Pricing Liquid Petroleum Gas in Mexico.Dagobert L. Brito [*] William Laney Littlejohn [+] Juan Rosellon [++] This paper considers the regulation of pricing of liquid petroleum gas in Mexico. We construct a model that incorporates all information essential to the pricing question and derive relationships that should hold between prices in Mexico and prices in world markets. Prices in Mexico can be tied to the readily observable ob·serv·a·ble adj. 1. Possible to observe: observable phenomena; an observable change in demeanor. See Synonyms at noticeable. 2. prices in the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. by a netback net·back n. Linkage of the price of crude oil to the market price of products refined from it. rule. However, this rule can lead to incentives to increase the price of domestic liquid petroleum gas by diverting production from the regulated market A regulated market is the provision of goods or services that is regulated by a government appointed body. The regulation may cover the terms and conditions of supplying the goods and services and in particular the price allowed to be charged. . 1. Introduction The economics of oil and gas in Mexico are difficult, and many of the issues involved are very subtle. It is not surprising that there is substantial misunderstanding of many of the issues involved. The difficulties arise from three sources. First, the national oil company Petroleos Mexicanos (PEMEX Pemex officially Petróleos Mexicanos Mexico's state-owned oil company. In 1938 Pres. Lázaro Cárdenas nationalized 17 foreign oil companies to create Pemex, the largest Latin American petroleum company and a major world exporter of fossil fuel. ) is a monopoly and many of the markets involved are regulated. Prices are not a good guide for economic decisions as to production. PEMEX must solve a very difficult programming problem to reach decisions as to quantities produced. Second, oil, gas, and natural gas liquids are often produced jointly, and in such cases, is impossible to allocate costs of production to a specific product (see Adelman 1963). Finally, the goods produced are almost perfect substitutes as inputs in production. Gas and oil are substitutes in the generation of power; natural gas liquids, gas, and oil are substitutes as feedstocks. There is little or no curvature curvature Measure of the rate of change of direction of a curved line or surface at any point. In general, it is the reciprocal of the radius of the circle or sphere of best fit to the curve or surface at that point. in the marginal rates of technical substitution. There are very difficult pr oblems in regulating prices. The Comision Reguladora de Energia (CRE CRE Commercial Real Estate CRE Corporate Real Estate CRE Commission for Racial Equality (Scotland) CRE CCD (Charge Coupled Device) and Readout Electronics CRE Camp Response Element , Energy Regulatory Commission) has been given the responsibility of regulating the price of liquid petroleum gas (LPG LPG: see liquefied petroleum gas. 1. LPG - Linguaggio Procedure Grafiche (Italian for "Graphical Procedures Language"). dott. Gabriele Selmi. Roughly a cross between Fortran and APL, with graphical-oriented extensions and several peculiarities. ), natural gas, and electricity. To overcome the difficulties created by the technology, national institutions, and market structure, the Comision Reguladora de Energia has linked the LPG market in Mexico to the price at Mont Belvieu near Houston, Texas “Houston” redirects here. For other uses, see Houston (disambiguation). Houston (pronounced /'hjuːstən/) is the largest city in the state of Texas and the . The link is real when Mexico is importing LPG and LPG is moving into the Gulf of Mexico Noun 1. Gulf of Mexico - an arm of the Atlantic to the south of the United States and to the east of Mexico Golfo de Mexico Atlantic, Atlantic Ocean - the 2nd largest ocean; separates North and South America on the west from Europe and Africa on the east or if Mexico is importing (or exporting) LPG from Mont Belvieu. When Mexico is not importing LPG or exporting LPG into Mont Belvieu, the price at Mont Belvieu serves as a reference point for the price of LPG in Mexico. This paper considers the means by which the price of LPG in Mexico can be tied to observable world market prices in an economically defensible de·fen·si·ble adj. Capable of being defended, protected, or justified: defensible arguments. de·fen fashion. We begin by considering the essentials of the market for LPGs in North America North America, third largest continent (1990 est. pop. 365,000,000), c.9,400,000 sq mi (24,346,000 sq km), the northern of the two continents of the Western Hemisphere. and the Gulf of Mexico and demonstrate that it is appropriate to tie prices in Mexico