California Gasoline Demand Elasticity Estimated Using Refinery Outages

Abstract

This paper presents new gasoline price elasticity estimates for California. We use unique characteristics of the California gasoline market and a new set of proposed instruments that are strong and plausibly exogenous. As a first step, we take advantage of California's unique gasoline market, which is partially isolated from the rest of the U.S. due to environmental regulations. We control for persistent demand shocks and estimate a lower bound for the elasticity of demand of -0.23. In the second step, we use a new set of instruments to control for simultaneity. We use detailed information on refinery outages to capture short-run supply shocks. Our estimate of long-run demand elasticity is -0.57.

Keywords: Capacity outages, gasoline demand price elasticity, Instrumental variable estimation, California gasoline market

JEL Classification: C22, C36, C51, D12, Q41