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The Incidence of an Oil Glut: Who Benefits from Cheap Crude Oil in the Midwest?

Abstract:
Beginning in early 2011, crude oil production in the U.S. Midwest and Canada surpassed the pipeline capacity to transport it to the Gulf Coast where it could access the world oil market. As a result, the U.S. "benchmark" crude oil price in Cushing, Oklahoma, declined substantially relative to internationally traded oil. In this paper, we study how this development affected prices for refined products, focusing on the markets for motor gasoline and diesel. We find that the relative decrease in Midwest crude oil prices did not pass through to wholesale gasoline and diesel prices. This result is consistent with evidence that the marginal gallon of fuel in the Midwest is still imported from coastal locations. Our findings imply that investments in new pipeline infrastructure between the Midwest and the Gulf Coast, such as the southern segment of the controversial Keystone XL pipeline, will not raise gasoline prices in the Midwest.

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Keywords: Oil pricing, Gasoline pricing, Arbitrage, Cost pass-through

DOI: 10.5547/01956574.35.1.2

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Published in Volume 35, Number 1 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.