to the readily observable LPG prices at Mont Belvieu, Texas Mont Belvieu is a city in Chambers County, Texas, United States. It is just north of Interstate 10 along State Highway 146. The population was 2,324 at the 2000 census. Geography Mont Belvieu is located at (29.860242, -94. . We then demonstrate that the detailed linear programming models currently used for the planning of the import, export, and distribution of LPG in Mexico can be greatly reduced in dimensionality without loss of information about optimal pricing. This permits the construction of simple, transparent policy models that incorporate all information essential to the pricing question and derive relationships that should hold between prices in Mexico and prices in world markets. 2. The North American North American named after North America. North American blastomycosis see North American blastomycosis. North American cattle tick see boophilusannulatus. Liquid Petroleum Gas Market The U.S. is a net importer of LPGs, with net imports running about 100 thousand barrels per day Barrels per day (abbreviated BPD, bbl/d, bpd, bd or b/d) is a measurement used to describe the amount of crude oil (measured in barrels) produced or consumed by an entity in one day. . The majority of this material comes from Canada via pipeline, but significant volumes are imported as waterborne cargoes from Algeria and Venezuela. Depending on market conditions in various parts of the world, the U.S. also imports LPG from Europe (North Sea) and the Middle East (Saudi Arabia Saudi Arabia (sä  `dē ərā`bēə, sou`–, sô–), officially Kingdom of Saudi Arabia, kingdom (2005 est. pop. , UAE (Uninterruptible Application Error) The name given to a crash in Windows 3.0. In subsequent versions of Windows, a crash was called a "General Protection Fault," "Application Error" or "Illegal Operation." See crash in Windows and abend. ). In the future, as new gas
processing facilities come onstream, Nigerian LPG can be expected to
flow into the U.S. Of particular interest to Mexico, is the fact that an
annual average of 35 million barrels a day (MBD MBDmethylene blue dye bindng test. See sabin-feldmann dye test. MBD Minimal brain dysfunction, see there ) of LPGs are imported into the U.S. Gulf Coast (USGC USGC US Gulf Coast USGC United States Global Change USGC United States Grain Corporation USGC United States Government Classified USGC United States Gymnastics Championships USGC United States Gypsum Corporation USGC US Government Consulting, Inc ) region from outside North America. About 70% of this material comes from Algeria and the remainder from Venezuela. These imports are landed at Houston, where they can move into storage facilities at Mont Belvieu. Mont Belvieu is located 20 miles northeast of Houston and has long been the center of the U.S. market for natural gas liquids (NGL NGL - A dialect of IGL. ). There are four large fractionators that produce 23 million gallons per day of finished product in Mont Belvieu. Mont Belvieu has the largest NGL storage facilities in the world. Located in underground salt domes salt dome Largely subsurface geologic structure that consists of a vertical cylinder of salt embedded in horizontal or inclined strata. In the broadest sense, the term includes both the core of salt and the strata that surround and are “domed” by the core. , the total storage capacity exceeds 4000 million gallons. The market is large so the price at Mont Belvieu is used for trading in Texas, Louisiana, and throughout the Caribbean basin The Caribbean Basin is generally defined as the area running from Florida westward along the Gulf coast, then south along the Mexican coast through Central America and then eastward across the northern coast of South America. . LPG, butane butane (by `tān), C4H10, gaseous alkane, a hydrocarbon that is obtained from natural gas or by refining petroleum. , and propane propane, CH3CH2CH3, colorless, gaseous alkane. It is readily liquefied by compression and cooling. It melts at −189.9°C; and boils at −42.2°C;. , which
include ethane ethane (ĕth`ān), CH3CH3, gaseous hydrocarbon. It is a continuous-chain alkane. As a constituent of natural gas, it is used for fuel. It can be prepared by cracking and fractional distillation of petroleum. , isobutane isobutane (ī'səby`tān): see butane. , and natural gasoline A natural gas liquid with a vapor pressure intermediate between natural gas condensate and liquefied petroleum gas and has a boiling point within the range of gasoline. This hydrocarbon mixture is liquid at ambient pressure and temperature. , are a subset A group of commands or functions that do not include all the capabilities of the original specification. Software or hardware components designed for the subset will also work with the original. of NGL.
