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Are Regional Oil Markets Growing Closer Together?: An Arbitrage Cost Approach

Andrew N. Kleit

Year: 2001
Volume: Volume22
Number: Number 2
DOI: 10.5547/ISSN0195-6574-EJ-Vol22-No2-1
View Abstract

A large number of papers published in the last decade have attempted to show that energy markets have grown more integrated. These articles attempt to infer that various markets have become more "unified" because the correlation (in various forms) of prices between markets has increased during the last several years. This article suggests that a more appropriate modeling technique based on the theory of arbitrage as presented in Spiller and Wood (1988a and b), is better suited to answering this question. In this paper, the arbitrage technique is extended and applied to light crude oil markets in the 1990s. Arbitrage costs between markets are estimated. In addition, the hypothesis that crude oil markets have converged during this period is tested. Substantial though mixed support is gained for this hypothesis.

Arbitrage in Energy Markets: Price Discrimination under Congestion

Bert Willems and Gerd Kupper

Year: 2010
Volume: Volume 31
Number: Number 3
DOI: 10.5547/ISSN0195-6574-EJ-Vol31-No3-3
View Abstract

During the last decades the production of electrical energy has been liberalized. This paper studies the effect of using a market mechanism to allocate scarce transmission capacity when the incumbent producers remain dominant. We show that granting exclusive use to an incumbent producer is preferred to trading access to this essential facility if interregional production-cost differences are significant and transmission capacity is scarce. This result counters the intuition on third degree price-discrimination, that arbitrage will improve the social surplus when there is no output contraction. The reason is that with arbitrage the incumbent can still charge different regional prices as long as it creates congestion on the transmission lines. As a consequence, welfare will be lower, since the incumbent distorts production decisions to congest the lines. We recommend that a market-oriented access to scarce transmission capacity should be accompanied by additional regulatory or structural measures to address market power.

Is Arbitrage Tying the Price of Ethanol to that of Gasoline? Evidence from the Uptake of Flexible-Fuel Technology

Alberto Salvo and Cristian Huse

Year: 2011
Volume: Volume 32
Number: Number 3
DOI: 10.5547/ISSN0195-6574-EJ-Vol32-No3-5
View Abstract

Brazil is the only sizable economy to date to have developed a homegrown ubiquitously-retailed alternative to fossil fuels in light road transportation: ethanol from sugar cane. Perhaps unsurprisingly, the uptake of flexible-fuel vehicles (FFVs) has been tremendous. Five years after their introduction, FFVs accounted for 90% of new car sales and 30% of the circulating car stock. We provide a stylized model of the sugar/ethanol industry which incorporates substitution by consumers, across ethanol and gasoline at the pump, and substitution by producers, across domestic regional and export markets for ethanol and sugar. We argue that the model stands up well to the empirical co-movement in prices at the pump in a panel of Brazilian states. The paper offers a case study of how agricultural and energy markets link up at the very micro level.

The Incidence of an Oil Glut: Who Benefits from Cheap Crude Oil in the Midwest?

Severin Borenstein and Ryan Kellogg

Year: 2014
Volume: Volume 35
Number: Number 1
DOI: 10.5547/01956574.35.1.2
View Abstract

Beginning in early 2011, crude oil production in the U.S. Midwest and Canada surpassed the pipeline capacity to transport it to the Gulf Coast where it could access the world oil market. As a result, the U.S. "benchmark" crude oil price in Cushing, Oklahoma, declined substantially relative to internationally traded oil. In this paper, we study how this development affected prices for refined products, focusing on the markets for motor gasoline and diesel. We find that the relative decrease in Midwest crude oil prices did not pass through to wholesale gasoline and diesel prices. This result is consistent with evidence that the marginal gallon of fuel in the Midwest is still imported from coastal locations. Our findings imply that investments in new pipeline infrastructure between the Midwest and the Gulf Coast, such as the southern segment of the controversial Keystone XL pipeline, will not raise gasoline prices in the Midwest.

Analyzing the Potential Economic Value of Energy Storage

Monica Giulietti, Luigi Grossi, Elisa Trujillo Baute, and Michael Waterson

Year: 2018
Volume: Volume 39
Number: Special Issue 1
DOI: 10.5547/01956574.39.SI1.mgiu
View Abstract

This paper examines the commercial opportunities for electrical energy storage, taking market prices as given and determining the extent to which a strategy of arbitrage across the day, buying at the lowest price times at night and selling at the highest price times during the early evening, and relying on price forecasts one day-ahead generates profits in the British context. The paper sets out the potential problems as the market moves to absorb increasing amounts of wind, then characterises the nature of prices, which reveals the importance of a strategy in which power is absorbed into store for a relatively few hours of the day and discharged over a relatively few hours. It argues that additional incentives may need to be put into place in order to render storage over relatively longer periods more attractive and to deliver broader social benefits which are unlikely to be generated and captured as a result of purely commercial considerations.

Cross-product Manipulation in Electricity Markets, Microstructure Models and Asymmetric Information

Chiara Lo Prete, William W. Hogan, Bingyuan Liu, and Jia Wang

Year: 2019
Volume: Volume 40
Number: Number 5
DOI: 10.5547/01956574.40.5.cpre
View Abstract

Electricity market manipulation enforcement actions have moved from conventional analysis of generator market power in real-time physical markets to materialallegations of sustained cross-product price manipulation in forward financial markets. A major challenge is to develop and apply forward market analyticalframeworks and models. This task is more difficult than for the real-time market. An adaptation of cross-product manipulation models from cash-settled financialmarkets provides an existence demonstration under uncertainty and asymmetric information. The implications of this analysis include strong empirical predictionsabout necessary randomized strategies that are not likely to be observed or sustainable in electricity markets. Absent these randomized strategies and othermarket imperfections, the means for achieving sustained forward market price manipulation remains unexplained.

Statistical Arbitrage and Information Flow in an Electricity Balancing Market

Derek W. Bunn and Stefan O.E. Kermer

Year: 2021
Volume: Volume 42
Number: Number 5
DOI: 10.5547/01956574.42.5.dbun
View Abstract

Motivated by the events following a natural experiment in 2015, when the market rules for electricity spot trading were changed in Britain, we analyse the operational effects of market participants responding to price incentives for spillage and shortage positions in a single price, real-time market. We develop an analytical model for optimal real-time decisions by generators and speculators based upon forecasts of the conditional distribution of the total system imbalance between instantaneous supply and demand. From this, we examine the effects of time delays in information transparency for the consequent statistical arbitrage positions. We backtested this model empirically to the Austrian system imbalance settlements process within the German/Austrian integrated market. Results suggest that permitting additional intraday flexibility from a physical generator or a non-physical trader can be beneficial for the agents themselves, the system operator and market efficiency.

Market Arbitrage: European and North American Natural Gas Prices

Stephen P. A. Brown and Mine K. Yucel

Year: 2009
Volume: Volume 30
Number: Special Issue
DOI: 10.5547/ISSN0195-6574-EJ-Vol30-NoSI-11
View Abstract

The development of an international market for liquefied natural gas (LNG) and the resulting opportunities for intercontinental arbitrage are seen as creating a world in which movements in natural gas prices are linked between continents. Increased flows of LNG into the United States and the potential sensitivity of these shipments to price differentials between Europe and North America suggests the possibility of a strengthening relationship between natural gas prices on these two continents. At the same time, there is considerable evidence linking natural gas price movements in Europe and North America to those for crude oil. Accordingly, we use a series of econometric tests to determine whether the co-movement between natural gas prices in Europe and North America is mediated through crude oil prices or is being shaped directly by gas-to-gas arbitrage.

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