The West Texas Intermediate (WTI) crude oil price, which is priced at Cushing, Oklahoma, is
chosen to represent the crude oil price in this study. The reason is that WTI-Cushing is one of the
most widely traded and price-transparent crude oils in the U.S. crude oil market.
We use the Petroleum Administration for Defense Districts (PADDs) to define refinery product
markets. This market definition was formed during World War II for the purpose of
administering oil allocation. The PADDs are still used by the Department of Transportation
(DOT) and Energy Information Administration (EIA) for statistical and reporting purposes. The
five regions are East Coast (PADD I), Midwest (PADD II), Gulf Coast (PADD III), Rocky
Mountain (PADD IV), and West Coast (PADD V). These five geographically distinct regions are
also very different in terms of their economic conditions, oil and petroleum characteristics, oil-
related pipeline infrastructure, and local product supply and demand conditions.
Because of its high population density, the East Coast PADD I has the highest demand for
refined products in the country, but it has very limited refinery capacity. Its regional demand is
largely satisfied by the Gulf Coast and by foreign imports. The Midwest PADD II is distinct in
its coexistence of a highly industrialized section and a rural agricultural section. It also leads the
nation in ethanol production, mainly because of its leading role in corn production, the primary
feedstock for ethanol production. For example, Iowa had 30 ethanol plants in operation by the
end of 2007 and produces nearly 2.1 billion gallons of ethanol annually. Much of the crude oil
used in the Midwest is piped in from the Gulf Coast and Canada. One place worth mentioning in
this region is Cushing, Oklahoma, which is the major crude oil transportation hub for the
Midwest.
The Gulf Coast region, including Texas, Louisiana, New Mexico, Arkansas, Alabama, and
Mississippi, produces over 50% of the nation’s crude oil and 47% of its final refined products.
This region also serves as a national hub for crude oil and is the center of the pipeline system.
The Rocky Mountain region, or PADD IV, has the smallest and fastest-growing oil market in the
U.S., with only 3% of national petroleum product consumption. The West Coast region, PADD
V, is the largest oil-producing and consuming region. This region’s oil supply is independent of