other regions since it is geographically separated by the Rocky Mountains. In addition, the
refinery market of this region is highly concentrated.
Data
The gasoline price relative to that of crude oil is used as a dependent variable to measure
ethanol’s possible substitution effect on the gasoline price, while the 3:2:1 crack spread is
employed as a dependant variable to quantify the effect of ethanol on the refinery profit margin.
Figure 1 presents the relative gasoline to crude oil price over the 1995-2007 period. Figure 2 is
for the 3:2:1 crack spread deflated by Producer Price Index (PPI) for crude energy material for
five PADD regions over the same sample period. The PPI data are obtained from the U.S.
Bureau of Labor Statistics.
The relative gasoline price is similar to crack spread in the sense that both are measurements of
profitability of the refinery industry. The difference is that relative gasoline prices only account
for the contribution of gasoline to the profit margin. It is employed in this study to quantify the
substitution effect of ethanol production on gasoline prices. Relative gasoline prices and the
refinery profit margin are mainly determined by similar explanatory variables. The explanatory
variables included in this study are market demand and supply conditions, refinery capacity and
utilization rate, market concentration and structure, unexpected supply disruptions, gasoline
imports, seasonality, and ethanol production. Each of these chosen variables and its relationship
with the relative gasoline price and refinery profitability is discussed in greater detail in this
section.
Crude and Product Market Conditions
The gasoline price and refinery profitability are affected by the supply and demand balances of
the crude market and product market. When the crude oil market has ample stocks, refinery
profit should increase because of lower crude oil prices. Alternatively, when there are large
stocks of gasoline and other refinery products, refinery profits should fall because of lower
product prices. A tight product market will generate upward pressure on product prices even
when there is an ample supply of crude oil. That is, product prices are bid up by more than any
underlying cost increases. This upward movement relative to crude oil prices will be seen as an