The Importance of Non-Price Competitiveness: Oil Downstream Sector in Europe

• Název práce v češtině: The Importance of Non-Price Competitiveness: Oil Downstream Sector in Europe
• Název v anglickém jazyce: The Importance of Non-Price Competitiveness: Oil Downstream Sector in Europe
• Klíčová slova: Mezinárodní obchod, komoditní trhy, ropný průmysl, cenová a necenová konkurenceschopnost, kvalita, relativní exportní cena
• Klíčová slova anglicky: International trade, commodity markets, oil market, price and non-price competitiveness, quality, relative export price
• Akademický rok vypsání: 2016/2017
• Typ práce: diplomová práce
• Jazyk práce: angličtina
• Ústav: Institut ekonomických studií (23-IES)
• Vedoucí / školitel: PhDr. Jaromír Baxa, Ph.D.
• Řešitel: skrytý - zadáno vedoucím/školitelem
• Datum přihlášení: 09.11.2016
• Datum zadání: 09.11.2016
• Datum a čas obhajoby: 14.09.2017 08:30
• Místo konání obhajoby: Opletalova - Opletalova 26, O206, Opletalova - místn. č. 206
• Datum odevzdání elektronické podoby: 31.07.2017
• Datum proběhlé obhajoby: 14.09.2017
• Oponenti: Mgr. Michal Paulus

Zásady pro vypracování

Hypotheses:

1. Hypothesis #1: Non-price factors are important contributors to changes in export market shares
2. Hypothesis #2: Price factors play considerably smaller role while other competitiveness gains or losses are less significant in the CEE region
3. Hypothesis #3: Less developed countries experience mostly gains in non-price competitiveness

Expected Contribution:

The thesis will provide a detailed analysis of export market shares developments in terms of price and non-price factors of selected countries in CEE region. The losses and gains in export market shares will be explained by considering both price and non-price factors. The results of the study will provide more insight into what are the differences in countries‘ competitiveness and its changes between countries that decided to join the euro area and those who kept their currencies. Implications of the results will provide more insight both for the Czech Republic as a euro candidate but also for countries like Greece who might consider leaving the euro area. The implications from the findings might serve for policy decisions on how to improve export market shares via various competitiveness factors.

Seznam odborné literatury

1. Armington, P.S., (1969). “A Theory of Demand for Products Distinguished by Place of Production,” International Monetary Fund Staff Papers, 16, 159-178
2. Benkovskis, K. and J. Wörz (2012). “Non-Price Competitiveness Gains of Central, Eastern, and Southeastern European Countries in the EU Market,” Focus on European Economic Integration Q3/12, 2012, 27-47
3. Benkovskis, K. and J. Wörz (2014). “What Drives the Market Share Changes? Price versus Non-Price Factors,” ECB Working Paper Series No. 1640, February 2014
4. Benkovskis, K. and Wörz, J. (2016). “Non-Price Competitiveness of Exports from Emerging Countries,” Empirical Economics Volume 51, Issue 2, p. 707-735
5. Broda, C. and D.E. Weinstein (2006). “Globalization and the Gains from Variety,” Quarterly Journal of Economics, 121(2), 541-585
6. Feenstra, R.C. (1994). “New Product Varieties and the Measurement of International Prices,” American Economic Review, Vol. 84, No. 1, 157-177
7. Rodrik, D. (2008). “The Real Exchange Rate and Economic Growth,“ Brookings Papers on Economic Activity, Fall 2008

Předběžná náplň práce

Motivation:
The downstream segment of oil & gas sector in Europe has been under pressure for four decades since the second oil price shock. The last golden age of refining in Europe ended with the 2008/2009 crisis and European refiners have been struggling to achieve profits ever since. The European downstream industry suffers from chronic oversupply, low utilization rates, decreasing demand for oil, low margins, high labour costs, expensive feedstock, and costly upgrading investments to comply with EU’s environmental regulations.

