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Rising Crude Oil Prices: The Link to Environmental Regulations

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  • Philip K Verleger

Abstract

Crude oil is not a homogenous commodity. Light sweet crude oils produce a high percentage of products desired by consumers after distillation. Other crude oils (heavy, sour, or high-sulfur crude) must be heavily processed to obtain needed products. The failure to understand the differences between desirable light crudes and heavy sour crude oils can lead to bad forecasts of market behavior. Using a stylized model of the market, I show that tightening environmental regulations in the absence of adequate refining capacity to process heavy sour crude puts upward pressure on crude prices and explains the 2008 price increase. The upward pressure is exacerbated by the monopolist practices of heavy sour crude producers, who set price differentials to maximize income. This model also can be used to analyze the impact of the supplies lost from Libya in 2011.

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  • Philip K Verleger, 2011. "Rising Crude Oil Prices: The Link to Environmental Regulations," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 46(4), pages 239-248, October.
  • Handle: RePEc:pal:buseco:v:46:y:2011:i:4:p:239-248
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    Cited by:

    1. Bahattin Buyuksahin, Thomas K. Lee, James T. Moser, and Michel A. Robe, 2013. "Physical Markets, Paper Markets and the WTI-Brent Spread," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    2. Philip K. Verleger Jr., 2015. "Structure Matters: Oil Markets Enter the Adelman Era," The Energy Journal, International Association for Energy Economics, vol. 0(Adelman S).
    3. Kaufmann, Robert K. & Banerjee, Shayan, 2014. "A unified world oil market: Regions in physical, economic, geographic, and political space," Energy Policy, Elsevier, vol. 74(C), pages 235-242.

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