LPG from South America South America, fourth largest continent (1991 est. pop. 299,150,000), c.6,880,000 sq mi (17,819,000 sq km), the southern of the two continents of the Western Hemisphere. and North Africa is also traded at Mont Belvieu. One of the reasons that LPG trades in an international market is that NGL becomes liquid at a temperature of about 0[degrees]F. By contrast, natural gas becomes liquid at about --275[degrees]F. Thus, it is relatively cheap to liquefy liquefy /liq·ue·fy/ (lik´wi-fi) to become or cause to become liquid. and transport LPG. It costs about $5.00 to ship a ton of LPG 1000 miles by sea. This is approximately $0.10 per MMBTU MMBTU Million British Thermal Units (million BTU Btu: see British thermal unit. ) or $0.02 a gallon. It should be noted that there is considerable seasonal variation in these imports. In winter, LPG prices in Europe typically rise sufficiently to attract all of the waterborne LPG available from Africa and South America. Under these conditions, it becomes uneconomic to ship this material to the USGC, and imports cease. In summer, however, European prices drop, imports into the U.S. become attractive, and some 50-60 MBD moves into the USGC. When the U.S. is importing LPG into the USGC, prices at Mont Belvieu should equate e·quate v. e·quat·ed, e·quat·ing, e·quates v.tr. 1. To make equal or equivalent. 2. To reduce to a standard or an average; equalize. 3. to the landed cost of imports (including terminal costs). [1] Noting further that the sailing distance from Algeria to Pajaritos, Mexico (c. 5500 nautical nau·ti·cal adj. Of, relating to, or characteristic of ships, shipping, sailors, or navigation on a body of water. [From Latin nauticus, from Greek nautikos, from miles [nm]), differs only slightly from that from Algeria to Houston (c. 5400 nm), the landed cost of imports into Pajaritos should be approximately the same as the landed cost in Houston, differing only by the amount of the differences in terminal costs. Consequently, one would expect the price of LPG at Pajaritos to be the same as the price at Mont Belvieu. When prices of African and South American LPG are too high to permit imports into the U.S., Mont Belvieu may well become the most economic source of product for import into Pajaritos. Under these conditions, one would expect the landed cost of imports at Pajaritos (and the price) to be approximately that at Mont Belvieu plus 2.5 to 3 cents per gallon. [2] Mexico imports LPG by pipeline and truck along its northern border. These imports are of product that would otherwise flow by pipeline into the market in the interior of the United States. Thus, to assess prices at the border, and their magnitude relative to prices at Mont Belvieu, it is necessary to consider the pattern of distribution of LPGs in the U.S. market. As can be quickly ascertained from the attached map (Figure 1), there are two major storage points for LPGs in the United States: Mont Belvieu and Conway, Kansas. LPG moves by pipeline from Mont Belvieu into the midwest and eastern portions of the U.S. Product moves from Conway into the midwest, where it must compete with material coming up from Mont Belvieu and imports coming in by pipeline from Canada. Given the locations of Conway and Mont Belvieu relative to their competition point in the Chicago region, one would expect LPG prices at Conway to be approximately the same as they are in Mont Belvieu. This indeed turns out to be the case most of the time, as can be seen in the graph in Figure 2 prepared by the U.S. Energy Information Administration (1997). In the winter of 1996-1997, low propane stocks, high crop-drying demand in the fall, and cold weather combined to create a shortage of propane in markets served by Conway, which could not be reached by product from Mont Belvieu due to pipeline limitations. Consequently, Conway prices reached levels significantly higher than those in Mont Belvieu. However, this is a highly unusual situation, and under normal circumstances, one finds the price of propane at Conway to be essentially the same as at Mont Belvieu; that is, Mont Belvieu even. Natural gas liquids are extracted at gas processing plants in New Mexico New Mexico, state in the SW United States. At its northwestern corner are the so-called Four Corners, where Colorado, New Mexico, Arizona, and Utah meet at right angles; New Mexico is also bordered by Oklahoma (NE), Texas (E, S), and Mexico (S). and West Texas. However, there is insufficient capacity in the region to fractionate frac·tion·ate tr.v. frac·tion·at·ed, frac·tion·at·ing, frac·tion·ates 1. To divide or separate into parts; break up: all liquids into marketable products, including propane and butane. Thus, to meet product demand in the area, LPGs must flow back to the region from fractionation fractionation /frac·tion·a·tion/ (frak?shun-a´shun) 1. in radiology, division of the total dose of radiation into small doses administered at intervals. 