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Pipes, Trains and Automobiles: Explaining British Columbia’s High Wholesale Gasoline Prices

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  • G. Kent Fellows

Abstract

I modify a coumot oligopoly model to examine the effect of pipeline capacity constraints on regional wholesale gasoline prices. The model includes a discontinuous supply function for a common input (transportation) with a constrained low-cost mode (pipelines) and an unconstrained higher cost mode (rail, truck or barge). The equilibrium outcome demonstrates a piecewise linear relationship between the low-cost capacity constraint and the equilibrium price. The shape of the transportation supply curve is also shown to affect the relationship between firm average marginal costs and the equilibrium price. I also present a test of the model’s implications, demonstrating that it is able to explain a recent pronounced increase in wholesale gasoline prices for cities in British Columbia Canada. While the exercise is motivated by a specific market, the model and its implications apply to a broad set of discussions on inter-regional arbitrage in the context of imperfect competition.

Suggested Citation

  • G. Kent Fellows, 2022. "Pipes, Trains and Automobiles: Explaining British Columbia’s High Wholesale Gasoline Prices," The Energy Journal, , vol. 43(5), pages 139-160, September.
    • Handle: RePEc:sae:enejou:v:43:y:2022:i:5:p:139-160
    DOI: 10.5547/01956574.43.5.gfel
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    References listed on IDEAS

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    1. Mark Agerton and Gregory B. Upton Jr., 2019. "Decomposing Crude Price Differentials: Domestic Shipping Constraints or the Crude Oil Export Ban?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    2. 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.
    3. W.D. Walls & Xiaoli Zheng, 2020. "Pipeline Capacity Rationing and Crude Oil Price Differentials: The Case of Western Canada," The Energy Journal, , vol. 41(1), pages 241-258, January.
    4. David M. Kreps & Jose A. Scheinkman, 1983. "Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 326-337, Autumn.
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