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Pipeline Capacity Rationing and Crude Oil Price Differentials: The Case of Western Canada

W.D. Walls and Xiaoli Zheng

Year: 2020
Volume: Volume 41
Number: Number 1
DOI: 10.5547/01956574.41.1.wwal
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Abstract:
This paper examines the impact of pipeline capacity constraints on the discount of Canadian oil prices relative to U.S. benchmark oil prices. Using a panel of monthly data for Canadian oil exporting pipelines, we estimate that price differentials between U.S. markets and Western Canada would increase by 3.6% for 1% increase in pipeline capacity constraints. Pipeline capacity constraints in Canada have resulted in an average loss of $5.53 for every barrel of crude oil exported to the U.S. between 2009 and 2017. In 2015 and 2016, the losses due to insufficient pipeline capacity were equivalent to 3%-5% of the Canadian oil and gas industry's sales revenue and 69%-102% of its royalty payments to provincial governments. Western Canadian oil refiners and refined products' consumers benefit from the depressed crude oil prices. However, the total gains captured by local refiners and consumers are much smaller than the losses of the upstream sector.



Closer to One Great Pool? Evidence from Structural Breaks in Oil Price Differentials

Michael Plante and Grant Strickler

Year: 2021
Volume: Volume 42
Number: Number 2
DOI: 10.5547/01956574.42.2.mpla
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Abstract:
We show that the oil market has become closer to �one great pool,� in the sense that price differentials between crude oils of different qualities have generally become smaller over time. We document, in particular, that many of these price differentials experienced a major structural break in or around 2008, after which there was a marked reduction in their means and volatilities. Differentials between residual fuel oil, a low-quality fuel, and higher-valued products, such as gasoline and diesel, experienced similar breaks during the same time period. A growing ability of the global refinery sector to process lower-quality crude oil and the U.S. shale boom, which has unexpectedly boosted the supply of high-quality crude oil, are two factors consistent with these changes. Differentials between crude oils of similar quality in general did not experience breaks in or around 2008, although we do find evidence of breaks at other times.





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