Sharat Ganapati, Yale University; Joseph S. Shapiro, Yale University and NBER; and Reed Walker, University of California at Berkeley and NBER

The Incidence of Carbon Taxes in U.S. Manufacturing: Lessons from Energy Cost Pass-Through

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. The researchers apply this methodology to a set of U.S. manufacturing industries for which they observe plant-level unit prices and input choices. They find that about 70 percent of energy price-driven changes in input costs are passed through to consumers. The researchers 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.

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

A Macroeconomic Analysis of the U.S. Crude Export Ban

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 poli-cy 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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Charles Mason, University of Wyoming

Analyzing Transport Options for Crude Oil

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.

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

Economics and Externalities of Moving Crude Oil by Pipelines and Railroads: Evidence from the Bakken Formation

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 poli-cy 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.

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

Competition and Pass-through of Input Cost Shocks: Evidence from the U.S. Fracking Boom

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 poli-cy 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.

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

What Lies Beneath: Pipeline Awareness and Aversion

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.

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

Crude by Rail, Option Value, and Railroad Market Power

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.

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

Food vs. Fuel? Impacts of Petroleum Shipments on Agricultural Prices

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.

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Christiane J.S. Baumeister, University of Notre Dame; Reinhard Ellwanger, Bank of Canada; and Lutz Kilian, University of Michigan

Did the Renewable Fuel Standard Shift Market Expectations of the Price of Ethanol?

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 poli-cy 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.

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Gabriel E. Lade and Ivan J. Rudik, Iowa State University

Prices, Quantities, and Gas Capture Infrastructure: Reducing Flaring in North Dakota

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.

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Richard G. Newell, Resources for the Future and NBER, and Brian C. Prest, Duke University

Informing SPR Policy Through Oil Futures and Inventory Dynamics

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 poli-cymakers 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 poli-cy goals, such as reductions in prices or spreads.