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Crude Oil Is Not Fungible, Where It Comes from Does Matter, and Global Markets Are More Fragmented Than Many Think

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In studying petroleum issues, some analysts tend to overestimate the role of markets in promoting U.S. energy security. In particular, these analysts assume that crude oil moves internationally as if it were traded in a “free market.” They often repeat phrases such as “oil always moves to the highest bidder,” or “oil is fungible and where it comes from does not matter.” But global petroleum markets are not “free.” They are severely constrained by many factors, including logistical limitations, increasingly non-interchangeable types of crude oil, and limitations on where companies can produce oil and to whom they can sell it. Most important, the markets for petroleum are distorted by the practices of Saudi Arabia and the Organization for Petroleum Exporting Countries (OPEC). A misunderstanding of the above factors can lead to, among other misconceptions, an underestimation of the role of Canada in promoting U.S. energy security and an exaggeration of the ability of markets to protect consumer or U.S. national interests, both before and after supply disruptions. A more realistic understanding would recognize the imperfect hold markets have on global crude oil allocation and would stop confusing the theory of “free markets” with the reality of international politics and oligopoly.
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Keywords: Canada; OPEC; Saudi Arabia; energy security; international trade; petroleum

Document Type: Research Article

Publication date: May 1, 2012

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