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Gasoline Price Spikes and Regional Gasoline Content Regulation: A Structural Approach

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  • Muehlegger, Erich

    (Harvard U)

Abstract

This paper studies the degree to which gasoline price spikes in California, Illinois and Wisconsin over 1995 to 2001 can be explained by regulatory differentiation - gasoline sold in California, Illinois and Wisconsin is chemically different than gasoline sold in other locations as a result of local regulation supplementary to the Clean Air Act Amendments of 1990. I specify a structural model based on the production optimization problem of refiners and estimate wholesale prices for jet fuel, diesel and four blends of gasoline in each geographic market. I then simulate a counterfactual in which gasoline in the three states meets federal requirements. Comparing the results from the counterfactual to the initial model, allows me to distinguish the degree to which prices spikes in these markets are the result of regulatory differentiation, rather than geographic heterogeneity. I estimate that 72, 92 and 91 percent of price spikes created by refinery fires in California, Illinois and Wisconsin could be mitigated by compatibility with federal RFG standards. Moreover, I also quantify the effect of two other factors thought to increase gasoline prices, (i) changes in refinery ownership and (ii) limited expansion of domestic refining capacity.

Suggested Citation

  • Muehlegger, Erich, 2006. "Gasoline Price Spikes and Regional Gasoline Content Regulation: A Structural Approach," Working Paper Series rwp06-015, Harvard University, John F. Kennedy School of Government.
  • Handle: RePEc:ecl:harjfk:rwp06-015
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    Cited by:

    1. Marion, Justin & Muehlegger, Erich, 2011. "Fuel tax incidence and supply conditions," Journal of Public Economics, Elsevier, vol. 95(9-10), pages 1202-1212, October.
    2. Michael Davis, 2009. "Environmental regulations and the increasing seasonality of gasoline prices," Applied Economics Letters, Taylor & Francis Journals, vol. 16(16), pages 1613-1616.
    3. Lutz Kilian, 2008. "The Economic Effects of Energy Price Shocks," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 871-909, December.
    4. Du, Xiaodong & Hayes, Dermot J., 2009. "The impact of ethanol production on US and regional gasoline markets," Energy Policy, Elsevier, vol. 37(8), pages 3227-3234, August.
    5. Adriana Fernandez & Robert W. Gilmer & Jonathan Story, 2007. "Gasoline content regulation as a trade barrier: do boutique fuels discourage fuel imports?," Working Papers 0709, Federal Reserve Bank of Dallas.
    6. Maximilian Auffhammer & Ryan Kellogg, 2011. "Clearing the Air? The Effects of Gasoline Content Regulation on Air Quality," American Economic Review, American Economic Association, vol. 101(6), pages 2687-2722, October.
    7. Anderson, Soren T. & Elzinga, Andrew, 2014. "A ban on one is a boon for the other: Strict gasoline content rules and implicit ethanol blending mandates," Journal of Environmental Economics and Management, Elsevier, vol. 67(3), pages 258-273.
    8. Kilian, Lutz, 2008. "Why Does Gasoline Cost so Much? A Joint Model of the Global Crude Oil Market and the U.S. Retail Gasoline Market," CEPR Discussion Papers 6919, C.E.P.R. Discussion Papers.
    9. Du, Xiaodong, 2008. "Essays on land cash rents, biofuels, and their interactions," ISU General Staff Papers 200801010800001979, Iowa State University, Department of Economics.
    10. Muehlegger, Erich, 2006. "Market Effects of Regulatory Heterogeneity: A Study of Regional Gasoline Content Regulations," Working Paper Series rwp06-021, Harvard University, John F. Kennedy School of Government.

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