Crude or Refined? Rationality of Downstream Investment for Oil-Rich Economies

49 Pages Posted: 13 Feb 2018 Last revised: 6 Oct 2018

See all articles by Hamed Ghoddusi

Hamed Ghoddusi

Stevens Institute of Technology - School of Business

Franz Wirl

University of Vienna - Institute of Business Administration

Date Written: February 1, 2018

Abstract

Should oil-rich countries aggressively move toward downstream and invest in the oil refinery industry? This is a crucial energy policy question for such economies. We offer theoretical models for a vertical integration strategy (i.e. downstream investment) within an oil-producing economy. The first model highlights the trade-off between return and risk-reduction features of upstream/downstream sectors. The dynamic model demonstrates the volatility of total budgetary revenue of each sector. We motivate the discussion in the context of OPEC countries. Our theory-guided empirical analysis shows that the average markup in the refining sector is significantly smaller than the profits in the upstream; thus, not much economic value-added can be expected through vertical integration. We, however, find that from a hedging prospective the more stable and mean-reverting refining margins may provide a partial revenue cushion when crude oil prices are low. The analysis can inform energy sector investment decisions as well as export diversification policies of oil producing countries.

Suggested Citation

Ghoddusi, Hamed and Wirl, Franz, Crude or Refined? Rationality of Downstream Investment for Oil-Rich Economies (February 1, 2018). Stevens Institute of Technology School of Business Research Paper. Available at SSRN: https://ssrn.com/abstract=3116172 or http://dx.doi.org/10.2139/ssrn.3116172

Hamed Ghoddusi (Contact Author)

Stevens Institute of Technology - School of Business ( email )

Hoboken, NJ 07030
United States

HOME PAGE: http://www.ghoddusi.com

Franz Wirl

University of Vienna - Institute of Business Administration ( email )

Bruenner Strasse 72
Vienna, A1210
Austria
+43 - 1 - 4277 38102 (Phone)
+43 - 1 - 4277 38104 (Fax)

HOME PAGE: http://ieu.bwl.univie.ac.at

Register to save articles to
your library

Register

Paper statistics

Downloads
147
rank
186,415
Abstract Views
892
PlumX