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Crude by Rail, Option Value, and Pipeline Investment


  • Thomas R. Covert
  • Ryan Kellogg


The U.S. shale boom has profoundly increased crude oil movements by both pipelines–the traditional mode of transportation–and railroads. This paper develops a model of how pipeline investment and railroad use are determined in equilibrium, emphasizing how railroads' flexibility allows them to compete with pipelines. We show that policies that address crude-by-rail's environmental externalities by increasing its costs should lead to large increases in pipeline investment and substitution of oil flows from rail to pipe. Similarly, we find that policies enjoining pipeline construction would cause 80-90% of the displaced oil to flow by rail instead.

Suggested Citation

  • Thomas R. Covert & Ryan Kellogg, 2017. "Crude by Rail, Option Value, and Pipeline Investment," NBER Working Papers 23855, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:23855
    Note: EEE IO

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    References listed on IDEAS

    1. Smith, James L. & Lee, Thomas K., 2017. "The price elasticity of U.S. shale oil reserves," Energy Economics, Elsevier, vol. 67(C), pages 121-135.
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    Cited by:

    1. Mason, Charles F. & Wilmot, Neil A., 2020. "Jumps in the convenience yield of crude oil," Resource and Energy Economics, Elsevier, vol. 60(C).

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    More about this item

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • 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
    • Q35 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Hydrocarbon Resources

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