Crude by Rail, Option Value, and Pipeline Investment

60 Pages Posted: 18 Mar 2019

See all articles by Thomas Covert

Thomas Covert

University of Chicago - Booth School of Business

Ryan Kellogg

University of Chicago - Harris School of Public Policy

Multiple version iconThere are 2 versions of this paper

Date Written: September 15, 2017

Abstract

The U.S. shale boom has profoundly increased crude oil movements by both pipelines–the traditional mode of transportation–and railroads. This paper develops a model of how pipeline investment and railroad use are determined in equilibrium, emphasizing how railroads' flexibility allows them to compete with pipelines. We show that policies that address crude-by-rail's environmental externalities by increasing its costs should lead to large increases in pipeline investment and substitution of oil flows from rail to pipe. Similarly, we find that policies enjoining pipeline construction would cause 80-90% of the displaced oil to flow by rail instead.

JEL Classification: L13, L71, L95, Q35

Suggested Citation

Covert, Thomas and Kellogg, Ryan, Crude by Rail, Option Value, and Pipeline Investment (September 15, 2017). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2019-49. Available at SSRN: https://ssrn.com/abstract=3353481 or http://dx.doi.org/10.2139/ssrn.3353481

Thomas Covert (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Ryan Kellogg

University of Chicago - Harris School of Public Policy ( email )

1155 East 60th Street
Chicago, IL 60637
United States

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