It’s a commonly used analogy for the global oil market: Crude oil is fungible and supplies from
producing countries and companies enter a giant pool that is drained by a wide variety of consumers. Analysts, academics and politicians often talk of the global oil trade in this manner, saying that additional supplies of oil – regardless of where they originate – are good for US energy security because increased volumes available on the global market should exert downward price pressure. Well, perhaps unsurprisingly, it’s not that simple.
The situation is clarified in a recent journal article titled “Crude Oil Is Not Fungible, Where It Comes from Does Matter, and Global Markets Are More Fragmented Than Many Think.” The piece, written by Jonathan Chanis, a long-time commodity trader, finance expert and current Columbia University professor, appeared in American Foreign Policy Interests: The Journal of the National Committee on American Foreign Policy.
Chanis argues that far from functioning freely, the global oil market is highly regionalized, disproportionately influenced by a small group of powerful producers and international politics have as much to do with shaping the global petroleum regime as market forces.
“If the market for crude oil is a ‘bathtub,’ it is a very funny bathtub,” says Chanis. “Besides multiple spigots and drains, the bathtub is also divided into scores of compartments, or localized demand centers. Each compartment has its own drain and more than one-third of these compartments have their own spigots.”
The power of Opec cannot be underestimated he says, “Recognize that the crude oil markets are highly oligopolized. Even if the Organization for Petroleum Exporting Countries (OPEC) is not a cartel (and many still think it is), it is made up of a few dominant producers with disproportionate power over supply and prices. This clearly reduces consumer welfare and transfers a large amount of economic rent to a few producers.”
The US often focuses on “the free market” when discussing its energy security policies, but does little to address the anticompetitive forces at play in the global oil trade because the political and economic costs and risk would likely outweigh the gains. “Consequently, U.S. policy on crude oil and markets is to talk about the importance of markets for assuring U.S. energy security but to do little to promote their greater use.”
Despite it not being a truly free market, the global oil business functions remarkably well given its size, reach and patchwork of influential stakeholders including governments, some of the world’s most powerful corporations, banks, funds, intergovernmental organizations like the IEA, opaque trading houses and many others.
The piece contends it’s better to accept the complexity, competing forces and inefficiencies at work in the global oil trade than to oversimplify matters, particularly when crafting policy designed to bolster energy security. “Pundits and policymakers should at least recognize the imperfect hold markets have on global crude oil allocation and stop confusing the theory of ‘free markets’ with the reality of international politics and oligopoly.”
