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Do Crises Tear the Fabric of Oil Trade?

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  • Weiner, Robert

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    (Resources for the Future)

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    Abstract

    In 1990, Iraq invaded Kuwait, touching off an economic, financial, diplomatic, and military crisis associated with a tremendous spike in oil prices and recession in OECD and oil-importing developing countries. But was the Gulf Crisis a disruption? Did it affect the fabric of oil trade? To examine this question, this paper examines the changing role of international trade intermediaries (ITIs, often referred to as “trading companies”) in the oil market. ITIs connect buyers and sellers, serving as the glue that holds many commodity markets together. Oil trading companies have attracted harsh scrutiny form policymakers as a result of allegations regarding their role in the United Nations’ Iraqi Oil-for-Food Program, but minimal scholarly attention. The paper takes advantage of a unique microdatabase on the Brent market. Produced in the U.K. North Sea, Brent Blend is by far the most widely traded crude oil in the international market. Participants in the Brent market are diverse, with the largest traders falling into two categories. The first comprises “industrial MNEs”—companies active in the business of producing or refining crude oil. The second category comprises financial houses and trading companies. This diversity provides an opportunity to test hypotheses regarding behavioral differences across types of companies and geographic origin, before, during, and after the crisis.

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    File URL: http://www.rff.org/RFF/documents/RFF-DP-06-16.pdf
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    Bibliographic Info

    Paper provided by Resources For the Future in its series Discussion Papers with number dp-06-16.

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    Date of creation: 08 Mar 2006
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    Handle: RePEc:rff:dpaper:dp-06-16

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    Keywords: oil; trading companies; crisis; Brent; North Sea;

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    1. Harald Trabold, 2002. "Export Intermediation: An Empirical Test of Peng and Ilinitch," Journal of International Business Studies, Palgrave Macmillan, vol. 33(2), pages 327-344, June.
    2. Forbes, Kristin, 2002. "How Do Large Depreciations Affect Firm Performance?," Working papers 4379-02, Massachusetts Institute of Technology (MIT), Sloan School of Management.
    3. Froot, Kenneth A & Stein, Jeremy C, 1991. "Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets Approach," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1191-217, November.
    4. Mike W Peng & Anne Y Ilinitch, 1998. "Export Intermediary Firms: A Note on Export Development Research," Journal of International Business Studies, Palgrave Macmillan, vol. 29(3), pages 609-620, September.
    5. Kristin J. Forbes, 2002. "Cheap Labor Meets Costly Capital: The Impact of Devaluations on Commodity Firms," NBER Working Papers 9053, National Bureau of Economic Research, Inc.
    6. Levy, Brian, 1982. "World oil marketing in transition," International Organization, Cambridge University Press, vol. 36(01), pages 113-133, December.
    7. Robert J Weiner, 2005. "Speculation in international crises: report from the Gulf," Journal of International Business Studies, Palgrave Macmillan, vol. 36(5), pages 576-587, September.
    8. Melick, William R. & Thomas, Charles P., 1997. "Recovering an Asset's Implied PDF from Option Prices: An Application to Crude Oil during the Gulf Crisis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(01), pages 91-115, March.
    9. James E. Rauch, 2001. "Business and Social Networks in International Trade," Journal of Economic Literature, American Economic Association, vol. 39(4), pages 1177-1203, December.
    10. Carlos, Ann M, 1992. "Principal-Agent Problems in Early Trading Companies: A Tale of Two Firms," American Economic Review, American Economic Association, vol. 82(2), pages 140-45, May.
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