Despite the development of an international market for crude petroleum and the resulting opportunities for arbitrage, Saudi oil continues to be shipped to markets in the U.S. and Europe when closer markets are available. Furthermore, these Western sales take place at fob (Saudi Arabia) prices that are lower than for exports to customers in the Far East. This note explains these Saudi price and trade flow anomalies in terms of a model of constrained price discrimination in which the quality adjusted price differential between Asian and European prices cannot exceed the differential in tanker rates to the two markets. The conditions under which price discrimination is likely to continue are also explored. The focus is on the West European and Far East oil markets but the argument applies to the U.S. market as well. Implications of Saudi marketing practices for new oil producers such as those in Central Asia are also discussed.
