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Crude Oil Price Differentials and Pipeline Infrastructure

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  • Shaun McRae

Abstract

Crude oil production in the United States increased by nearly 80 percent between 2008 and 2016, mostly in areas that were far from existing refining and pipeline infrastructure. The production increase led to substantial discounts for oil producers to reflect the high cost of alternative transportation methods. I show how the expansion of the crude oil pipeline network reduced oil price differentials, which fell from a mean state-level difference of $10 per barrel in 2011 to about $1 per barrel in 2016. Using data for the Permian Basin, I estimate that the elimination of pipeline constraints increased local prices by between $6 and $11 per barrel. Slightly less than 90 percent of this gain for oil producers was a transfer from existing oil refiners and shippers. Refiners did not pass on these higher costs to consumers in the form of higher gasoline prices.

Suggested Citation

  • Shaun McRae, 2017. "Crude Oil Price Differentials and Pipeline Infrastructure," NBER Working Papers 24170, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:24170
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    References listed on IDEAS

    as
    1. Bahattin Buyuksahin, Thomas K. Lee, James T. Moser, and Michel A. Robe, 2013. "Physical Markets, Paper Markets and the WTI-Brent Spread," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
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    3. Gilles Duranton & Peter M. Morrow & Matthew A. Turner, 2014. "Roads and Trade: Evidence from the US," Review of Economic Studies, Oxford University Press, vol. 81(2), pages 681-724.
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    5. Grogan, Louise & Sadanand, Asha, 2013. "Rural Electrification and Employment in Poor Countries: Evidence from Nicaragua," World Development, Elsevier, vol. 43(C), pages 252-265.
    6. Barron, Manuel & Torero, Maximo, 2017. "Household electrification and indoor air pollution," Journal of Environmental Economics and Management, Elsevier, vol. 86(C), pages 81-92.
    7. Severin Borenstein and Ryan Kellogg, 2014. "The Incidence of an Oil Glut: Who Benefits from Cheap Crude Oil in the Midwest?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1).
    8. Kenneth Lee & Edward Miguel & Catherine Wolfram, 2016. "Experimental Evidence on the Demand for and Costs of Rural Electrification," NBER Working Papers 22292, National Bureau of Economic Research, Inc.
    9. repec:fip:fedker:00053 is not listed on IDEAS
    10. Karen Clay & Akshaya Jha & Nicholas Muller & Randall Walsh, 2017. "The External Costs of Transporting Petroleum Products by Pipelines and Rail: Evidence From Shipments of Crude Oil from North Dakota," NBER Working Papers 23852, National Bureau of Economic Research, Inc.
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    More about this item

    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
    • Q35 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Hydrocarbon Resources
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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