COMPETITION IN THE U.S. PETROLEUM REFINING INDUSTRY: EMPIRICAL EVIDENCE AND POLICY IMPLICATIONS (ECONOMETRICS, INDUSTRIAL ORGANIZATION, UNITED STATES)

The fundamental thesis of this dissertation is that the U.S. petroleum refining industry is competitive, meaning refiners choose output quantities such that price equals marginal cost. A four-equation model of the U.S. gasoline and distillate fuel oil markets is constructed in order to test the competitive hypothesis. The model is linear under the null hypothesis of perfect competition, while oligopolistic behavior leads to nonlinear cross-equation constraints between supply and demand equations. Estimation under the null hypothesis was performed using the techniques presented in Hansen (1982) and a Lagrange multiplier test was used to test the competitive hypothesis against the noncompetitive alternative. Noncompetitive firms are assumed to have stable conjectural variations and form rational expectations concerning the dynamic evolution of demand. Since the noncompetitive model has no obvious solution, the rational expectations features were treated using the instrumental variables method suggested by Hansen and Singleton (1982). The Lagrange multiplier test fails to reject the competitive hypothesis and this result is shown to be insensitive to some important changes in model specification.;Using the conclusion of a competitive market as a point of departure, we proceed to theoretically examine the key component of current U.S. energy policy, the Strategic Petroleum Reserve (SPR). Three alternative SPR depletion policies are analyzed: spot sales, call options, and foward sales. A model is constructed to predict the different effects of these policies on private inventories, spot prices for crude oil, and refined product prices. The most basic result is that a spot sale of SPR oil during a supply crisis will result in both higher private inventories and a greater supply of refined products. Further results suggest the sale of call options will also lower present prices but that forward sales may actually raise current prices.