Geographical Limits to Arbitrage in the Global Oil Market

For more than 30 years, the world’s main indices for oil prices – WTI in the US and Brent in Europe – have moved in sync. This changed dramatically in 2011, when WTI started trading at a considerable discount to Brent for almost five years. This disparity violated the “law of one price” as arbitrage between markets should quickly reduce these differences. We trace the limits to arbitrage to the specificities of the WTI oil market and highlight how geography – manifest in material infrastructure and the design and regulation of markets – can pose sizable limits to arbitrage even in globally integrated commodity markets.