Class 5: oil markets Flashcards
What do the density and sulfur content of oil say about its quality?
lower density and sulfur content mean higher quality
Which regions of the world have the best vs worst oil?
South American oil bad, North African great
What is conventional vs unconventional oil, which is more expensive?
Conventional: extracted by drilling down (crude oil, natural gas liquids)
Unconventional: extracted differently, like fracking
Unconventional more expensive for now, until conventional supplies get too low
Who has the highest oil reserves?
Middle East, South & North America
Repeat question: difference between reserves and resources? When do reserves grow?
Resources: everything in the whole world
Reserves: economically and technologically extractable
reserves grow when demand/prices rise, new tech is invented
Which regions are exporters/importers of oil? How/why has the dynamic in North America changed?
Middle East, CIS export a lot, Africa exports a little
Americas are balanced
Asia, Europe import
NA used to import, more balanced since fracking, unconventional methods were invented
What are some factors that make certain countries demand more oil?
Cold weather/ heating needs, higher supply/ availability, industrialized countries
Where does Switzerland import oil from/ use it for?
imports mostly from EU, Africa, US
75% for transport, rest for heat
Where does Germany import oil from/ use it for?
imports a lot from CIS, some from EU
less for transport/ heating, more for industry than CH
How has war affected Russia’s oil industry?
Affected but still profiting, producing less oil because focus is on war, reallocating exports to Asia because of European embargo
How is demand for oil for transport expected to change in next 10 years?
Decrease due to EV usage
What does the value added chain for oil look like?
Extraction, transport/trade, conversion (refineries), distribution, consumption
What are the two differentiations of oil extraction methods?
onshore vs offshore (ocean)
vertical vs horizontal drilling
What are tight sand and shale?
Tight sand: layer of earth with gas in it (fracking)
Shale: layer of hard rock with gas or oil in it (fracking)
What do refineries do? What is an example of a final product made in a refinery?
they take lower quality oil, remove certain chemicals, make it higher quality = lighter, less dense
e.g. kerosene and fuel
Upstream vs downstream refineries
upstream: closer to extraction point, allow firms to arbitrage on world market
downstream: closer to end consumption/demand centers, cheaper transportation due to economies of scale
Why is refinery investment a barrier to exit for firms?
Once they invest in refining the oil, they want to sell it, otherwise it’s a sunk cost
They’ll stay in business until they get rid of refined oil even if costs > prices because losses are lower
Are oil firms quick to leave the market?
No, high fixed costs and often prices/costs turn around and business becomes profitable again, makes more sense to stick it out
Are there more downstream of upstream refineries globally?
A mix, but more upstream
obviously in exporting areas more upstream, in demand centers more downstream refineries
What are refinery margins and how do they vary over time?
difference between price of crude oil and price refined oil is sold for, vary a lot
What are the main kinds of refined oils?
fuel, gasoline, diesel, kerosene (airplane fuel), heating oils
Which kinds of refined oil are most common in CH?
Diesel, then gasoline (both for cars), then kerosene (drop during covid), then heating (declining because of better insulated buildings and natural gas substitute)
Where do the three oil pipelines leading into Germany come from?
North Europe, Russia and Mediterranean
How is oil brought to end consumers?
Large consumers have direct pipeline connections, smaller ones by truck
fuel taxes in Europe vs US
US almost none, European taxes almost as high as entire cost per unit in US
What are some factors that make oil an imperfect market globally?
cartel (OPEC), political tensions/ import bans/ contracts, small number of extractors and refineries
What causes volatile prices?
mostly politics/ general economy, war in middle east
What drives global demand and supply changes?
Demand: changes in economic activity, like a recession decreasing manufacturing/trade, taxes, consumption changes (EVs)
Supply: new tech (fracking), investments, wars and other unexpected events
How do supply and demand elasticity affect prices?
Both very inflexible, shock (like pipeline going out) causes strong price changes
How could nationalization affect prices?
Theory (controversial) that countries own resources -> discount rates rise -> less production -> higher prices (maybe what happened in oil crises)
What is OPEC? When was it founded?
Organization of Petroleum Exporting Countries, cartel
founded in 1960s
How could the target revenue of firms affect prices?
Firms may not have simple goal of maximizing profit, but of reaching output given by investment of country (?)
Oil market from WW2 until today
WWII: most oil produced by western monopolists
60s: OPEC formed by Middle Eastern/ South American countries to compete with monopolists
1970s: Middle Eastern countries nationalize oil, causes oil crises
80s: decreased demand due to efficiency, more non-OPEC producers enter market
2008: price skydives, SA and RU start coordinating to keep prices stable
Where is equilibrium in perf. comp.? How do monopolists choose price/ quantity?
Perf. comp.: where supply and demand meet
Monopoly: quantity where marginal revenue and supply meet, P at demand curve for that quantity
marginal revenue: demand with twice the slope
Where can consumer and producer surplus be seen?
Consumer: everything above price, below demand curve
Producer: everything above supply, below price
What does the simple theory about cartels assume and predict? (cartel model)
Cartel collectively behaves as monopolist, sellers have similar MC and MR curves, the more firms the more likely for one to cheat
What does the dominant firm price leadership model assume and predict? How would it apply within OPEC or globally?
firm with biggest market share chooses price and quantity based on residual MR curve, other firms do too, P and Q fall between monopoly/perf comp levels
within OPEC, SA is dominant
globally, OPEC is dominant
