Oil is important in every economy; whenits prices are high and volatile, governments feel compelledto intervene. Because there can be large costs associatedwith such interventions, reserve banks, central planninginstitutions, and think tanks in industrial countries havebeen carrying out quantitative analyses of oil pricevolatility for a number of years. This report focuses onfluctuations around trends in oil prices. It examinesmeasurements of oil price volatility and evaluates severaldifferent approaches to coping with oil price volatility:hedging, security stocks, price-smoothing schemes, andreducing dependence on oil including diversification. Itdoes not deal with the impact of oil price volatility oncountries' macroeconomic performance or withmacroeconomic policy responses; these generally have more todo with coping with higher price levels than with highervolatility per se. The study examines oil price volatilitylargely from the point of view of consumers and does notcover the management of revenue volatility by large oil exporters.
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