Transporting Hydrocarbons

May 23, 2017
Supported by the Alfred P. Sloan Foundation
James B. Bushnell of the University of California, Davis, Ryan Kellogg of the University of Chicago, and Erin T. Mansur of Dartmouth College, Organizers

Thomas Covert, the University of Chicago and NBER, and Ryan Kellogg

Crude by Rail, Option Value, and Pipeline Investment (NBER Working Paper No. 23855)

In this paper, Covert and Kellogg find that both spatial and intertemporal variation in crude oil prices generate option value that can be unlocked with railroad transportation but not with pipelines, and they do not find evidence that this option value is fully captured by the railroad carriers themselves. While the very large volumes of crude-by-rail that were realized several years ago may have been driven in part by the long lead times associated with pipeline permitting and construction, crude-by-rail can still add value even after construction of new pipeline capacity (such as DAPL) is completed. In particular, the researchers' model of pipeline investment implies that shippers will not be willing to underwrite pipeline capacity investments that are so large that railroad transportation is excluded in high oil price environments.

Wesley W. Wilson, the University of Oregon, and Frank A. Wolak, Stanford University and NBER

Regulation by Price Benchmarks: Protecting Small Shippers from the Exercise of Railroad Market Power

Railroads haul thousands of different commodities between thousands of different origins and destinations. Prior to 1980, all rates were subject to federal regulation. However, financial ruin and bankruptcies in the 1970s led to legislation that placed a greater emphasis on the marketplace in regulating rates. The regulatory agency was mandated to have a costing model in place that allocated costs to specific movements and established thresholds which, if established, gave the regulatory agency jurisdiction over rates. In our previous work, Wilson and Wolak (2016), Authors provide both theoretical and empirical criticisms of the costing methodology and concluded it should be abandoned. In this paper, Wilson and Wolak offer a benchmark approach to identifying shipments that may warrant further investigation for whether rates are reasonable or not.

James B. Bushnell; Jonathan E. Hughes, the University of Colorado at Boulder; and Aaron Smith, the University of California at Davis

Food vs. Fuel? Impacts of Petroleum Shipments on Agricultural Prices (NBER Working Paper No. 23924)

In this paper Bushnell, Hughes, and Smith examine the relationship between shipments of oil by rail and agricultural commodities. They first examine the impact that rail shipments of oil have had on both local and regional prices of key agricultural commodities such as wheat and corn. They also explore potential mechanisms for these price effects, including shipper pricing and the cost of availability of grain rail cars. The researchers examine price spreads between the silos that constitute regional storage and shipping hubs and major trading hubs such as Minneapolis and Chicago. From 2012 to 2014, shipments of oil by rail in North Dakota increased from approximately 9 to 24 thousand cars per month while the average spread in wheat prices increased from $1.50 to $2.64 per bushel. Controlling for diesel prices, seasonal and spatial effects, the researchers find a significant relationship between oil shipments and grain price spreads, although the impact is only economically meaningful for wheat. Increasing oil shipments by 10 thousand cars per month is associated with an increase of $.50 per bushel in wheat price spreads. The impacts of oil shipments on corn and soybean spreads were also statistically significant but an order of magnitude smaller. Agricultural price impacts were not confined to pricing points on rail lines that experienced substantial increases in oil-by-rail traffic.

Charles Mason, the University of Wyoming

Analyzing the Risk of Transporting Crude Oil by Rail (NBER Working Paper No. 24299)

In this paper, Mason combines data on incidents associated with rail transportation of crude oil and detailed data on rail shipments to appraise the relation between increased use of rail to transport crude oil and the risk of safety incidents associated with those shipments. Mason finds a positive link between the accumulation of minor incidents and the frequency of serious incidents, and a positive relation between increased rail shipments of crude oil and the occurrence of minor incidents. He also finds that increased shipments are associated with a rightward shift in the distribution of economic damages associated with these shipments. In addition, Mason finds larger average effects associated with states that represent the greatest source of tight oil production.

Shaun McRae, ITAM

Crude Oil Price Differentials and Pipeline Infrastructure (NBER Working Paper No. 24170)

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. McRae shows 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, the researcher estimates 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.

