This conference is supported by Grant #2015-13909
from Alfred P. Sloan Foundation
National Science Foundation
This paper examines how information on the time pattern of expected future prices for crude oil, based on the term structure of futures contracts, can be used in determining whether to draw down, or contribute to the Strategic Petroleum Reserve (SPR). Such price information provides insight on expected changes in the supply-demand balance in the market and can also facilitate cost-effective transitions for SPR holdings. Backwardation in futures curves suggests that market participants expect shocks to be transitory, creating a stronger case for SPR releases. Newell and Prest use vector autoregression to analyze the relationship between the term structure of futures contracts, the management of private oil inventories, and other variables of interest. This relationship is used to estimate the magnitude of the impacts of SPR releases into the much larger global inventories system. Impulse response functions estimate that a strategic release of 10 million barrels will reduce spot prices by up to 4% and mitigate backwardation by approximately 1.5 percentage points. Historical simulations suggest that past releases reduced spot prices by 20% to 30% and prevented about 10 percentage points of backwardation in futures curves, relative to a no-release counterfactual. This research can help policymakers determine when to release SPR reserves based on economic principles informed by market prices. It also provides an econometric model that can help inform the amount of SPR releases needed to achieve given policy goals, such as reductions in prices or spreads.
In addition to the conference paper, the research was distributed as NBER Working Paper w23974, which may be a more recent version.
Oil wells often produce large volumes of lighter hydrocarbons such as natural gas. In regions that are primarily valued for their oil reserves, well operators often resort to flaring these gases. In 2015, the state of North Dakota implemented a regulation requiring operators to capture a minimum fraction of all gas produced across their wells. The regulation is enforced uniformly and does not allow for inter-firm trading. In this paper, Lade and Rudik estimate the effectiveness of this regulation and study its relative efficiency compared to a market-based approach. The researchers find that the regulation reduced flaring rates by 2 to 7 percentage points and that firms primarily complied by connected wells to gas capture infrastructure more quickly. They then exploit information on natural gas collection infrastructure costs to construct firm-specific marginal compliance cost curves, and construct counter-factual compliance scenarios that achieve the same flaring reductions but reallocate abatement from high- to low-cost firms. They find that allowing greater flexibility in the regulation would reduce aggregate compliance costs by tens of millions of dollars.
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), we provide both theoretical and empirical criticisms of the costing methodology and concluded it should be abandoned. In this paper, they offer a benchmark approach to identifying shipments that may warrant further investigation for whether rates are reasonable or not.
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.
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.
A widely-used test of consumer misperception compares the demand response to potentially misperceived costs such as energy operating costs, sales tax, or shipping and handling, versus salient, correctly perceived purchase costs. The ratio of the responsiveness coefficients has been considered a sufficient statistic to determine the degree of consumer misperception. In this paper, Houde and Myers show that this statistic corresponds to a first-order approximation of the average degree of misperception, and this approximation can lead to an economically important bias. The direction of the bias depends on the sign of the correlation between the two responsiveness coefficients. Further, they show that even if measured correctly, the average amount of misperception in a market is not sufficient for optimal policy design, and can in fact be misleading. Using data for the U.S. refrigerator market, the researchers quantify the bias of the first order approximation and demonstrate the importance of accounting for heterogeneity of misperception. Houde and Myers find substantial heterogeneity in perception of energy costs and show that this heterogeneity is not driven by income. In their context the first-order approach provides a downward bias of the average degree of misperception. The researchers use the estimated distribution the two responsiveness coefficients to simulate different optimal policies and show that heterogeneity in the degree of misperception can significantly impact optimal policy design and estimates of welfare effects.
Net Energy Metering policies common to 41 U.S. states and parts of Europe subsidize distributed solar electricity generation by according the generator displacement of grid electricity and export sales at retail electricity rates that value the electricity at greater than wholesale prices. This subsidy has engendered criticism on equity grounds because it affects cost shifting from relatively wealthy households who adopt solar photovoltaic capacity to poor households who
bear greater shares of electric grid supply costs. This paper explores the efficiency implications of NEM policies that subsidize a future stream of electricity generation that may be highly discounted by households relative to market rates. Sexton, Bollinger, and Gillingham estimate an implied discount rate of NEM subsidies equal to 10.9-13.7% in preferred specifications, far greater than prevailing market rates, suggesting that planners could arbitrage discount rates to achieve greater solar generation per public dollar expenditure.
This paper studies how changes in energy input costs for U.S. manufacturers affect the relative welfare of manufacturing producers and consumers (i.e. incidence). In doing so, Ganapati, Shapiro, and Walker develop a partial equilibrium methodology to estimate the incidence of input taxes that can simultaneously account for three determinants of incidence that are typically studied in isolation: incomplete pass-through of input costs, differences in industry competitiveness, and factor substitution amongst inputs used for production. They apply this methodology to a set of U.S. manufacturing industries for which we observe plant-level unit prices and input choices. The researchers find that about 70 percent of energy price-driven changes in input costs are passed through to consumers. Ganapati, Shapiro, and Walker combine industry-specific pass-through rates with estimates of industry competitiveness to show that the share of welfare cost borne by consumers is 25-75 percent smaller (and the share borne by producers is correspondingly larger) than models featuring complete pass-through and perfect competition would suggest.
