Working Paper: NBER ID: w24170
Authors: Shaun McRae
Abstract: Crude oil production in the United States increased by nearly 80 percent between 2008 and 2016, mostly in areas that were far from existing refining and pipeline infrastructure. The production increase led to substantial discounts for oil producers to reflect the high cost of alternative transportation methods. I show how the expansion of the crude oil pipeline network reduced oil price differentials, which fell from a mean state-level difference of $10 per barrel in 2011 to about $1 per barrel in 2016. Using data for the Permian Basin, I estimate that the elimination of pipeline constraints increased local prices by between $6 and $11 per barrel. Slightly less than 90 percent of this gain for oil producers was a transfer from existing oil refiners and shippers. Refiners did not pass on these higher costs to consumers in the form of higher gasoline prices.
Keywords: Crude Oil; Pipeline Infrastructure; Price Differentials; Oil Markets
JEL Codes: L71; L95; Q35; Q41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Expansion of Pipeline Network (L95) | Reduction in Oil Price Differentials (F16) |
| Increased Local Prices (P22) | Transfer from Refiners and Shippers to Producers (L71) |
| Reduction in Transportation Costs (L91) | Increase in Producer Prices (E31) |
| Expansion of Pipeline Network (L95) | Increase in Producer Prices (E31) |
| Increased Local Prices (P22) | No Impact on Consumer Prices (D19) |