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A Note on Saudi Arabian Price Discrimination

Ronald Soligo and Amy Myers Jaffe

Year: 2000
Volume: Volume21
Number: Number 1
DOI: 10.5547/ISSN0195-6574-EJ-Vol21-No1-6
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Abstract:
Despite the development of an international market for crude petroleum and the resulting opportunities for arbitrage, Saudi oil continues to be shipped to markets in the U.S. and Europe when closer markets are available. Furthermore, these Western sales take place at fob (Saudi Arabia) prices that are lower than for exports to customers in the Far East. This note explains these Saudi price and trade flow anomalies in terms of a model of constrained price discrimination in which the quality adjusted price differential between Asian and European prices cannot exceed the differential in tanker rates to the two markets. The conditions under which price discrimination is likely to continue are also explored. The focus is on the West European and Far East oil markets but the argument applies to the U.S. market as well. Implications of Saudi marketing practices for new oil producers such as those in Central Asia are also discussed.



Jump Processes in the Market for Crude Oil

Neil A. Wilmot and Charles F. Mason

Year: 2013
Volume: Volume 34
Number: Number 1
DOI: 10.5547/01956574.34.1.2
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Abstract:
In many commodity markets, the arrival of new information leads to unexpectedly rapid changes--or jumps--in commodity prices. Such arrivals suggest the assumption that log-return relatives are normally distributed may not hold. Combined with time-varying volatility, the possibility of jumps offers a potential explanation for fat tails in oil price returns. This article investigates the potential presence of jumps and time-varying volatility in the spot price of crude oil and in futures prices. The investigation is carried out over three data frequencies (Monthly, Weekly, Daily), which allows for an investigation of temporal properties. Employing likelihood ratio tests to compare among four stochastic data-generating processes, we find that that allowing for both jumps and time-varying volatility improves the model's ability to explain spot prices at each level of temporal aggregation; this combination also provides a statistically compelling improvement in model fit for futures prices at the Daily and Weekly level. At the monthly level, allowing for jumps does not provide a statistically significant increase in model fit after incorporating time-varying volatility into the model.



The Relationship Between Oil Price and Costs in the Oil Industry

Gerhard Toews and Alexander Naumov

Year: 2015
Volume: Volume 36
Number: Adelman Special Issue
DOI: 10.5547/01956574.36.SI1.gtoe
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Abstract:
We propose a simple structural model of the upstream sector in the oil industry to study the determinants of costs with a focus on its relationship with the price of oil. We use the real oil price, data on global drilling activity and real cost of drilling to estimate a three-dimensional VAR model. We use short run restrictions to decompose the variation in the data into three structural shocks. We estimate the dynamic effects of these shocks on drilling activity, costs of drilling and the real price of oil. Our main results suggest that (i) a 10% increase (decrease) in the oil price increases (decreases) global drilling activity by 4% and costs of drilling by 3% with a lag of 4 and 6 quarters respectively; (ii) positive shocks to drilling activity affect the oil price negatively within a year; (iii) shocks to cost of drilling have a relatively small and statistically insignificant effect on the price of oil.



Decomposing Crude Price Differentials: Domestic Shipping Constraints or the Crude Oil Export Ban?

Mark Agerton and Gregory B. Upton Jr.

Year: 2019
Volume: Volume 40
Number: Number 3
DOI: 10.5547/01956574.40.3.mage
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Abstract:
Over the past decade the primary U.S. crude benchmark, WTI, diverged considerably from its foreign counterpart, Brent, sometimes selling at a steep discount. Some studies pointed to the ban on exporting U.S. crude oil production as the main culprit for this divergence. We find that scarce domestic pipeline capacity explains half to three quarters of the deviation of mid-continent crude oil prices from their long-run relationship with Brent crude. We are unable to find evidence that mismatch between domestic refining configurations and domestic crude characteristics contributed significantly to this deviation. This implies that the short-run deleterious effects of the export ban may have been exaggerated.



Socially Responsible Investment and Market Performance: The Case of Energy and Resource Companies

Janusz Brzeszczynski, Binam Ghimire, Tooraj Jamasb, and Graham McIntosh

Year: 2019
Volume: Volume 40
Number: Number 5
DOI: 10.5547/01956574.40.5.jbrz
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Abstract:
Do financial markets reward the energy and resource companies for adopting socially responsible practices? In this study, we investigate the stock market performance of major international energy and resource firms, classified within the socially responsible investment (SRI) category, from 2005 to 2016. We simulate investments in the portfolios of the SRI energy and resource companies stocks during this 11-year period and we further assess their risk-adjusted performance. The returns of the energy and resource SRI portfolio as a whole were neither consistently superior nor inferior to those of the benchmark indices. However, there exist substantial differences across the individual sub-sectors. The overall results show that markets do not reward or penalize the energy and resource firms for their SRI attitudes. We also find that the crude oil price consistently had a significant influence on the stock returns of the SRI energy and resource companies.



Pipeline Capacity Rationing and Crude Oil Price Differentials: The Case of Western Canada

W.D. Walls and Xiaoli Zheng

Year: 2020
Volume: Volume 41
Number: Number 1
DOI: 10.5547/01956574.41.1.wwal
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Abstract:
This paper examines the impact of pipeline capacity constraints on the discount of Canadian oil prices relative to U.S. benchmark oil prices. Using a panel of monthly data for Canadian oil exporting pipelines, we estimate that price differentials between U.S. markets and Western Canada would increase by 3.6% for 1% increase in pipeline capacity constraints. Pipeline capacity constraints in Canada have resulted in an average loss of $5.53 for every barrel of crude oil exported to the U.S. between 2009 and 2017. In 2015 and 2016, the losses due to insufficient pipeline capacity were equivalent to 3%-5% of the Canadian oil and gas industry's sales revenue and 69%-102% of its royalty payments to provincial governments. Western Canadian oil refiners and refined products' consumers benefit from the depressed crude oil prices. However, the total gains captured by local refiners and consumers are much smaller than the losses of the upstream sector.



Closer to One Great Pool? Evidence from Structural Breaks in Oil Price Differentials

Michael Plante and Grant Strickler

Year: 2021
Volume: Volume 42
Number: Number 2
DOI: 10.5547/01956574.42.2.mpla
View Abstract

Abstract:
We show that the oil market has become closer to �one great pool,� in the sense that price differentials between crude oils of different qualities have generally become smaller over time. We document, in particular, that many of these price differentials experienced a major structural break in or around 2008, after which there was a marked reduction in their means and volatilities. Differentials between residual fuel oil, a low-quality fuel, and higher-valued products, such as gasoline and diesel, experienced similar breaks during the same time period. A growing ability of the global refinery sector to process lower-quality crude oil and the U.S. shale boom, which has unexpectedly boosted the supply of high-quality crude oil, are two factors consistent with these changes. Differentials between crude oils of similar quality in general did not experience breaks in or around 2008, although we do find evidence of breaks at other times.





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