In addition to the conference paper, the research was distributed as NBER Working Paper w22281, which may be a more recent version.
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.
In addition to the conference paper, the research was distributed as NBER Working Paper w23924, which may be a more recent version.
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.
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.
It is commonly believed that the response of the price of corn ethanol (and hence of the price of corn) to shifts in biofuel policies operates in part through market expectations and shifts in storage demand, yet to date it has proved difficult to measure these expectations and to empirically evaluate this view. Baumeister, Ellwanger, and Kilian utilize a recently proposed methodology to estimate the market’s expectations of the prices of ethanol, unfinished motor gasoline, and crude oil at horizons from three months to one year. The researchers quantify the extent to which price changes were anticipated by the market, the extent to which they were unanticipated, and how the risk premium in these markets has evolved. They show that the Renewable Fuel Standard (RFS) is likely to have increased ethanol price expectations by as much $1.45 in the year before and in the year after the implementation of the RFS had started. The researchers' analysis of the term structure of expectations provides support for the view that a shift in ethanol storage demand starting in 2005 caused an increase in the price of ethanol. There is no conclusive evidence that the tightening of the RFS in 2008 shifted market expectations, but the analysis suggests that policy uncertainty about how to deal with the blend wall raised the risk premium in the ethanol futures market in mid-2013 by as much as 50 cents at longer horizons. Finally, the researchers present evidence against a tight link from ethanol price expectations to corn price expectations and hence to storage demand for corn in 2005–06.
In addition to the conference paper, the research was distributed as NBER Working Paper w23752, which may be a more recent version.
Given the uncertainty over compliance costs characterizing many public policies and regulations, economists have developed decision rules for choosing a price-based or quantity-based instrument – or a hybrid of the two approaches – to maximize net social benefits. Recent applications of quantity-price instruments include state renewable power mandates, federal renewable fuel mandates, and several carbon dioxide cap-and-trade programs. The evolution of fuel content regulations has resulted in quantity-based regulations in which the regulator retains discretionary authority to waive (temporarily) the stringent rules. Boutique fuel regulations dating to the 1990s – such as reformulated gasoline – established quantitative restrictions on pollutants in transportation fuels. Starting in 2005, the Environmental Protection Agency had the authority to issue a temporary waiver of these regulations in response to a fuel supply shock. In the first decade of this authority, EPA waived fuel content regulations 60 times, with nearly 90% of these waivers prompted by hurricane-related disruption of fuel supplies. This analysis examines the impacts of temporary waivers of regulations in response to shocks to production. Specifically, Aldy explores how shocks affect local fuel markets and how waivers mitigate these shocks through analysis of daily, city-level fuel price data. These markets experience large increases in response to hurricane shocks, then prices stabilize after a waiver, followed by fairly quick declines in fuel prices, although it is difficult to discern these impacts from markets that do not seek regulatory waivers. The nature of these shocks – affecting many local markets at the end of the pipeline far from the natural disaster – serves as the basis for statistically identifying the impacts of waivers on air pollutant concentrations. The researcher finds that waiving reformulated gasoline regulations does not meaningfully impact ozone concentrations, on average, but it does appear to have some city-specific impacts. Aldy also finds that fine particulate matter concentrations increase by about 20% in the two months after a waiver has been issued.
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.
In addition to the conference paper, the research was distributed as NBER Working Paper w24170, which may be a more recent version.
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.
The intermittency (variability) of solar and wind power imposes network costs associated with maintaining system stability. Wolak and Tangerås examine how the socially optimal deployment of intermittent renewable generation capacity depends on such ancillary services costs and demonstrate how network interconnection tariffs can be designed to implement the efficient outcome. They then apply our theory to obtain quantitative results for the California electricity market.
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.
Are Consumers Attentive to Local Energy Costs? Evidence from the Appliance Market
Analyzing the Risk of Transporting Crude Oil by Rail
Crude by Rail, Option Value, and Pipeline Investment
The External Costs of Transporting Petroleum Products by Pipelines and Rail: Evidence From Shipments of Crude Oil from North Dakota
The U.S. Shale Oil Boom, the Oil Export Ban, and the Economy: A General Equilibrium Analysis
Did the Renewable Fuel Standard Shift Market Expectations of the Price of Ethanol?
Crude Oil Price Differentials and Pipeline Infrastructure
Food vs. Fuel? Impacts of Petroleum Shipments on Agricultural Prices
What Lies Beneath: Pipeline Awareness and Aversion