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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

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.

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.