October 2005, the month after Hurricanes Katrina and Rita. Major sources of gasoline imports
include Canada, Europe, and the Virgin Islands. A structural surplus in gasoline production in
Europe means that gasoline production costs are lower when derived from foreign sources than
they would be if the U.S. built and operated additional refinery capacity domestically. Growth in
imports is expected to be tempered because of the increased use of domestically produced
ethanol. Also, with increases in imported gasoline, refinery profitability is expected to be
negatively affected.
Ethanol Production
Figure 8 presents the monthly ethanol production over the 1995-2007 period. There are 68
ethanol plants under construction or expanding. Iowa leads the nation with about 2 billion
gallons of ethanol production capacity. Our hypothesis is that this additional production has had
a negative impact on gasoline prices and on the margins of crude oil refiners.
Seasonality
The gasoline market is highly seasonal due to stronger demand in spring and summer. Gasoline
price tends to gradually rise before and after summer. Demand for distillate fuel including
heating oil and diesel fuel typically peaks in winter and thus has a counter-cyclical price pattern
from gasoline. We include a set of monthly dummies to account for the seasonal pattern.
Estimation Method
The regression model is specified as follows:
(1) πit=Xi'tβ+εit i=1,...,N;t=1,...T.
where πit is the price of gasoline divided by the price of crude oil or the 3:2:1 crack spread of
region i at month t, and Xit is the K-dimensional vector of explanatory variables described
earlier.
There are several options for estimating equation (1), including pooled OLS regression and panel
data models. The pooled OLS regression simply pools together data series for all PADD regions