapter proposes answers to these questions, or at least part of an answer, whenever it is possible. It focuses on derivatives markets,¹ and more specifically on energy derivatives markets.