Decomposing Crude Price Differentials: Domestic Shipping Constraints or the Crude Oil Export Ban?

Abstract

Over the past five years the U.S. domestic crude benchmark, WTI, diverged considerably from its foreign counterpart, Brent. Some studies pointed to the crude oil export ban as the main culprit for this divergence, but pipeline capacity was also scarce during this time. To understand the drivers of domestic crude oil discounts, we decompose domestic price differentials for multiple crudes into the contributions of shipping and export constraints. We find that scarce pipeline capacity explains the majority of the deviation of mid-continent crude oil prices from their longrun relationship with Brent crude, while refining changes explain very little. This implies that the deleterious effects of the export ban may have been exaggerated.

Keywords: Crude Oil Prices; Crude Oil Export Ban; Shale Oil; Crude Oil Pipelines; Crude-By-Rail; Congestion Pricing; Oil Refining

JEL Classification: Q33; Q35; Q43