Abstract
Closer to One Great Pool? Evidence from Structural Breaks in Oil Price Differentials
Highlights
Crude oil is often considered a homogenous good, it can have a wide range of physical characteristics that generate price differentials between different crude oils
We show that the oil market has become closer to “one great pool,” in the sense that price differentials between crude oils of different qualities have generally become smaller over time
We begin with the WTI Midland (WTIM)-West Texas Sour (WTS) differential, which is a differential between a light, sweet crude and a light, sour crude
Summary
Crude oil is often considered a homogenous good, it can have a wide range of physical characteristics that generate price differentials between different crude oils. These differentials are important for many oil market participants. Oil producers are concerned about these differentials because of the impacts they can have on revenues earned from producing certain types of oil. They can affect a government’s choice of the benchmark used to set official selling prices.. They can affect a government’s choice of the benchmark used to set official selling prices. for academics, analysts and others interested in understanding the upstream and downstream oil markets, these differentials provide important signals about how supply and demand conditions are changing over time for one type of crude relative to others
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