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Volume :3 Issue : 12 1977      Add To Cart                                                                    Download

ALTERNATIVE PRINCIPLES FOR INTERNATIONAL PRICING OF CRUDE OIL

Auther : Dr. Saddik M. Afifi S.

 

       Recently, oil pricing has become one of the most controversial issues in the oil industry.  The O.P.E.C’S decision to increase the price of crude oil (October 1973) led to a series of reactions on the international scene.  The issues is centered around the bases and principles of crude oil pricing.

        The aim of the study was to evaluate and recommend alternate bases and principles that could be used for a more objective crude oil pricing.

        Four different bases or principles of oil pricing were identified and evaluated.  These dealt with:

1.     The initial Basic Price for Reference Crude.

2.     The Price Differential approaches depending on the type and origin of the crude.

3.     The Adjusted Initial Basic price.

4.     Price Reviewing.

        Different variables pertaining to each of the above bases were discussed taking into consideration the realities of the oil industry, and those of the international market.

        As for the initial basic price for reference crude, the following factors were studies:

a-     Pricing based on cost.  Here the author recommended that the “Social cost or value” should be taken into consideration since oil is a non-renewable or depletable resource.

b-    Pricing based on “what the market can bear”, taking into consideration the fluctuation in the international market.

c-     Pricing on competitive bases.  Here other sources of energy were mentioned as prospective competitors.  The recommendation was to maintain competition while providing for a clear and measurable way to evaluate the other sources and their shortcomings.

d-    Pricing on the bases of predetermined net revenues.  Here penetration pricing and “Skimming the market pricing” were presented as possible avenues when applicable, according to the needs of individual states.

      The problems related to the price differential approach were studies taking into consideration:

a-     Gravity differential and the True Boiling Point.

b-    Sulphur Differential and Pollution factors.

c-     Freight Differential

       The above mentioned principles deal basically with the Initial Basic Price for Crude oil.  However, the principle, namely the adjusted price deals with the final value of the produced oil and its importance for the exporting country.  Therefore, the factors involved here are more subjective in nature.  The variables involved in this principle are external to the oil industry as a whole.  However, they might be basic factors in bilateral relations.  This could be used as special cases, where certain countries might give discounts or preferential treatment to other counties, for political or social reasons.

         As for price, reviewing in later dates, justifications were dealt with for many reasons.  Some had to deal with the devaluation of the dollar, others were based on inflation.  The recommendation here is to provide for a wholestic approach to price reviewing that will take into account internal as well as external factors that might affect the oil industry.

        Finally, a price index was suggested a principle for crude oil pricing, taking into account the year 1974 as a base price for both the intrinsic value and the demand on oil for energy uses, or as ingredients in the Petro-chemical Industry.  Production as well as sales will be decided upon by producing countries in lieu of creating a balance in the international oil market.

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