Natural Resource and Energy Economics, Real Options Analysis, Time series Econometrics
Natural Resource and Energy Economics, Microeconomics
The Impact of Spatial Price Differences on Oil Sands Investments
The Impact of Spatial Price Differences on Oil Sands Investments (Job Market Paper) - In this article, a two-factor real options model is developed to examine the impact spatial price differences have on the value of an oil sands project and the incentive to invest. Large, volatile price differences between locations can emerge when demand to ship exceeds capacity limits. This may have a significant impact on policy, production and investment in exporting regions. We assume the price difference between two locations follows a stationary process implying prices in different locations move together. The investment decision is formulated as a linear complementarity problem that is solved numerically using a fully implicit finite difference method. Results show the value of an oil sands project and the incentive to invest in a new project will increase when price differences decrease. Surprisingly, the standard deviation of the price difference has very little impact on project value or the incentive to invest.
Crude Oil Spatial Pricing Dynamics: A Cointegration Approach - This article examines the spatial pricing relationship between weekly crude oil spot prices using cointegration analysis that allows for multiple endogenously determined structural breaks. Particular focus is given to the relationship between land-locked North American crude oils (WTI and WCS) and international benchmarks with access to tidewater (Brent, Dubai Fateh, and Mexican Maya). The number of breaks is determined using a sequential testing procedure proposed by Kejriwal and Perron (2010) and the break dates are estimated using the Bai and Perron (2003) algorithm. Results indicate crude oil prices, for similar and different quality crude oils, are cointegrated with multiple structural breaks. It appears that constrained infrastructure caused from the rapid increase in unconventional crude oil production in North America caused the relationship between land-locked crude oils and tidewater crude oils to change over the sample period causing land-locked crude oils to be discounted relative to similar quality tidewater crude oils.