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The Incidence of an Oil Glut: Who Benefits from Cheap Crude Oil in the Midwest?

Author

Listed:
  • 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.

Suggested Citation

  • Severin Borenstein & Ryan Kellogg, 2014. "The Incidence of an Oil Glut: Who Benefits from Cheap Crude Oil in the Midwest?," The Energy Journal, , vol. 35(1), pages 15-34, January.
    • Handle: RePEc:sae:enejou:v:35:y:2014:i:1:p:15-34
    DOI: 10.5547/01956574.35.1.2
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    References listed on IDEAS

    as
    1. Anderson, Soren T. & Kellogg, Ryan & Sallee, James M., 2013. "What do consumers believe about future gasoline prices?," Journal of Environmental Economics and Management, Elsevier, vol. 66(3), pages 383-403.
    2. Severin Borenstein & A. Colin Cameron & Richard Gilbert, 1997. "Do Gasoline Prices Respond Asymmetrically to Crude Oil Price Changes?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(1), pages 305-339.
    3. Chen, Li-Hsueh & Finney, Miles & Lai, Kon S., 2005. "A threshold cointegration analysis of asymmetric price transmission from crude oil to gasoline prices," Economics Letters, Elsevier, vol. 89(2), pages 233-239, November.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Oil pricing; Gasoline pricing; Arbitrage; Cost pass-through;
    All these keywords.

    JEL classification:

    • L71 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Mining, Extraction, and Refining: Hydrocarbon Fuels
    • L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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