Asian Premium or North Atlantic Discount: Does Geographical Diversification in Oil Trade Always Impose Costs?

About the Project

Since the oil price shocks of the 1970s, the security of oil supply has been the main concern in academic and policy circles. The goal of this research project is to study the other side of the coin—the security of oil demand from the net-exporters perspective. How do large oil exporters trade off risk and rewards in ensuring security of demand?

In the first phase of this research project, the project develops a comparative static model of global oil trade to empirically measure the impacts of alternative crude oil market shares across segmented markets; to assess the strategic choice NOCs have in valuing alternative sales market portfolios in the context of the trade-off along the risk- reward frontier; and to compare IOC behavior as a benchmark for NOCs.

More specifically, this project will attempt to specify a parsimonious model of regionally segmented global oil trade calibrated to 2012 benchmark data which would allow comparative static exercises to simulate equilibrium impacts of alternative placement of term-contracted crude oil, including impacts on total revenues for crude oil producers. The model focuses on three fundamental variables that determine relative crude oil prices: transport costs, crude oil quality, and refinery flexibility.

In line with KAPSARC’s overall objectives, the intent is to produce policy-relevant insights that help actors in the oil industry understand the consequences of decisions taken by large exporters. The workshop series fits into the overall project by providing a continuing dialogue that raises key issues, provides feedback on current work, and sets future directions. The workshops are an open collaborative forum that enables the discussion of particular themes that feed into identified research questions.

Key Points

Diversification of supply or demand is normally viewed as reducing risks but imposing costs. KAPSARC has developed a framework that suggests this is not always the case. Among our conclusions are:

- Large crude suppliers may increase their revenues by allocating volumes to more distant markets, if by doing so they capture locational rents from more proximate buyers.

- Based on the 2012 configuration of global oil markets, any significant coalition of Arabian Gulf exporters can exploit this opportunity.

- Large crude buyers may reduce their costs by purchasing volumes from more distant suppliers, counteracting the strategies of their nearest suppliers.

- No single buyer is currently large enough to position itself to benefit from supplier diversification.

Long-term future reconfigurations, such as North American volumes becoming available in the Pacific markets or a Russian supply pivot from Europe to North East Asia, might alter the ability of current Middle East exporters to increase revenues while achieving greater customer diversity.