Working Paper: NBER ID: w18127
Authors: Severin Borenstein; Ryan Kellogg
Abstract: Beginning in early 2011, crude oil production in the U.S. Midwest and Canada surpassed the pipeline capacity to transport it to the Gulf Coast where it could access the world oil market. As a result, the U.S. "benchmark" crude oil price in Cushing, Oklahoma, declined substantially relative to internationally traded oil. In this paper, we study how this development affected prices for refined products, focusing on the markets for motor gasoline and diesel. We find that the relative decrease in Midwest crude oil prices did not pass through to wholesale gasoline and diesel prices. This result is consistent with evidence that the marginal gallon of fuel in the Midwest is still imported from coastal locations. Our findings imply that investments in new pipeline infrastructure between the Midwest and the Gulf Coast, such as the southern segment of the controversial Keystone XL pipeline, will not raise gasoline prices in the Midwest.
Keywords: oil glut; crude oil prices; refined products; gasoline prices; diesel prices
JEL Codes: L71; L95; Q41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| decrease in Midwest crude oil prices (Q31) | prices of gasoline and diesel (Q31) |
| decrease in Midwest crude oil prices (Q31) | wholesale gasoline and diesel prices remain stable (Q31) |
| prices of gasoline and diesel (Q31) | imported prices from coastal regions (F14) |
| Midwest refiners operating at capacity (L71) | higher margins due to low-priced crude oil (L71) |
| lack of pass-through of crude oil prices (L71) | refiners benefit from lower crude prices (L71) |