The sector survives mainly thanks to increasing closures of smaller plants. Many refiners have started to focus on larger scale and closer integration between refining, petrochemical and chemical segments to capture more of the value chain. Recent refining and petrochemical investments in the Gulf and shale gas exploration in USA, however, have changed the market landscape considerably, and the full-scale effect is yet to come. Developing countries such as China or India have built their own plants to satisfy most of their domestic demand. European plants can hardly achieve quality and profitability of larger scale projects overseas or in the Gulf without substantial investments. Moreover, Russia and the whole Caspian region have invested massively into both refining and petrochemical facilities, directly competing with its European peers and putting additional pressure on their profitability.

To capture both price and non-price competitiveness developments of Europe’s and its competitors’ refining and petrochemical segments, we choose index created by Benkovskis and Wörz (2016). We investigate developments in the quality level, while using the first part of the index as a standard RXP indicator to depict changes in price competitiveness of the downstream sector in past two decades.
Hypotheses:
1. Hypothesis #1: Western European refiners’ product quality decreases compared to other competitors, along with fall in refining margins.
2. Hypothesis #2: Russia’s and Saudi Arabia’s investments in refining and petrochemical segments have had a profound, positive effect on product quality.
3. Hypothesis #3: CEE refiners have significantly increased product quality and benefit from ongoing investments, discounted Urals crude and increasing demand for their products. We would expect the non-price competitiveness to be the main driver of their increased profitability.
Methodology:
Along with use of the conventional RXP, this thesis follows work of Benkovskis and Wörz (2016) who relax the assumption of constant elasticity of substitution in Armington’s (1969) demand-side oriented theoretical model. Armington examines country’s competitiveness from the import demand side, identifying both price and non-price competitiveness. Armington (1969) describes consumer’s utility as a CES function, combining demand for domestic and foreign products. Benkovskis and Wörz (2013) rework the model to account for the role of non-price factors such as quality and taste. The index, however, could be used as a more detailed tool, examining changes in non-price (and price) competitiveness within a sector, i.e. oil downstream.
There is no unified database of downstream product types, prices or margins. The companies prefer reporting model operating margins based on quotation prices and the sector numbers within the company (refining, petrochemicals, merchandise etc.) are often reported together, making all assessments of changing quality inaccurate. Therefore, we decide to look at the sectors on the country level, using the UN COMTRADE database. The analysis uses 6-digit HS code from UN COMTRADE database, which is the most detailed, unified level for all countries considered. The use of detailed data allows us to capture differences in elasticities of substitution between varieties and changes in quality of oil products. We choose 1996-2015 period, capturing developments before the crisis, or the golden age of Europe’s refining, and several years that followed. Eurostat’s COMEXT database, highly disaggregated EU database, might be used for the detailed EU countries comparison in case of lack of data in UN COMTRADE. For the comparisons between countries of four continents, UN COMTRADE database provides information on a sufficiently detailed level.
Expected Contribution:
This thesis will provide a detailed analysis of oil downstream sector developments in terms of price and non-price competitiveness factors of selected EU countries, Russia, USA, Saudi Arabia, and China. We will investigate drivers of Europe’s falling downstream competitiveness and highlight examples of successful approach to the ever-changing petroleum market. Further, to test reliability of the index, we aim to replicate the index and add four more years for potential future research, computing the index for the entire UN COMTRADE database.
Outline:
1. Motivation: We examine regions facing different competitive forces in EU’s downstream market and briefly describe their position and current trends.
2. Previous research: We will briefly describe previous and similar competitiveness studies and replicate the original index (Benkovskis and Wörz, 2016).
3. Data: UN COMTRADE database will be used as the only tool capable of unification of such a broad research across countries of the downstream sector.
4. Methods: We will explain the methods used (CES functions, import price index, elasticities of substitution between varieties, LIML method, Herfindahl index).
5. Results: We will discuss the results of the replication, the downstream results and potential drivers behind changes in price and non-price competitiveness.
6. Concluding remarks: We will summarize the findings and their implications for policy and future research.

Předběžná náplň práce v anglickém jazyce

Motivation:
The downstream segment of oil & gas sector in Europe has been under pressure for four decades since the second oil price shock. The last golden age of refining in Europe ended with the 2008/2009 crisis and European refiners have been struggling to achieve profits ever since. The European downstream industry suffers from chronic oversupply, low utilization rates, decreasing demand for oil, low margins, high labour costs, expensive feedstock, and costly upgrading investments to comply with EU’s environmental regulations.

