Not all oil types are alike in trade substitution

Motivated by the ongoing war in Ukraine and the public debate on sanctioning crude oil imports from Russia, we estimate the elasticity of substitution between different crude oil types. Using European data on country-level crude oil imports by their field of origin, we argue that crude oil is far from a homogenous good, and that the relevant substitutability for analyzing the impact of trade sanctions must account for the quality of different oil types in terms of their density and sulfur content. Distinguishing crude oil imports by their chemical composition, the elasticity of substitution between types is substantially lower than suggested by previous estimates. Our results also suggest that, by neglecting these differences in quality, standard estimates underestimate the production disruptions and price effects in crude oil refining resulting from sanctions.

Peter Öhlinger, Michael Irlacher, Jochen Güntner