Crude Oil Is Not Fungible, and Where It Comes From Does Matter

WORLD ECONOMIC ROUNDTABLE

Crude Oil Is Not Fungible, and Where It Comes From Does Matter

by Jonathan Chanis

World Economic Roundtable contributor Jonathan Chanis, who is Managing Member at New Tide Asset Management, argues in a new academic paper for American Foreign Policy Interests that the global flow of crude oil does not operate in a "free market." Chanis writes: "Analysts assume that crude oil moves internationally as if it were traded in a ''free market.'' They often repeat phrases such as ''oil always moves to the highest bidder,'' or ''oil is fungible and where it comes from does not matter.'' But global petroleum markets are not ''free.'' They are severely constrained by many factors, including logistical limitations, increasingly non-interchangeable types of crude oil, and limitations on where companies can produce oil and to whom they can sell it. Most important, the markets for petroleum are distorted by the practices of Saudi Arabia and the Organization for Petroleum Exporting Countries (OPEC)." "A misunderstanding of the above factors can lead to, among other misconceptions, an underestimation of the role of Canada in promoting U.S. energy security and an exaggeration of the ability of markets to protect consumer or U.S. national interests, both before and after supply disruptions. A more realistic understanding would recognize the imperfect hold markets have on global crude oil allocation and would stop confusing the theory of "free markets'' with the reality of international politics and oligopoly." Crude Oil is Not Fungible by Jonathan Chanis in American Foreign Policy Interests journal.

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