2. plants elsewhere, such as Conway. Consequently, one should expect the price of LPG at the Mexican border to be equal to Conway (or equivalently, Mont Belvieu) plus transportation costs of approximately 3 cents per gallon. 3. A Model for Pricing Liquid Petroleum Gas PEMEX uses a very large programing model to plan production and to price LPG in Mexico (see Comision Reguladora de Energia 1997). This model is very general and detailed. The duals of the model are the values of the product and the cost of meeting the demands; however, the model is too detailed to be very transparent as to the relationship between the variables. The key variables of interest are the duals associated with the stocks. Large linear models are very easy to compute To perform mathematical operations or general computer processing. For an explanation of "The 3 C's," or how the computer processes data, see computer. , but results can be less than transparent. Fortunately, the maximum theorem theorem, in mathematics and logic, statement in words or symbols that can be established by means of deductive logic; it differs from an axiom in that a proof is required for its acceptance. permits us to show that large programming models can be reduced to a model whose dimensionality is that of the input and constraint set (see Appendix). This model can be solved analytically and permit a clear understanding as to the implications of various policy choices on the price of gas. Any path through a network that connects a source of gas to a point of demand is a line. This basic concept permits the construction of models for studying the implications of pricing policy for LPG. The price can be derived from the concept of Ricardian rents. As long as gas is free to flow, the price of gas must equal the price at the source plus the cost of moving gas to the point of demand. Any other price creates the possibility of profits from arbitrage arbitrage: see foreign exchange. arbitrage Business operation involving the purchase of foreign currency, gold, financial securities, or commodities in one market and their almost simultaneous sale in another market, in order to profit from price . Consider the stylized styl·ize tr.v. styl·ized, styl·iz·ing, styl·iz·es 1. To restrict or make conform to a particular style. 2. To represent conventionally; conventionalize. pipeline in Figure 3. Assume that the pipeline is a circle normalized to a circumference of three. The cost of transporting gas is c per unit of length, and there is unit demand on the circle uniformly distributed. There are three equally spaced nodes on the pipeline. Node 1 is a connection to a source [Q.sub.1]. Node 2 is located one unit from node 1 and is a connection to a competitive market supply at a price [p.sub.2]. Node 3 is located one unit from node 1 and is a connection to a competitive market demand at a price [p.sub.3]. If flow through the pipeline is not constrained con·strain tr.v. con·strained, con·strain·ing, con·strains 1. To compel by physical, moral, or circumstantial force; oblige: felt constrained to object. See Synonyms at force. 2. , then market equilibrium requires that [p.sub.3] = [p.sub.2] + c. The price at node 1 is [p.sub.1] = [p.sub.3] - c, so [p.sub.1] = [p.sub.2]. The price at the arbitrage point, [p.sub.a], midway between node 1 and node 2, is [p.sub.a] = [p.sub.1] + c/2 = [p.sub.2] + c/2. We can map this circle into a line to get the price gradient gradient In mathematics, a differential operator applied to a three-dimensional vector-valued function to yield a vector whose three components are the partial derivatives of the function with respect to its three variables. The symbol for gradient is ∇. (Figure 4). The point at node 3 in the circle is mapped into the end points of the line at zero and three. The price declines uniformly from each of the endpoints until the center of the line, which is the arbitrage point. 4. Pricing LPG in Mexico The structure of imports, exports, and production in Mexico is depicted de·pict tr.v. de·pict·ed, de·pict·ing, de·picts 1. To represent in a picture or sculpture. 2. To represent in words; describe. See Synonyms at represent. in Figure 5. LPG is produced in the oil fields This list of oil fields includes major fields of the past and present. The list is incomplete; there are more than 40,000 oil and gas fields of all sizes in the world[1]. in southern Mexico near Cactus. LPG is imported and exported at Pajaritos by sea. LPG is also exported by sea to Central and South America from the Pacific coast. It is imported on the U.S.--Mexico border by pipeline and truck. Most LPG is consumed in the center of Mexico and this demand is primarily supplied by pipeline. The balance of this demand is mostly in the north of Mexico. Mexico has some degree of monopoly power in Central and South America. [3] Furthermore, this is a relatively small market, so the price of exports to South America is not a good guide for pricing gas in Mexico. Thus, exports to South America will be initially ignored because they only complicate com·pli·cate tr. & intr.v. com·pli·cat·ed, com·pli·cat·ing, com·pli·cates 1. To make or become complex or perplexing. 