A Financial Institutionalization Scheme for the Northeast Asian Mercantile Exchange

Abstract

This study highlights the core concepts of oil hub and theorize the process in which financial apparatus bring functionality to physical structure of an oil hub, namely, financial institutionalization of oil hubs. This will be a very crucial task especially to the Korean government’s Northeast Asian (NEA) Oil Hub project which is close to its completion of the first stage in Ulsan, a southeastern port city of Korea. The second stage of oil hub project would be operational shortly. However, merely building tank terminals would not guarantee an operational oil hub unless it creates sufficient liquidity. The authors of this study use their field experiences of visiting numerous tank terminals, trading companies, and other related institutions and were able to discuss some theoretic design of the structure of oil hubs. This study attempts to provides definitions of key terms in the oil hub business and theorize the fundamentals of how an oil hub can be operational. The authors conclude that unless the project aims at creating sufficient liquidity for the NEA oil hub, it is not guaranteed to be functional. They suggest a practical way of creating liquidity by electronically combining the clearing houses of already existing mercantile exchanges of Korea, Japan, and China. The liquidity generated from this design would lead to accumulation of transactions which establishes a hub-based pricing mechanism. This would lead to the most effective way of creating a functioning oil market in Northeast Asia which would be a complement to or competition with Singapore market.