refined product, prices in these markets are comparable. Because of ease of transport and the opportunity for arbitrage, there is little potential for marked price divergence across regions.

With the exception of a handful of countries in the Middle East that burn crude oil for power generation, crude oil is rarely used in final consumption. Virtually all crude oil is supplied to refineries, making refined product prices at international hubs the relevant reference prices. Provided sufficient information exists, these prices are adjusted for key fuel-quality parameters. For gasoline, the most important determinant of price is its octane number. For all oil-based liquid fuels, the sulfur content is an increasingly important determinant of price.

For each refined product, the first step is to see whether the country or a region in the country is a net importer or exporter. Assessing the trade status at the refined product level is important; approximations relying instead on a comparison of total fuel net imports (crude oil plus refined products) versus total exports can lead to large over- or under-estimations of reference prices. Several major crude-oil exporters are also net importers of certain refined products, including the Islamic Republic of Iran, Iraq, and Nigeria, making import- rather than export-parity prices relevant.

If the actual costs at the domestic port of entry or exit are known, they represent a natural starting point for calculating reference prices. Otherwise, a common practice is to add shipping costs to FOB prices at the nearest international hub for net importers and subtract transportation costs for net exporters. For a net exporter, shipping and associated costs to major markets to which the country sells the refined product in question are subtracted from the reference prices at those destinations. Because such an approach might entail calculating reference prices in foreign countries, a simplifying approach would be to subtract shipping and other associated costs from the closest export-oriented refining center providing the benchmark FOB price.

The formula used by the Department of Energy in South Africa, a net importer, illustrates many principles used to arrive at reference prices. It is intended to “represent the realistic, market-related costs of importing a substantial portion of South Africa's liquid fuels requirements ... in terms of both product quality and sustained supply considerations” (www.energy.gov.za/files/petroleum_frame.html). The so-called basic fuels price is equal to FOB + freight + demurrage + insurance + ocean loss + cargo dues (wharfage) + costal storage + stock financing + inland transport costs + wholesale margin + retail profit margin + government taxes and charges,

# where

FOB = combination of FOB prices in the Mediterranean, Singapore, and the Arab Gulf, depending on the fuel; price adjusted for gasoline octane number using linear interpolation Freight = freight rates published by London Tanker Brokers Panel on January 1 each year, adjusted on a monthly basis in line with the Average Freight Rate Assessment, which is a function of risks and supply and demand of ships transporting refined petroleum products internationally Demurrage = rates published by the World Scale Association Limited, with the total demurrage time limited to 3 days 18