The sector survives mainly thanks to increasing closures of smaller plants. Many refiners have started to focus on larger scale and closer integration between refining, petrochemical and chemical segments to capture more of the value chain. Recent refining and petrochemical investments in the Gulf and shale gas exploration in USA, however, have changed the market landscape considerably, and the full-scale effect is yet to come. Developing countries such as China or India have built their own plants to satisfy most of their domestic demand. European plants can hardly achieve quality and profitability of larger scale projects overseas or in the Gulf without substantial investments. Moreover, Russia and the whole Caspian region have invested massively into both refining and petrochemical facilities, directly competing with its European peers and putting additional pressure on their profitability.

To capture both price and non-price competitiveness developments of Europe’s and its competitors’ refining and petrochemical segments, we choose index created by Benkovskis and Wörz (2016). We investigate developments in the quality level, while using the first part of the index as a standard RXP indicator to depict changes in price competitiveness of the downstream sector in past two decades.
Hypotheses:
1. Hypothesis #1: Western European refiners’ product quality decreases compared to other competitors, along with fall in refining margins.
2. Hypothesis #2: Russia’s and Saudi Arabia’s investments in refining and petrochemical segments have had a profound, positive effect on product quality.
3. Hypothesis #3: CEE refiners have significantly increased product quality and benefit from ongoing investments, discounted Urals crude and increasing demand for their products. We would expect the non-price competitiveness to be the main driver of their increased profitability.
Methodology:
Along with use of the conventional RXP, this thesis follows work of Benkovskis and Wörz (2016) who relax the assumption of constant elasticity of substitution in Armington’s (1969) demand-side oriented theoretical model. Armington examines country’s competitiveness from the import demand side, identifying both price and non-price competitiveness. Armington (1969) describes consumer’s utility as a CES function, combining demand for domestic and foreign products. Benkovskis and Wörz (2013) rework the model to account for the role of non-price factors such as quality and taste. The index, however, could be used as a more detailed tool, examining changes in non-price (and price) competitiveness within a sector, i.e. oil downstream.
There is no unified database of downstream product types, prices or margins. The companies prefer reporting model operating margins based on quotation prices and the sector numbers within the company (refining, petrochemicals, merchandise etc.) are often reported together, making all assessments of changing quality inaccurate. Therefore, we decide to look at the sectors on the country level, using the UN COMTRADE database. The analysis uses 6-digit HS code from UN COMTRADE database, which is the most detailed, unified level for all countries considered. The use of detailed data allows us to capture differences in elasticities of substitution between varieties and changes in quality of oil products. We choose 1996-2015 period, capturing developments before the crisis, or the golden age of Europe’s refining, and several years that followed. Eurostat’s COMEXT database, highly disaggregated EU database, might be used for the detailed EU countries comparison in case of lack of data in UN COMTRADE. For the comparisons between countries of four continents, UN COMTRADE database provides information on a sufficiently detailed level.
Expected Contribution:
This thesis will provide a detailed analysis of oil downstream sector developments in terms of price and non-price competitiveness factors of selected EU countries, Russia, USA, Saudi Arabia, and China. We will investigate drivers of Europe’s falling downstream competitiveness and highlight examples of successful approach to the ever-changing petroleum market. Further, to test reliability of the index, we aim to replicate the index and add four more years for potential future research, computing the index for the entire UN COMTRADE database.
Outline:
1. Motivation: We examine regions facing different competitive forces in EU’s downstream market and briefly describe their position and current trends.
2. Previous research: We will briefly describe previous and similar competitiveness studies and replicate the original index (Benkovskis and Wörz, 2016).
3. Data: UN COMTRADE database will be used as the only tool capable of unification of such a broad research across countries of the downstream sector.
4. Methods: We will explain the methods used (CES functions, import price index, elasticities of substitution between varieties, LIML method, Herfindahl index).
5. Results: We will discuss the results of the replication, the downstream results and potential drivers behind changes in price and non-price competitiveness.
6. Concluding remarks: We will summarize the findings and their implications for policy and future research.