Assume, for the sake of argument that a technological breakthrough has made electric vehicles both highly efficient and low in cost. In a short time, 50% of consumers suddenly switched to electric vehicles.

Author: Iloka Benneth Chiemelie

Published: 20-October-2014

1.      What would happen to crude price differentials?

Robert and Silvana (2005) made known that the differentials (or discounts) between some crude oils are very large; and even in the case of given pairs of crude oil, it still appears that the differentials change with an increase in the general oil price. This is a big issue because it affects the decision of governments that import oil, as well as the profitability of oil exporting governments. This is because this differentials can importing governments importing less volume for same price or exporting governments making less profit for same volume.

A new innovative electric car that is highly efficient and low in cost will definitely have an influence on the price differentials of crude oil as competing governments and brand will only have 50% of the market left – forcing them into price competition in order to remain competitive. Past researches have shown that brands with higher values and lower price will profit most in this kind of case (Naipaul and Parsa, 2001; Stiving, 2000; Stiving and Winer, 1997; Friedman, 1967). Thus, the expected influence is a close differential gap in which oil will likely be priced similar irrespective of the country of origin as those with high differential will reduce their price in order to remain competitive.

2.      Will any refiner be disadvantaged relative to any other refiner?

Yes! The possibility is always there. The assumption is that the such will not be from all countries at the same time as countries with these technologies and market that can afford them (mostly advanced nations) are expected to have higher switch than those that don’t have these technologies or the countries that can afford them (mainly developing and under developed countries). Thus, refiners in the advanced countries are expected to be more disadvantages because they will lose more market as opposed to those in the developing countries and underdeveloped countries where the switch will be mild as they can still have significant market intact.

3.      How would refiner investment decisions be affected?

Peter, Kenneth and Jennifer (2007) has a good idea of how such shift will influence refiner decisions in their comparative analysis of the influence of natural gas on crude oil pricing. Their overall conception is that the influence will come in two directions as:

3.1. More investments will be made on innovation to reduce overall oil price and efficiency – in order to remain competitive, there is always the tendency of refiners to innovative the oil refining industry towards producing more efficient and affordable crude oils. This will ensure that the outstanding 50% market is not lost and even a reverse effect might be experienced from the electric car offers if the cost of owning an oil powered car is found to be cheaper in the long-run than that of the electric car.

3.2. Refiners will likely expand their business operation into other energy success and potentially into the electric car industry – in order to remain competitive, refiners might look into investing in order sources of energy in order to cover more than just commercial industry and they might also expand their investments into the electric car industry, all with the intention of leveraging loss experienced in the oil sector.

In conclusion, it is obvious that ease of access to substitute does have an influence on energy demand. This implies that if more reliable and low priced substitutes are found as opposed to oil, the demand for oil will decline and overall energy efficiency can be achieved in the long-run.

Reference

Friedman, L., (1967). Psychological pricing in the food industry. In: Prices: Issues in theory, practice, and public policy. Almarin, P. & Williamson, O. E. (Eds), Philadelphia: University of Pennsylvania Press, 187–201.

Naipaul, S. and Parsa, H. G., (2001). Menu price endings that communicate value and quality, Cornell Hotel and Restaurant Administration Quarterly, Vol. 42: 1, 26–37.

Peter, H., Kenneth, B. M., and Jenifer, R., (2007). The relationship between crude oil and natural gas prices. Available at: http://bakerinstitute.org/media/files/Research/c4d76454/ng_relationship-nov07.pdf [Accessed on: 21^st August 2014].

Robert, B., and Silvana, T., (2005).  Crude Oil Price Differentials and Differences in Oil Qualities: A Statistical Analysis. Available at: http://www.esmap.org/sites/esmap.org/files/08105.Technical%20Paper_Crude%20Oil%20Price%20Differentials%20and%20Differences%20in%20Oil%20Qualities%20A%20Statistical%20Analysis.pdf [Accessed on: 21^st August 2014].

Stiving, M. A. and Winer, R. S., (1997). An empirical analysis of price endings with scanner data. Journal of Consumer Research, Vol. 24: 1, 57–67.

Stiving, M. A., (2000). Price-Endings: When prices signal quality. Management Science, Vol. 46: 12, 1617–629.