Economic Implications of Oil Price Differentials and Volatility: Analyses of Recent Shale Induced Price Shocks
Friday, Jan. 5, 2018 2:30 PM - 4:30 PM
- Chair: Erin T. Mansur, Dartmouth College
Decomposing Crude Price Differentials: Domestic Shipping Constraints or the Crude Oil Export Ban?
AbstractOver the past five years the U.S. domestic crude benchmark, WTI, diverged considerably from its foreign counterpart, Brent. Some studies pointed to the crude oil export ban as the main culprit for this divergence, but pipeline capacity was also scarce during this time. To understand the drivers of domestic crude oil discounts, we decompose price differentials for multiple crudes into the contributions of shipping and export constraints. We find that scarce pipeline capacity explains the majority of the deviation of mid-continent crude oil prices from their long-run relationship with Brent crude, while refining changes explain very little. This implies that the deleterious effects of the export ban may have been exaggerated.
Pass-Through of Input Cost Shocks Under Imperfect Competition: Evidence from the U.S. Fracking Boom
AbstractThe advent of hydraulic fracturing lead to a dramatic increase in US oil production. Due to regulatory, shipping and processing constraints, this sudden surge in domestic drilling caused an unprecedented divergence in crude acquisition costs across US refineries. We take advantage of this exogenous shock to input costs to study the nature of competition and the incidence of cost changes in this important industry. We begin by estimating the extent to which US refining’s divergence from global crude markets was passed on to consumers. Using rich microdata, we are able to decompose the effects of firm-specific, market-specific and industry-wide cost shocks on refined product prices. We show that this distinction has important economic and econometric significance, and discuss the implications for prospective policy which would put a price on carbon emissions. The implications of these results for perennial questions about competition in the refining industry are also discussed.
Crude by Rail, Option Value, and Pipeline Investment
AbstractHow should a fuel economy standard be set in the presence of substantial gasoline price uncertainty? I show that this problem has a strong parallel to Weitzman's (1974) classic model of using price or quantity controls to regulate an externality. Changes in fuel prices act as shocks to the marginal cost of complying with the standard. Assuming constant marginal damages from fuel consumption, an application of Weitzman (1974) implies that a fixed fuel economy standard reduces expected welfare relative to a “price” policy such as a feebate or, equivalently, a fuel economy standard that is indexed to the price of gasoline. When the regulator is constrained to use a fixed standard, I show that the usual approach to setting the standard---equate expected marginal compliance cost to marginal damage---is likely to be sub-optimal because the standard may not bind if gasoline prices substantially increase. Instead, the optimal fixed standard will be relatively relaxed and may be non-binding even at the expected gasoline price. Finally, I show that although an attribute-based standard allows vehicle choices to flexibly respond to gasoline price shocks, the resulting distortions imply that the optimal fuel economy standard is not attribute-based.
- Q4 - Energy
- L9 - Industry Studies: Transportation and Utilities