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absolutely true. Since some people are questioning this in the comments: for those that want to do their own research, this is called 'The Law of One Price,' an

absolutely true. Since some people are questioning this in the comments: for those that want to do their own research, this is called 'The Law of One Price,' and it applies to other commodities where transportation and storage costs are low. https://www.investopedia.com/terms/l/law-one-price.asp https://www.investopedia.com/terms/l/law-one-price.asp https://en.wikipedia.org/wiki/Law_of_one_price https://en.wikipedia.org/wiki/Law_of_one_price https://corporatefinanceinstitute.com/resources/knowledge/economics/law-of-one-price-loop/ https://corporatefinanceinstitute.com/resources/knowledge/ec... This has been well established in mainstream energy economics for ~50 years. Other disciplines seem to have trouble grokking the arguments. But ask any professional trader and they'll go with the economists on this one.

lumost 5y ago
This rule works in any environment where traders trade freely. Historically this has lead to catastrophes such as the Irish potato famine where the price of locally produced food exceeded what locals could pay. Leading to a country that had millions starving while exporting enough food to feed the country. For this and various other temporary phenomenon governments set limits on market economies to prevent outcomes pathologically opposed to the wellbeing of residents. These limits include export controls and subsidies on food and other basic necessities. It absolutely makes sense for a country not to suddenly shift its income to the benefit of external commodity holders due to a sudden price jump in the commodity due to supply chain issues. Not doing so could destroy “higher value” “finished product” industries by making them uncompetitive. If a large supply chain issue hits a critical necessity you would absolutely expect countries to start triggering their hoarding policies making the issue worse. An economic zone not planning for such a disruption to occur in the future is equivalent to a bet that such disruptions will never occur.
- mopsi 5y ago
  > If a large supply chain issue hits a critical necessity you would absolutely expect countries to start triggering their hoarding policies making the issue worse. The PPE shortage of 2020 demonstrated very clearly how quickly free-market economics gets thrown overboard in a serious crisis.
totalZero 5y ago
That is very theoretical. In practice, petroleum markets go to great pains to deal with transportation and storage. Look up "netback pricing" as a start. Crude is not an identical commodity in the sense that is assumed by the Law Of One Price. There are some crude specifications that certain refineries prefer not to process, either due to sulfur or viscosity or other characteristics for which the refinery may be ill equipped. https://www.mckinseyenergyinsights.com/resources/refinery-reference-desk/crude-grades/ https://www.mckinseyenergyinsights.com/resources/refinery-re... Crude transportation takes time and money. Transportation prices rise in correlation to crude prices, but they matter if you are determining the relative marketability of different products sourced around the globe. Arbitrage works worst when transactions are lossy, costly, delayed, and unique, as is the case in the petroleum market. https://oilprice.com/oil-price-charts/ https://oilprice.com/oil-price-charts/
- AnthonyMouse 5y ago
  > Arbitrage works worst when transactions are lossy, costly, delayed, and unique, as is the case in the petroleum market. If you compare the petroleum market to the markets where those things are actually major factors, like the market for artwork, petroleum is an idealized commodity market. The fact that the price of transportation isn't literally zero and there are different well-defined grades of the commodity doesn't meaningfully change that. Transaction costs are never literally zero. And what matters is the relative transaction costs. You have to ship the oil from the well to the refinery, but if the transportation to go 1500 miles from Texas to a refinery in New Jersey and the cost to go the same distance in the other direction to a refinery in Mexico are the same, there is no relative difference in transportation costs.

lumost 5y ago

This rule works in any environment where traders trade freely. Historically this has lead to catastrophes such as the Irish potato famine where the price of locally produced food exceeded what locals could pay. Leading to a country that had millions starving while exporting enough food to feed the country. For this and various other temporary phenomenon governments set limits on market economies to prevent outcomes pathologically opposed to the wellbeing of residents. These limits include export controls and subsidies on food and other basic necessities. It absolutely makes sense for a country not to suddenly shift its income to the benefit of external commodity holders due to a sudden price jump in the commodity due to supply chain issues. Not doing so could destroy “higher value” “finished product” industries by making them uncompetitive. If a large supply chain issue hits a critical necessity you would absolutely expect countries to start triggering their hoarding policies making the issue worse. An economic zone not planning for such a disruption to occur in the future is equivalent to a bet that such disruptions will never occur.

mopsi 5y ago
> If a large supply chain issue hits a critical necessity you would absolutely expect countries to start triggering their hoarding policies making the issue worse. The PPE shortage of 2020 demonstrated very clearly how quickly free-market economics gets thrown overboard in a serious crisis.

totalZero 5y ago

That is very theoretical. In practice, petroleum markets go to great pains to deal with transportation and storage. Look up "netback pricing" as a start. Crude is not an identical commodity in the sense that is assumed by the Law Of One Price. There are some crude specifications that certain refineries prefer not to process, either due to sulfur or viscosity or other characteristics for which the refinery may be ill equipped. https://www.mckinseyenergyinsights.com/resources/refinery-reference-desk/crude-grades/ https://www.mckinseyenergyinsights.com/resources/refinery-re... Crude transportation takes time and money. Transportation prices rise in correlation to crude prices, but they matter if you are determining the relative marketability of different products sourced around the globe. Arbitrage works worst when transactions are lossy, costly, delayed, and unique, as is the case in the petroleum market. https://oilprice.com/oil-price-charts/ https://oilprice.com/oil-price-charts/

AnthonyMouse 5y ago
> Arbitrage works worst when transactions are lossy, costly, delayed, and unique, as is the case in the petroleum market. If you compare the petroleum market to the markets where those things are actually major factors, like the market for artwork, petroleum is an idealized commodity market. The fact that the price of transportation isn't literally zero and there are different well-defined grades of the commodity doesn't meaningfully change that. Transaction costs are never literally zero. And what matters is the relative transaction costs. You have to ship the oil from the well to the refinery, but if the transportation to go 1500 miles from Texas to a refinery in New Jersey and the cost to go the same distance in the other direction to a refinery in Mexico are the same, there is no relative difference in transportation costs.