Refining for Export and the Convergence of Petroleum Product Prices

The refining industry has changed over the past decades from one in which petroleum refining capacity primarily served local and regional markets to one in which trade in refined petroleum products has become more widespread. We investigate the hypothesis of increasing globalization by examining the convergence of prices for refined products across different markets. Using data on refined products from market centers in the US and Europe, we test for convergence of prices using standard time-series techniques. The data plainly show that markets for refined petroleum products have become more interrelated as Europe has exported its gasoline surplus and global demand for petroleum products has approached refining capacity. The econometric evidence supports the hypothesis that the US and European markets for oil and refined products are integrated. We find evidence that a structural break during the financial crisis of 2008 changed the long-run equilibrium price relationships and the short-run price dynamics. Refined product markets are likely to experience continued globalization given trends in the United States and Europe and because of key export-oriented refining capacity investments made to take advantage of access to specific crude oil sources.