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“Asian premium” or “North Atlantic discount”: Does geographical diversification in oil trade always impose costs?

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  • AlKathiri, Nader
  • Al-Rashed, Yazeed
  • Doshi, Tilak K.
  • Murphy, Frederic H.

Abstract

We develop a Global Oil Trade Model (GOTM) to examine the ability of large crude oil exporters or importers to influence inter-regional price differentials by allocating their sales or purchases respectively among different crude oil consuming or producing regions. The model is based on the trade-offs among freight costs, qualities of the crude oils traded and the technical configurations of refineries that process the crude oil. Our reference case (based on 2012 data) minimizes the sum of freight costs and the costs of processing sub-optimal grades of crude oil at a refinery. We model a large Middle East exporter allocating its supply regionally as the leader in a Stackelberg game where all other producers and importers are price takers on the competitive fringe. We then examine the ability of a coalition of importers in Asia to make countervailing strategic purchases rather than act as a price taker. We find that large sellers can increase their revenues while diversifying their customer base by allocating volumes to more distant markets if, by doing so, they capture locational rents from more proximate buyers. Large buyers are unable to reduce their costs compared to the competitive market outcome by adopting countervailing purchase strategies but have the potential to disrupt the rent-seeking of large sellers.

Suggested Citation

  • AlKathiri, Nader & Al-Rashed, Yazeed & Doshi, Tilak K. & Murphy, Frederic H., 2017. "“Asian premium” or “North Atlantic discount”: Does geographical diversification in oil trade always impose costs?," Energy Economics, Elsevier, vol. 66(C), pages 411-420.
  • Handle: RePEc:eee:eneeco:v:66:y:2017:i:c:p:411-420
    DOI: 10.1016/j.eneco.2017.07.005
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    3. Long, Houyin & Huang, Xiang & Wang, Jiaxin, 2023. "How does energy finance promote energy transition? Evidence from Shanghai crude oil futures," International Review of Financial Analysis, Elsevier, vol. 90(C).
    4. Hu, Genhua & Jiang, Haifeng, 2023. "Time-varying jumps in China crude oil futures market impacted by COVID-19 pandemic," Resources Policy, Elsevier, vol. 82(C).
    5. Jayson Beckman & Getachew Nigatu, 2021. "Do Political Factors Influence U.S. Crude Oil Imports?," International Journal of Energy Economics and Policy, Econjournals, vol. 11(4), pages 288-297.
    6. Ji, Qiang & Zhang, Hai-Ying & Zhang, Dayong, 2019. "The impact of OPEC on East Asian oil import security: A multidimensional analysis," Energy Policy, Elsevier, vol. 126(C), pages 99-107.
    7. Ji, Qiang & Zhang, Dayong, 2019. "China’s crude oil futures: Introduction and some stylized facts," Finance Research Letters, Elsevier, vol. 28(C), pages 376-380.
    8. Huang, Wenyang & Gao, Tianxiao & Hao, Yun & Wang, Xiuqing, 2023. "Transformer-based forecasting for intraday trading in the Shanghai crude oil market: Analyzing open-high-low-close prices," Energy Economics, Elsevier, vol. 127(PA).
    9. He, Feng & Chen, Longxuan & Hao, Jing & Wu, Ji, 2024. "Financial market development and corporate risk management: Evidence from Shanghai crude oil futures launched in China," Energy Economics, Elsevier, vol. 129(C).
    10. Toma, Pierluigi & Frittelli, Massimo & Apergis, Nicholas, 2023. "The economic sustainability of optimizing feedstock imports with environmental constraints," Socio-Economic Planning Sciences, Elsevier, vol. 87(PB).
    11. Zou, Mi & Han, Lin & Yang, Zhini, 2024. "Price discovery of the Chinese crude oil options and futures markets," Finance Research Letters, Elsevier, vol. 60(C).
    12. Durand-Lasserve, Olivier & Pierru, Axel, 2021. "Modeling world oil market questions: An economic perspective," Energy Policy, Elsevier, vol. 159(C).
    13. Maria Ghani & Feng Ma & Dengshi Huang, 2024. "Forecasting the Asian stock market volatility: Evidence from WTI and INE oil futures," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(2), pages 1496-1512, April.
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    16. Zhang, Jing, 2019. "Oil and gas trade between China and countries and regions along the ‘Belt and Road’: A panoramic perspective," Energy Policy, Elsevier, vol. 129(C), pages 1111-1120.

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    More about this item

    Keywords

    Asian premium; Stackelberg game; MPEC; Oil market modeling; Oil trade flows;
    All these keywords.

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • L71 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Mining, Extraction, and Refining: Hydrocarbon Fuels
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium

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