The Congestion Effect of Oil Transportation and Its Trade Implications

86 Pages Posted: 24 May 2021 Last revised: 22 Feb 2022

See all articles by Xiwen Bai

Xiwen Bai

Tsinghua University

Yiliang Li

University of Oxford - Department of Economics

Date Written: May 22, 2021

Abstract

This paper uses a unique dataset, encompassing the entire product tanker fleet from 2017-2020, to study congestion in oil transportation markets. From this we establish three novel facts: (1) congestion significantly reduces tankers' contracting probability; (2) tankers switch frequently between markets; and, (3) oil trade shocks propagate in the economy through a transportation network. We develop a novel search and matching model by incorporating these facts with the interactions between oil exporters, tankers, and a final good producer. We show that shipping market congestion attenuates over one third of the volatility in oil trade and final good production, while increasing price fluctuations by more than tenfold. We also show that the endogenous adjustment of the oil transportation network and the resulting congestion effect are almost irrelevant for aggregate fluctuations; it is the exogenous oil trade shocks that generate large fluctuations.

Keywords: Oil Transportation, Oil Trade and Prices, Congestion, Transportation Network, AIS, Search and Matching

JEL Classification: E32, Q43, R41

Suggested Citation

Bai, Xiwen and Li, Yiliang, The Congestion Effect of Oil Transportation and Its Trade Implications (May 22, 2021). Available at SSRN: https://ssrn.com/abstract=3851173 or http://dx.doi.org/10.2139/ssrn.3851173

Xiwen Bai

Tsinghua University ( email )

Beijing, 100084
China

Yiliang Li (Contact Author)

University of Oxford - Department of Economics ( email )

10 Manor Rd
Oxford, OX1 3UQ
United Kingdom

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