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«The Incidence of an Oil Glut: Who Benefits from Cheap Crude Oil in the Midwest? Severin Borenstein* and Ryan Kellogg** ABSTRACT Beginning in early ...»

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capacity will have only a minimal impact on Gulf Coast and world oil prices, U.S. consumers outside the Midwest will not experience a decline in gasoline prices. As for Midwest consumers, our results imply that capacity expansions that increase the Midwest crude oil price will not increase the Midwest gasoline price. This price is already being set by gasoline refined using Gulf Coast rather than Midwest oil, despite the depressed Midwest oil price. Resolving the Midwest crude oil transportation bottleneck will not affect this situation, thereby leaving Midwest gasoline prices unaffected as well.

In May 2012, the Seaway pipeline began carrying about 150,000 barrels per day of crude oil from Cushing to the Gulf Coast. By July, however, the crude price differential remained at about the same level as prior to that capacity addition – about $15 per barrel – as production in the Midwest and Canada continued to increase. Refined product prices available through April 2012 show gasoline and diesel price differentials between PADD 2 and PADD 3 remained around their historical average, about five cents per gallon, unaffected by the difference in crude prices.

ACKNOWLEDGMENTS

We thank Stephanie Greene for excellent research assistance. This research was supported in part under a research contract from the California Energy Commission to the Energy Institute at Haas.

REFERENCES

Albert, Bill (2012). “Going with the Flow.” Barron’s, March 31.

Alquist, Ron, Lutz Kilian, and Robert J. Vigfusson (forthcoming). “Forecasting the Price of Oil,” in Graham Elliot and Allen Timmerman, eds., Handbook of Economic Forecasting, 2, Amsterdam: North-Holland.

Anderson, Soren T., Ryan Kellogg, and James M. Sallee (2011). “What do Consumers Believe about Future Gasoline Prices?” NBER working paper #16974, April.

Borenstein, Severin, A. Colin Cameron, and Richard Gilbert (1997). “Do Gasoline Prices Respond Asymmetrically to Crude Oil Price Changes?” Quarterly Journal of Economics 112(1), 305–339. http://dx.doi.org/10.1162/003355397555118.

Chen, Li-Hsueh, Miles Finney, and Kon S. Lai (2005). “A Threshold Cointegration Analysis of Asymmetric Price Transmission from Crude Oil to Gasoline Prices.” Economics Letters 89(2), 233–239. http://dx.doi.org/10.1016/ j.econlet.2005.05.037.

Peters, Mark and Ben Lefebvre (2011). “Riding the Dakota Oil Boom,” Wall Street Journal, November 2.

Swift, Anthony (2012). “Keystone XL: A Tar Sands Pipeline to Increase Oil Prices,” Natural Resources Defense Council report. Accessed at http://www.nrdc.org/energy/keystone-pipeline/higher-oil-prices.asp.

Verleger, Philip (2011). “If gas prices go up further, blame Canada,” Star Tribune, March 13.

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APPENDIX

Figure A1: Wyoming (PADD 4) and Light Louisiana Sweet (LLS) Spot Prices for Crude Oil Notes: Data plotted are monthly averages of daily spot prices. Delivery points are Guernsey, WY for Wyoming, and St.

James, Louisiana for LLS.

Source: Bloomberg.

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Figure A2: PADD 4 (Rocky Mountains) and PADD 3 (Gulf Coast) Wholesale Gasoline Prices Notes: Data sourced from the Energy Information Administration (EIA) and are PADD-month level prices for “gasoline for resale.” PADD denotes Petroleum Administration for Defense District.

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Notes: Crude prices are monthly averages of daily spot prices, all in $/gallon. Delivery points are Guernsey, WY for Wyoming and St. James, Louisiana for LLS. Gasoline and diesel prices are month-level prices for “sales for resale” obtained from the EIA. Data span 2006–2011. Standard errors are Newey-West with 12 lags.

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Notes: Crude prices are monthly averages of daily spot prices, all in $/gallon. Delivery points are Guernsey, WY for Wyoming and St. James, Louisiana for LLS. Gasoline and diesel prices are state-month level prices in PADD 4 for “sales for resale” obtained from the EIA. Data span 2006–2011. Standard errors are clustered on month-of-sample.

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