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Pipeline Capacity Rationing and Crude Oil Price Differentials: The Case of Western Canada

by Walls, W. D. and Zheng, Xiaoli

This paper examines the impact of pipeline capacity constraints on the discount of Canadian oil prices relative to U.S. benchmark oil prices. Using a panel of monthly data for Canadian oil exporting pipelines, we estimate that the price differentials between the U.S. markets and Western Canada would increase by 3.4% for a 1% increase in oil shipping nominations excluded from transportation service due to insufficient pipeline capacity. Pipeline capacity constraints in Canada have resulted in an average loss of $5.07 for every barrel of crude oil exported to the U.S. between 2009 and 2017. In 2015 and 2016, the losses due to insufficient pipeline capacity were equivalent to 3%--5% of the Canadian oil and gas industry's sales revenue and 67%--96% of its royalty payments to provincial governments. Western Canadian oil refiners benefit from the depressed crude oil prices and this translates into increasing profitability of $0.1 per gallon for refined products. However, the total gain captured by local refiners is much smaller than the losses of the upstream sector.

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