Is the World Oil Market “One Great Pool†?

Is there one, global market for crude oil? This appears to be the assumption made by most petroleum economists, stated succinctly by Adelman in a recent issue of The Energy Journal “The world oil market, like the world ocean, is one great pool†(July 1984, p. 5). Policymakers have often implicitly held the opposite assumption — that the world market is fragmented — as evidenced by the efforts of many importing-country governments to seek special arrangements for “secure supply†from exporters in the 1970s and early 1980s. Likewise, oil exporters have sought “secure outlets†for their crude in the late 1980s and early 1990s. These arrangements make no sense if the world crude oil market is integrated. In a similar fashion, a policy of diversifying suppliers, which is practised by many importers now, is senseless in a globally unified market. Surprisingly, despite the importance of this issue, there has been no research directed at examining the question of the degree of integration vs. fragmentation of the world crude market. This study makes the first systematic effort in this direction — by analyzing patterns of price adjustment. The correlation and regression results on price adjustment across regions indicate a surprisingly high degree of regionalization, implying that the world oil market is far from completely unified. The findings could be due to the ability of crude oil sellers to engage in price discrimination. The findings imply that the world oil market is not “one great pool,†as claimed by Adelman. The implications for SPR policy, and other policies based on assumptions of international crude oil market integration, are discussed in the conclusion of the paper.