The mythical market price of oil

Abstract Independent experts in oil trading disputes are often told by law firms that damages are to be calculated based on the difference between the ‘Market Price’ of the cargo at the time of the breach and the ‘Contract Price’ that would have applied if the breach had not occurred. ‘Market Price’ and ‘Contract Price’ are not straightforward because the price of a cargo is rarely a single fixed number. Instead, the price emerges from a formula, the outcome of which varies substantially depending on the highly volatile value of the many variables comprising the calculation. To explain what the ‘Market Price’ of crude oil or refined oil products is, this article examines the oil price negotiations that take place when oil changes hands and how both the Contract Price and the Market Price can vary substantially. In order to allocate damages fairly, judges and arbitrators typically want an answer from the expert that gives them a number, or a narrow range of numbers, pure and simple, on which to base their assessment of damages. In the words of Oscar Wilde, ‘The truth is rarely pure and never simple.’ This article attempts to explain why this is the case for oil prices and damages in oil trading disputes.