2. To twist or become twisted together. adj. 1. the analysis. The implications of export to Central and South America on the price of LPG will be discussed in the next section. The essential features of this structure can be characterized by a model with two modes of import, one mode of export, one point of production, and geographically distributed demand. The essential features of the distribution system for LPG are represented by the network depicted in Figure 6. In this network, LPG is produced at point A. This production is denoted by Q. This gas can be transported to points on a line between A and B. Gas can be imported at points A and B; these imports are denoted by [y.sub.1] and [y.sub.2], respectively. The prices of these imports are [p.sub.1] and [p.sub.2]. Gas can be exported at point A; these exports are denoted by z. The price of z is q. We can think of A as Pajaritos and the line A--B as demand in Mexico. We will assume that the distribution of demand on the line A--B is given by a distribution function g(s). [4] The distribution function g(s) is general and could have mass points. Total demand on the line A--B is then given by D = [[[integral of].sup.s].sub.0] g(n) dn + [[[integral of].sup.1].sub.s] g(n) dn. (1) It is assumed that the cost of moving LPG from point A to a point located at n is cn and the cost of moving LPG from point B to a point located at n is c(l - n). The point s is referred to as the arbitrage point, the point where the price of LPG from point A or point B is equal. The objective function of our model is min [[[integral of].sup.s].sub.0] g(n)cn dn + [[[integral of].sup.1].sub.s] g(n)[c(1 - n)] dn + [p.sub.2][y.sub.2] + [p.sub.1][y.sub.1] - qz. (2) The constraints are z + [[[integral of].sup.s].sub.0] g(n) dn - Q - [y.sub.1] = 0 (3) [[[integral of].sup.1].sub.s] g(n) dn - [y.sub.2] = 0. (4) Equation 3 is the resource constraint at point A and Equation 4 is the resource constraint at point B. Equation 4 can be substituted into the objective function and the resulting Lagrangian is L = [[[integral of].sup.s].sub.0] g(n)cn dn + [[[integral of].sup.1].sub.s] g(n)[c(1 - n)] dn + [p.sub.2] [[[integral of].sup.1].sub.s] g(n) dn + [p.sub.1][y.sub.1] - qz + [lambda][z + [[[integral of].sup.s].sub.0] g(n) dn - Q - [y.sub.1]], (5) where [lambda] is the dual associated with the value of LPG. The first-order conditions are [p.sub.1] - [lambda] [greater than or equal to] 0, [y.sub.1][[p.sub.1] - [lambda]] = 0 (6) -q + [lambda] [greater than or equal to] 0, z[-q + [lambda]] = 0. (7) The first-order condition with respect to s, under the assumption that 0 [less than] s [less than] 1, can be written as [lambda] = [p.sub.2] + c - 2cs. (8) If we examine Equations 6, 7, and 8, we see that if imports are positive, the shadow price of LPG at point A will equal the import price, [lambda] = [p.sub.1]. If exports at point A are positive, the shadow price of LPG will equal the export price [lambda] = q. Recall that the arbitrage point is the point where the price of imported and domestically produced LPG is equal. The arbitrage point can be determined in one of two ways. First, it can be the result of fixing the price of LPG at Pajaritos and the United States border. [5] Second, it can be the result of fixing the price at the United States border and the amount of LPG supplied by PEMEX to the domestic market. If the price of LPG at Pajaritos is determined, then the value of [lambda] is fixed and Equation 8 can be solved for the arbitrage point, s. s = 1/2([p.sub.2]-[lambda]/c + 1) (9) If, on the other hand, there are no imports or exports, then s is determined by the solution of Equation 3 for the condition that [y.sub.1] and z are equal to zero, [[[integral of].sup.s].sub.0] g(n) dn - Q = 0. (10) The value of s then gives the price of LPG at Pajaritos through Equation 8. This analysis leads to the rules that have been adopted. If LPG is imported or exported at Pajaritos, the base price of LPG is that cost. If, on the other hand, there are no imports or exports at Pajaritos, the base price of LPG at Pajaritos is given by the rule [beta] = [p.sub.2] + c - 2cs. (11) This is the netback rule that the CRE has implemented for pricing LPG in Mexico. 5. Problems with the Structure of Incentives The CRE has the authority to regulate the price of LPG that is offered for sale in Mexico. It does not have the authority to regulate exports or the use of LPG as petrochemical petrochemical, any one of a large group of chemicals derived from a component of petroleum or natural gas. The cracking processes for manufacturing gasoline produce vast quantities of gaseous hydrocarbons. feed stock. Assume that PEMEX can divert Z of the amount produced from the domestic market at its discretion. If LPG is being exported or imported at Pajaritos, then the price of LPG in the Mexican pipeline system is determined by the price at Pajaritos and the price on the U.S.