Evan M. Herrnstadt, Harvard University, and Richard Sweeney, Boston College

What Lies Beneath: Pipeline Awareness and Aversion (NBER Working Paper No. 23858)

Stated safety concerns are a major impediment to making necessary expansions to the natural gas pipeline network. While revealed willingness to pay to avoid existing natural gas pipelines appears small, it is difficult to know if this reflects true ambivalence or a lack of salience and awareness. In this paper, Herrnstadt and Sweeney test this latter hypothesis by studying how house prices responded to a deadly 2010 pipeline explosion in San Bruno, CA, which shocked both attention and information. Using multiple identification strategies, the researchers fail to find any evidence of a meaningful shift in the hedonic price gradient around pipelines following these events. They conclude with a discussion of how this result relates to latent, fully informed preferences, as well as the implications for future pipeline expansions.

Karen Clay, Carnegie Mellon University and NBER; Akshaya Jha, Carnegie Mellon University; and Nicholas Muller, Middlebury College and NBER

The External Costs of Transporting Petroleum Products by Pipelines and Rail: Evidence From Shipments of Crude Oil from North Dakota (NBER Working Paper No. 23852)

This paper provides new estimates of the air pollution and greenhouse gas costs from long distance transportation of domestically produced crude oil. While crude oil transportation has generated intense policy debate about rail and pipeline spills and accidents, an important externality – air pollution – has been largely overlooked. Using data for crude oil produced in North Dakota in 2014, Clay, Jha, Muller, and Walsh find that the air pollution and greenhouse gas costs of transporting crude oil to coastal refineries were 15.7 cents per gallon and totaled more than $1.3 billion. These estimated environmental costs were 6.7 times larger for rail than for pipelines. For both rail and pipeline, air pollution costs of transporting crude were more than 9 times greater than estimates of the combined costs of spills and accidents.

Erich Muehlegger, the University of California at Davis and NBER, and Richard Sweeney, Boston College

Pass-Through of Input Cost Shocks Under Imperfect Competition: Evidence from the U.S. Fracking Boom (NBER Working Paper No. 24025)

The advent of hydraulic fracturing lead to a dramatic increase in U.S. oil production. Due to regulatory, shipping and processing constraints, this sudden surge in domestic drilling caused an unprecedented divergence in crude acquisition costs across U.S. refineries. Muehlegger and Sweeney take advantage of this exogenous shock to input costs to study the nature of competition and the incidence of cost changes in this important industry. They begin by estimating the extent to which U.S. refining's divergence from global crude markets was passed on to consumers. Using rich microdata, the researchers are able to decompose the effects of firm-specific, market-specific, and industry-wide cost shocks on refined product prices. They show that this distinction has important economic and econometric significance, and discuss the implications for prospective policy which would put a price on carbon emissions. The implications of these results for perennial questions about competition in the refining industry are also discussed.

Nida Cakir Melek, Federal Reserve Bank of Kansas City; Michael Plante, Indiana University; and Mine Kuban Yucel, Federal Reserve Bank of Dallas

The U.S. Shale Oil Boom, the Oil Export Ban, and the Economy: A General Equilibrium Analysis (NBER Working Paper No. 23818)

This paper examines the effects of the U.S. shale oil boom in a two-country DSGE model where countries produce crude oil, refined oil products, and a non-oil good. The model incorporates different types of crude oil that are imperfect substitutes for each other as inputs into the refining sector. The model is calibrated to match oil market and macroeconomic data for the U.S. and the rest of the world (ROW). Cakir Melek, Plante, and Yucel investigate the implications of a significant increase in U.S. light crude oil production similar to the shale oil boom. Consistent with the data, their model predicts that light oil prices decline, U.S. imports of light oil fall dramatically, and light oil crowds out the use of medium crude by U.S. refiners. In addition, fuel prices fall and U.S. GDP rises modestly. The researchers then use their model to examine the potential implications of the former U.S. crude oil export ban. The model predicts that the ban was a binding constraint from 2013 to 2015. The researchers find that the distortions introduced by the policy are greatest in the refining sector. Light oil prices become artificially low in the U.S., and U.S. refineries produce inefficiently high amounts of refined products, but the impact on refined product prices and GDP are negligible.

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