Abstract
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 document, in particular, that many of these price differentials experienced a major structural break in or around 2008, after which there was a marked reduction in their means and volatilities. Differentials between residual fuel oil, a low-quality fuel, and higher-valued products, such as gasoline and diesel, experienced similar breaks during the same time period. A growing ability of the global refinery sector to process lower-quality crude oil and the U.S. shale boom, which has unexpectedly boosted the supply of high-quality crude oil, are two factors consistent with these changes. Differentials between crude oils of similar quality in general did not experience breaks in or around 2008, although we do find evidence of breaks at other times.Crude oil price differentials, Oil, Structural breaks, Refining
Highlights
Morris Adelman (1984) famously wrote “The world oil market, like the world ocean, is one great pool.” If this were literally true, it would imply that all crude streams would be perfectly substitutable for one another in the refining process
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
We list the breaks in the order the test finds them, which is related to the size of the test statistic that each break generates for the null of 0 vs. 1 break
Summary
Morris Adelman (1984) famously wrote “The world oil market, like the world ocean, is one great pool.” If this were literally true, it would imply that all crude streams would be perfectly substitutable for one another in the refining process. Morris Adelman (1984) famously wrote “The world oil market, like the world ocean, is one great pool.”. If this were literally true, it would imply that all crude streams would be perfectly substitutable for one another in the refining process. Oil producers and fiscal authorities are concerned about these differentials because of the impacts they can have on revenues earned from producing or taxing certain types of oil.. Oil producers and fiscal authorities are concerned about these differentials because of the impacts they can have on revenues earned from producing or taxing certain types of oil.2 They can affect profitability and influence investment decisions about specific equipment, such as cokers, that could improve the profitability of processing lower grades of crude. Oil producers and fiscal authorities are concerned about these differentials because of the impacts they can have on revenues earned from producing or taxing certain types of oil. They can affect
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