Oil and Petroleum Product Armington Elasticities : A New-Geography-Of-Trade Approach to Estimation

Exploiting the structural developments suggested by the geography-of-trade literature, we estimate the elasticity of substitution across regional varieties for six crude grades and seven refined products using fixed-effects gravity regressions. We use unique data, compiled by Al-Qahtani (2008), that include global coverage of bilateral trade and transport costs for the crude grades and refined products. We find that the point estimates of elasticities of substitution across import varieties exceed those commonly reported in the literature and those adopted in simulation analysis. Our estimates indicate that there may be far less hysteresis in the pattern of petroleum trade than previously forecast. This is important because the effectiveness of global climate and energy policies currently under debate may be significantly undermined by sizeable reactions in the trade equilibrium