Like Playing Russian Roulette with an Automatic

HOUSTON–(BUSINESS WIRE)–Jan. 17, 2006–”Energy trading is now poised to become an integral part of broader financial markets,” writes Dr. Craig Pirrong, energy markets director of the Global Energy Management Institute and professor at the University of Houston, in the January issue of World Energy Monthly Review. This assertion is evidenced by new players such as hedge funds, commercial banks and investment banks that have entered the energy trading ring. Dr. Pirrong asks, “I wonder if the plethora of new players has sufficient appreciation of the distinctive risks inherent in energy markets.”

“Understanding risks and opportunities in energy markets requires a deep understanding of the nature of energy commodities (and) the characteristics of energy infrastructure,” Dr. Pirrong continues. “Moreover, the idiosyncratic nature of energy commodities (such as the non-storability of power) means energy prices often behave very differently from interest rates, equity prices, exchange rates or even the prices of other widely traded commodities, such as gold.”
He asserts, “Using intuition and models taken off the shelf from other financial markets to understand and manage energy risks is like playing Russian roulette with an automatic.”

Education and certification for the energy industry are crucial to help trading and other financial organizations identify the people who can help them succeed in this market. Dr. Pirrong cites the Bauer College of Business at the University of Houston and the Global Association of Risk Professionals as two institutions that offer such industry-specific education and certification, while asserting that more such programs are needed.

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