Gasoline Price Spikes and Regional Gasoline Content Regulation: A Structural Approach

This paper studies the degree to which gasoline price spikes in California, Illinois and Wisconsin over 1995 to 2001 can be explained by regulatory differentiation gasoline sold in California, Illinois and Wisconsin is chemically different than gasoline sold in other locations as a result of local regulation supplementary to the Clean Air Act Amendments of 1990. I specify a structural model based on the production optimization problem of refiners and estimate wholesale prices for jet fuel, diesel and four blends of gasoline in each geographic market. I then simulate a counterfactual in which gasoline in the three states meets federal requirements. Comparing the results from the counterfactual to the initial model, allows me to distinguish the degree to which prices spikes in these markets are the result of regulatory differentiation, rather than geographic heterogeneity. I estimate that 72, 92 and 91 percent of price spikes created by refinery fires in California, Illinois and Wisconsin could be mitigated by compatibility with federal RFG standards. Moreover, I also quantify the effect of two other factors thought to increase gasoline prices, (i) changes in refinery ownership and (ii) limited expansion of domestic refining capacity.