- Mexico border. However, if there are no imports or exports at Pajaritos, the price of LPG in the Mexican pipeline system is determined by the price on the U.S.-Mexico border. The arbitrage point s is determined by supply of LPG to the domestic market and is given by [[[integral of].sup.s].sub.0] g(n) dn = Q - Z, (12) where Z is the amount of LPG supplied to the petrochemical industry and/or exported. The base price of LPG at the point of production is then given by Equation 11. If the arbitrage point is moved closer to the point of production, the price goes up by twice the cost of moving the gas (see Equation 11). This price increase is then imputed Attributed vicariously. In the legal sense, the term imputed is used to describe an action, fact, or quality, the knowledge of which is charged to an individual based upon the actions of another for whom the individual is responsible rather than on the individual's on the entire stock of LPG produced for domestic consumption. Thus, there are incentives to increase the price of the domestic stock of LPG by exporting production or diverting production to petrochemicals. In fact, PEMEX would have incentives to sell in the unregulated Adj. 1. unregulated - not regulated; not subject to rule or discipline; "unregulated off-shore fishing" regulated - controlled or governed according to rule or principle or law; "well regulated industries"; "houses with regulated temperature" 2. market beyond the point where marginal revenue Marginal revenue The change in total revenue as a result of producing one additional unit of output. marginal revenue The extra revenue generated by selling one additional unit of a good or service. equals marginal cost Marginal cost The increase or decrease in a firm's total cost of production as a result of changing production by one unit. marginal cost The additional cost needed to produce or purchase one more unit of a good or service. . Let q(Z) be the net price PEMEX receives for sales to nonregulated markets and [beta] be the net price it receives in the regulated markets as determined by Equation 11. Then the Lagrangian associated with maximizing revenues subject to a production constraint is [pi] = q(Z)Z + ([p.sub.2] + c - 2cs) [[[integral of].sup.s].sub.0] g(n) dn + [alpha][Q - Z - [[[integral of].sup.s].sub.0] g(n) dn], (13) where [alpha] is the shadow price of LPG to PEMEX in the revenue maximization problem. The first-order conditions are [delta]q/[delta]ZZ + q = [alpha] (14) -2c [[[integral of].sup.s].sub.0] g(n) dn + ([p.sub.2] + c - 2cs)g(s) - [alpha]g(s) = 0. (15) Solving for [alpha] we get [alpha] = ([p.sub.2] + c - 2cs) - 2c/g(s) [[[integral of].sup.s].sub.0] g(n) = [beta] - 2c/g(s) [[[integral of].sup.s].sub.0] g(n) dn. (16) Because the term 2c/g(s) [[[integral of].sup.s].sub.0] g(n) dn [greater than] 0, it follows that [alpha] = [delta]q/[delta]ZZ + q [less than] [beta]. Because the term [delta]q/[delta]ZZ + q is marginal revenue from nonregulated sales, there is an incentive for PEMEX to sell nonregulated LPG beyond the point where marginal revenue is equal to the base price of LPG, [beta]. Because the base price of LPG reflects the social shadow price of LPG, revenue maximizing on the part of PEMEX could lead to inefficiency. 6. Conclusions This paper studies the implications of linking the Mexican market for LPG to international markets in an efficient manner. The results are consistent with the pricing formula that the CRE has established for the pricing of LPG in Mexico (Comision Reguladora de Energia 1997). 1. If LPG is imported at Pajaritos, the base price of LPG is the import price. 2. If LPG is exported from Pajaritos, the base price of LPG is the export price. 3. If LPG is not imported or exported at Pajaritos, then the arbitrage point is determined by the balance of LPG that remains after exports. The price of LPG at the arbitrage point is the price of gas at the U.S.-Mexico border plus the cost of moving the LPG to the arbitrage point. The price of LPG at Pajaritos is the price of LPG at the arbitrage pointless the cost of moving the LPG from the arbitrage point to Pajaritos. The arbitrage point is the point where the price of imported LPG from the U.S.