Essays on refining markets and environmental policy

This thesis is comprised of three essays. The first two essays examine empirically the relationship between crude oil price and wholesale gasoline prices in the U.S. petroleum refining industry while the third essay determines the optimal combination of emissions tax and environmental research and development (ER&D) subsidy when firms organize ER&D either competitively or as a research joint venture (RJV). In the first essay, we estimate an error correction model to determine the effects of market structure on the speed of adjustment of wholesale gasoline prices, to crude oil price changes. The results indicate that market structure does not have a strong effect on the dynamics of price adjustment in the three regional markets examined. In the second essay, we allow for inventories to affect the relationship between crude oil and wholesale gasoline prices by allowing them to affect the probability of regime change in a Markov-switching model of the refining margin. We find that low gasoline inventory increases the probability of switching from the low margin regime to the high margin regime and also increases the probability of staying in the high margin regime. This is consistent with the predictions of the competitive storage theory. In the third essay, we extend the Industrial Organization R&D theory to the determination of optimal environmental policies. We find that RJV is socially desirable. In comparison to competitive ER&D, we suggest that regulators should encourage RJV with a lower emissions tax and higher subsidy as these will lead to the coordination of ER&D activities and eliminate duplication of efforts while firms internalize their technological spillover externality.