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Oil and Petroleum Product Armington Elasticities: A New-Geography-of-Trade Approach to Estimation

Exploiting the structural developments suggested by the geography-of-trade literature, we estimate the elasticity of substitution across regional varieties for six crude grades and seven refined products using fixed-effects gravity regressions. We use unique data, compiled by Al-Qahtani (2008), that include global coverage of bilateral trade and transport costs for the crude grades and refined products. We find that the point estimates of elasticities of substitution across import varieties exceed those commonly reported in the literature and those adopted in simulation analysis. Our estimates indicate that there may be far less hysteresis in the pattern of petroleum trade than previously forecast.

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Energy Specializations: Petroleum – Markets and Prices for Crude Oil and Products; Energy Modeling – Energy Data, Modeling, and Policy Analysis

JEL Codes:
L13 - Oligopoly and Other Imperfect Markets
E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination

Keywords: Oil product Armington Elasticities, Geography of trade approach, Hysteresis, Crude oil, Oil products

DOI: 10.5547/ISSN0195-6574-EJ-Vol31-No3-9

Published in Volume 31, Number 3 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.