-Mexico border and LPG domestically produced is equal. In these two cases, the arbitrage point is established by price at the border and the base price at Pajaritos. The import price would be ship's rail at Mont Belvieu, adjusted for differences in terminal costs. [6] Consequently, one would expect the price of LPG at Pajaritos to be the same as the price at Mont Belvieu. When prices of African and South American LPG are too high to permit imports into the U.S., Mont Belvieu may well become the most economic source of product for import into Pajaritos. Under these conditions, one would expect the price to be approximately Mont Belvieu plus 2.5 to 3 cents per gallon. If the arbitrage point is established by price of gas at the border and the net quantity of LPG supplied to nonregulated markets by PEMEX, then there is an incentive to reduce the supply of LPG by PEMEX by diverting it to nonregulated markets. If there is not an explicit cap on the price of LPG, this could result in a base price for LPG in excess of the market price for imports at Pajaritos. (*.) Department of Economics [MS-22], Rice University, 6100 Main, Houston, TX 77005, USA; E-mail brito@rice.edu; corresponding author. (+.) Littlejohn & Associates, 6433 Sawnee, Houston, TX 77005, USA. (++.) Centro de Investigacion y Docencia Economicas, A.C., Carret. Mexico Toluca 3655, Lomas de Santa Fe Santa Fe, city, Argentina Santa Fe, city (1991 pop. 341,000), capital of Santa Fe prov., NE Argentina, a river port near the Paraná, with which it is connected by canal. , 01210 Mexico D.F. The research reported in this paper was supported by the Comision Reguladora de Energia in a grant to the Centro de Investigacion y Docencia Economicas, A.C. Received April 1998; accepted July 1999. (1.) Butane imported to the U.S. is used as a feedstock feed·stock n. Raw material required for an industrial process. Noun 1. feedstock - the raw material that is required for some industrial process raw material, staple - material suitable for manufacture or use or finishing in petrochemicals and must be fractionated into normal and isobutane before entering the market. This should be treated as an addition to terminal costs for butane imported into the U.S. LPG in Mexico is used as a source of heat and fractionation is not necessary at Pajaritos. (2.) This number was suggested as a reasonable approximation approximation /ap·prox·i·ma·tion/ (ah-prok?si-ma´shun) 1. the act or process of bringing into proximity or apposition. 2. a numerical value of limited accuracy. by the Houston office of Purvin and Gertz during a consultation. Purvin and Gertz is a large consulting firm Noun 1. consulting firm - a firm of experts providing professional advice to an organization for a fee consulting company business firm, firm, house - the members of a business organization that owns or operates one or more establishments; "he worked for a with a well-known expertise in LPG. It should be noted that the exact cost of moving LPG will depend on the demand and supply conditions in the charter market for LPG carriers. (3.) Mexico ships LPG to Belize, Costa Rica Costa Rica (kŏs`tə rē`kə), officially Republic of Costa Rica, republic (2005 est. pop. 4,016,000), 19,575 sq mi (50,700 sq km), Central America. , Guatemala, and Ecuador, as well as to other Latin American countries List of American countries Nations:
(4.) The problem is originally formulated by PEMEX as minimizing the cost of providing LPG subjected to a demand constraint. For this reason, the demand for LPG, as represented by the density function, does not include price. This assumption can be supported on two grounds. The solution is determined by the linear Kuhn--Tucker conditions given by Equations 6 and 7. Thus the solution is not sensitive to price unless there is a sufficient change in demand so that Mexico switches from importing to exporting LPG. Second, outside of petrochemicals, there are no close substitutes for LPG in Mexico. There have been no studies of the elasticities for LPG in Mexico, but econometric e·con·o·met·rics n. (used with a sing. verb) Application of mathematical and statistical techniques to economics in the study of problems, the analysis of data, and the development and testing of theories and models. evidence suggests that the short-run price elasticity for energy is small (see Dahl dahl n. 1. See pigeon pea. 2. or dal A thick creamy East Indian stew made with lentils or other legumes, onions, and various spices. 1992). Petrochemicals are outside the regulatory control of the CRE. (5.) The import price at Pajaritos is either the price of LPG into the Gulf or the price of importing from Mont Belvieu. (6.) "Ship's rail" is the industry term for the price of a product as it crosses the ships rail before taxes or terminal Costs. References Adelman, M. A. 1963. The supply and price of natural gas. Oxford: B. Blackwell. Comision Reguladora de Energia 1997. Resolucion de la Comision Reguladora de Energia sobre la Solicitud de Pemex Gas y Petroquimica Bascia Relativa a un Mecanismo Transitorio para la Determinacion de Precios de Gas LP, en tanto Tanto may refer to several things. Please see:
