Vertical Integration and Price Differentials in the U.S. Crude Oil Market

Abstract

Vertical integration between regulated and unregulated businesses may create opportunities for upstream regulated assets to reduce input prices for their downstream operations. I provide the example of a refiner and pipeline owner in the U.S. crude oil market. During 2011, the configuration of the firm’s pipelines was inconsistent with maximizing pipeline profits. However, by reducing input prices for the firm’s refineries, the inefficient pipeline operation was consistent with profit maximization for the integrated firm. Changes to pipeline regulation, either through vertical separation or through market-based pricing, may enhance the efficiency of oil transportation networks.

Publication
Working Paper