Abstract
Crude oil is not a homogenous commodity. Light sweet crude oils produce a high percentage of products desired by consumers after distillation. Other crude oils (heavy, sour, or high-sulfur crude) must be heavily processed to obtain needed products. The failure to understand the differences between desirable light crudes and heavy sour crude oils can lead to bad forecasts of market behavior. Using a stylized model of the market, I show that tightening environmental regulations in the absence of adequate refining capacity to process heavy sour crude puts upward pressure on crude prices and explains the 2008 price increase. The upward pressure is exacerbated by the monopolist practices of heavy sour crude producers, who set price differentials to maximize income. This model also can be used to analyze the impact of the supplies lost from Libya in 2011.
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Notes
The problems with this theory, which in ways hark back to the Catholic Church's fifteenth-century geocentric view of the universe, are discussed below.
Petroleum Economics Monthly, May 2008, p. 10.
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*Philip K. Verleger, Jr. is the Owner and President of PKVerleger LLC and is the David E. Mitchell/EnCana Professor of Management at the University of Calgary's Haskayne School of Business. He writes and publishes The Petroleum Economics Monthly. He began his work on energy as a consultant to the Ford Foundation Energy Policy Project in 1972. He then served as a Senior Staff Economist on President Ford's Council of Economic Advisers and Director of the Office of Energy Policy at the U.S. Treasury in President Carter's administration. He has been a Senior Research Scholar and Lecturer at the School of Organization and Management at Yale University, a Vice President in the Commodities Division at Drexel Burnham Lambert, and a Senior Fellow at the Institute for International Economics. Verleger earned his Ph.D. in Economics from MIT in 1971.
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Verleger, P. Rising Crude Oil Prices: The Link to Environmental Regulations. Bus Econ 46, 239–248 (2011). https://doi.org/10.1057/be.2011.29
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DOI: https://doi.org/10.1057/be.2011.29