n. pl. ma·nos A hand-held stone or roller for grinding corn or other grains on a metate. [Spanish, hand, mano, from Latin manus, hand; see manner.] , RES/085/97, MEXICO. (WEBSITE: http://www.cre.gob.mx/registro/resoluciones/1997/res08597.html). Dahl, C. 1992. Energy and energy product demand, elasticities for the developing world: A survey of the econometric evidence. Colorado School of Mines Colorado School of Mines, at Golden; state supported, coeducational; chartered 1874. It was one of the first mineral engineering schools in the United States. Working Paper 92-14. U.S. Energy Information Admininistration. 1997. An analysis of U.S. propane markets winter 1996-97 SR/OOG/97-01. Appendix We will show that a large programing model can be reduced in dimensionality without loss of information as to the value of the duals. The models used for LPG are typically characterized by the following: N--demands given by the quantity vector D = ([D.sub.i]), i = 1, N M--domestic supply points given by the quantity vector Q = ([Q.sub.j]), j = 1, M E--export demands characterized by the price vector q = ([q.sub.k]) k = 1, R K--import supply points characterized by the price vector p = ([p.sub.j]) = M + 1, S T--transport modes, t = 1, T X = [x.sub.ijt]--the volume transport to demand i from source j using transportation mode t at cost [C.sub.ijt] y = [y.sub.j]--the volume of imports from source j z = [z.sub.k]--the volume of exports to demand k The objective function PEMEX is to minimize the cost of transporting LPG plus the cost of net imports: [[[sigma].sup.N].sub.i=1] [[[sigma].sup.S].sub.j=1] [[[sigma].sup.T].sub.t=1] [C.sub.ijt][x.sub.ijt] + [[[sigma].sup.S].sub.j=M+1] [p.sub.j][y.sub.j] - [[[sigma].sup.R].sub.k=1] [q.sub.k][z.sub.k] (A1) The first constraint requires that all demands be satisfied: [[[sigma].sup.S].sub.j=1] [[[sigma].sup.T].sub.t=1] [x.sub.ijt] = [D.sub.i], i = 1, N. (A2) The second constraint requires that domestic production be consumed or exported: [[[sigma].sup.N].sub.i=1] [[[sigma].sup.T].sub.t=1] [x.sub.ijt] + [z.sub.j] = [Q.sub.j], = j = 1, M. (A3) The third constraint requires that imports be consumed or exported: [[[sigma].sup.N].sub.i=1] [[[sigma].sup.T].sub.t=1] [x.sub.ijt] + [z.sub.j] = [y.sub.j], j = M + 1, S. (A4) To show that the model can be simplified, define F(X) = [[[sigma].sup.N].sub.i=1] [[[sigma].sup.S].sub.j=1] [[[sigma].sup.T].sub.t=1] [C.sub.ijt][X.sub.ijt] (A5) p'y = [[[sigma].sup.S].sub.j=M+1] [p.sub.j][y.sub.j] (A6) q'z = [[[sigma].sup.R].sub.k=1] [q.sub.k][z.sub.k] (A7) The PEMEX objective function can then be written as F(X) + p'y - q'z. (A8) Finally, let [gamma](X, y, z, D, Q) [greater than or equal to] 0 (A9) be the linear constraint set given by Equations A2, A3, and A4. Let W(y, z, D, Q) be the set of feasible allocations. We can first define the following problem of minimizing transport costs for a fixed value of imports and exports. This is given by the problem G(y, z, D, Q) = [min.sub.x] F(X), (A10) subject to Equation A9 for fixed values of y and z in W(y, z, D, Q). The Lagrangian for this problem is L = F(X) + [lambda][gamma](X, y, z, D, Q). (A11) From the envelop en·vel·op tr.v. en·vel·oped, en·vel·op·ing, en·vel·ops 1. To enclose or encase completely with or as if with a covering: "Accompanying the darkness, a stillness envelops the city" theorem, we know [delta]G/[delta]y = [lambda] [delta][gamma]/[delta]y (A12) [delta]G/[delta]z = [lambda] [delta][gamma]/[delta]z. (A13) Now consider the problem of minimizing the net cost of imported LPG given a vector of production and demands H(D, Q) = [min.sub.y,z] [G(y, z, D, Q) + p'y - q'z]. (A14) The first-order conditions for Equation A14 are given by p + [delta]G/[delta]y [greater than or equal to] 0, y[p + [delta]G/[delta]y] = 0 (A15) -q + [delta]G/[delta]z [greater than or equal to] 0, z[-q + [delta]G/[delta]z] = 0. (A16) If we substitute in Equations A15 and A16 from Equations A12 and A13, we get P + [lambda] [delta][gamma]/[delta]y [greater than or equal to] 0, y[p + [lambda] [delta][gamma]/[delta]y] = 0 (A17) - q + [lambda] [delta][gamma]/[delta]z [greater than or equal to] 0, z[-q + [lambda] [delta][gamma]/[delta]z] = 0. (A18) The problem defined by Equation A14 has a dimensionality less than or equal to the number of import and export activities. The vector of shadow prices is determined by the linear system given by Equations A17 and A18. It is independent of the particular structure of the function F(X). The convexity Convexity A measure of the curvature in the relationship between bond prices and bond yields. Notes: Positive convexity corresponds to curvature that opens upward. Negative convexity corresponds to curvature that opens downward. of the feasible set and the assumption that the objective function is linear ensures that the two problems have the same solution. Any objective function that maximizes welfare as a function of the demands for gas will give the same results as the cost minimizing model because the price is ultimately determined by the constraints. |
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