https://www.investopedia.com/terms/l/law-one-price.asp https://en.wikipedia.org/wiki/Law_of_one_price https://corporatefinanceinstitute.com/resources/knowledge/ec...
This has been well established in mainstream energy economics for ~50 years. Other disciplines seem to have trouble grokking the arguments. But ask any professional trader and they'll go with the economists on this one.
For this and various other temporary phenomenon governments set limits on market economies to prevent outcomes pathologically opposed to the wellbeing of residents. These limits include export controls and subsidies on food and other basic necessities. It absolutely makes sense for a country not to suddenly shift its income to the benefit of external commodity holders due to a sudden price jump in the commodity due to supply chain issues. Not doing so could destroy “higher value” “finished product” industries by making them uncompetitive.
If a large supply chain issue hits a critical necessity you would absolutely expect countries to start triggering their hoarding policies making the issue worse. An economic zone not planning for such a disruption to occur in the future is equivalent to a bet that such disruptions will never occur.
The PPE shortage of 2020 demonstrated very clearly how quickly free-market economics gets thrown overboard in a serious crisis.
Crude is not an identical commodity in the sense that is assumed by the Law Of One Price. There are some crude specifications that certain refineries prefer not to process, either due to sulfur or viscosity or other characteristics for which the refinery may be ill equipped.
https://www.mckinseyenergyinsights.com/resources/refinery-re...
Crude transportation takes time and money. Transportation prices rise in correlation to crude prices, but they matter if you are determining the relative marketability of different products sourced around the globe.
Arbitrage works worst when transactions are lossy, costly, delayed, and unique, as is the case in the petroleum market.
If you compare the petroleum market to the markets where those things are actually major factors, like the market for artwork, petroleum is an idealized commodity market. The fact that the price of transportation isn't literally zero and there are different well-defined grades of the commodity doesn't meaningfully change that. Transaction costs are never literally zero.
And what matters is the relative transaction costs. You have to ship the oil from the well to the refinery, but if the transportation to go 1500 miles from Texas to a refinery in New Jersey and the cost to go the same distance in the other direction to a refinery in Mexico are the same, there is no relative difference in transportation costs.
It wasn't even legal to export oil until 2015! https://www.gao.gov/products/gao-21-118#:~:text=With%20U.S.%....
That would cost US oil producers billions of dollars -- more than the price increase would cost US consumers. Which would only happen if oil producers had dramatically less political influence than they do now, i.e. if we stopped producing so much oil. But then there would be no reason to do it.
> It wasn't even legal to export oil until 2015!
Crude oil. It was protectionism for US refineries, not the other thing. Which makes oil cost consumers more, because of the reduction in competition for refining.
But if WW III starts with say China taking Taiwan and getting into stuff in the pacific, and Russia invading easter european countries, and maybe some other stuff... If the US were to fully engage in some kind of global conflict, they could ban oil exports and not have a supply problem.
This is the kind of thinking the military engages in to ensure their own supply chains won't be distrupted in a war. The ability to operate independently is important even if it's never used.
https://www.pillsburylaw.com/en/news-and-insights/us-repeals...
Also, several oil-producing nations have off-market domestic pricing for refined petroleum that is favorable versus the international spot price. Such prices won't naturally change when, say, the Strait of Hormuz closes. The IMF has been trying to force free-market pricing, as was the cause of the Ecuador protests in 2019.
So it translates into a strategic issue, and, there will be direct involvement by the US if things get bad.
The US I think will stay in S. Korea until the situation changes, it's better to have chips, but that's not necessary.
This has never been how it works.
Oil is a global commodity. Even if the US produced as much as it consumes, if something happened in the middle east, the global price would go up. Because when the price went up in Europe or Asia, American oil producers would sell to the highest bidder, which would force American consumers to bid higher.
The real path to "independence" is to stop consuming oil, i.e. the electrification of transportation and heating. Which is starting but nowhere near finished.
Because electricity generated from solar/wind/nuclear/hydro is not a global commodity. Nothing that happens in Iran is going to change the cost of power generated at Hoover Dam.