Shale Oil Boom and the Profitability of U.S. Petroleum Refiners

by Walls, W. D. and Zheng, Xiaoli

This paper provides a quantitative analysis of how the recent boom in U.S. oil production---largely a result of shale oil production---has impacted the domestic petroleum refining industry. We quantify how domestic crude prices are related to refiners' financial performance. The estimates suggest that since 2011 independent refiners' operating incomes rose by 2.2\% to 3.3\% for a domestic crude oil price decrease of 1\%, while they were not associated with domestic crude prices before 2011. The relation between refinery profitability and domestic oil prices is consistent with limited pass-through of domestic crude prices to refined product prices in the U.S. before and since the dramatic rise in shale oil production. Empirical evidence confirms that U.S. gasoline and diesel prices are determined by international rather than domestic crude oil prices. Because of this, there is very limited pass-through from domestic crude oil prices to refined product prices in most regions before and since 2011, resulting in increased refinery profitability during this period.

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