Is proximity to oil refinery a big factor in explaining differences in gas prices?

Abstract

According to the Energy Information Administration, average retail gasoline prices tend to typically be higher in certain states than in others. Aside from taxes, the factors shown to contribute to regional and even local differences in gasoline prices include proximity of supply, supply disruptions, competition in the local market and environmental programs. Of interest in this paper is proximity of supply. It has been hypothesized that areas farthest from the Gulf Coast (the source of nearly half of the gasoline produced in the United States and, thus, a major supplier to the rest of the country) tend to have higher prices. To test this hypothesis, the paper assembles state level monthly retail gasoline data for the period 1983 to 2007 for five states with oil refineries (Alabama, Georgia, Texas, Mississippi and Louisiana) and five states without refineries (Arkansas, Tennessee, North Carolina, South Carolina and Florida). The analysis employs dynamic correlation, regression, cointegration and vector autoregressive methods. Overall, the results show that retail gas prices in states with refineries and those without refineries tend to move in the same direction over time. The small differences observed over time may suggest that price shocks take a short time to be felt nationwide.