Exchange rates, refinery flexibility, and international petroleum flows.

Abstract

The study analyses the relative separation of the effects of changes in a nation's dollar exchange rate and crude oil's dollar price on a country's short-run crude oil derived demand. It examines the role of the dollar exchange rate on domestic and international petroleum flows and discusses the short-run inefficiencies that occur due to adjustment times in a country's domestic petroleum market. A four-equation, structural model of a country's short-run petroleum demand function for its two petroleum flows (crude oil and imported product) was used. Using the translog function, estimates of direct and indirect dollar exchange rate effects were estimated. To account for the role of a nation's refinery industry on international petroleum flows, a measure of the industry's flexibility was developed. The industry is said to be flexible when it can alter its inputs' naturally occurring product fractions to more closely meet the country's final demand. The index developed in this study measures the industry's increase in its output product slate's weighted average API, relative to the weighted average API of its crude oil and feedstocks inputs, adjusted for the crude oil's naturally occurring product fractions.