Geographical Limits to Arbitrage in the Global Oil Market
17 Pages Posted: 27 Jul 2017
Date Written: July 24, 2017
For more than 30 years, the world’s main indices for oil prices – WTI in the US and Brent in Europe – have moved in sync. This changed dramatically in 2011, when WTI started trading at a considerable discount to Brent for almost five years. This disparity violated the “law of one price” as arbitrage between markets should quickly reduce these differences. We trace the limits to arbitrage to the specificities of the WTI oil market and highlight how geography – manifest in material infrastructure and the design and regulation of markets – can pose sizable limits to arbitrage even in globally integrated commodity markets.
Keywords: Financial Geography, Limits to Arbitrage, Oil Markets, Oil Production
JEL Classification: Q41, L71, G15
Suggested Citation: Suggested Citation