The New Global Oil Market: Understanding Energy Issues in the World Economy

By Siamack Shojai | Go to book overview

Chapter 7
Refined Product Prices

John T. Boepple

Although OPEC production policies, security of supply concerns, and other geopolitical factors often take precedence over market forces as determinants of international crude oil prices, refined product prices are invariably established by a matrix of supply/demand pressure for refined products, the cost structure of refined processes, and the level of crude oil prices.

Refined product prices vary throughout the world as a result of regional differences in market structure, product quality specifications, environmental legislation, proximity to major markets, and supply/demand requirements. However, these differences are ultimately constrained by freight costs to move products from one region to another, because in today's global and increasingly transparent market, whenever price differentials exceed freight costs, traders and others will take advantage of the opportunities to arbitrage the discrepancies.

While freight economics strongly influence interregional price relationships, within each major refining center, all major product prices are heavily dependent on the characteristics of the region's refineries and are linked through the technical characteristics and variable margin of the area's incremental producer. The price differentials between major refined products also reflect the underlying economics of key refining technologies as well as supply/demand pressures. This chapter will highlight the linkages between refined product prices and refining processes in more detail and cite recent product pricing trends in several of the world's major refining centers that illustrate these linkages.

A region's refined product prices are primarily influenced by the cost structure and yield pattern for the refinery configuration most representative of the region's incremental producer of refined products. When a region's refining capacity is not fully utilized, it is hypothesized that prices for each major product are formed so that the incremental producer's variable margin is slightly posi-

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