Empirical Analysis of 2011 Alberta and Mid-West Crude Oil Price Differential

Abstract

In late 2011, spot prices for the Alberta bench mark heavy crude oil, Western Canadian Select, other exported Alberta crudes as well as Mid-Western United States crudes such as West Texas Intermediate, began to trade at large discounts relative to the global market for crude, the so-called ‘Bitumen Bubble’. It has been widely argued that since 2008, new shale-oil extraction techniques have sparked a massive increase in supply in these crudes, while infrastructural capacities of pipeline and refining have failed to keep pace. This paper aims to provide evidence for the hypothesis that the discount is being driven by infrastructural constraints. Following previous empirical studies, a series of cointegration tests is performed under the assumption that crude-prices are globally integrated and have stationary differentials. The constrained oils should therefore exhibit a break from the stationary differentials and unit roots with respect to unconstrained sea-traded crudes. The study finds that price discounts may indeed be driven by infrastructural constraints, caused by a supply glut for the transportation of Canadian and Mid-Western (land sourced) crudes. Relative to sea-sourced crudes, the crudes that converge at Cushing experience a deep discount beginning in late 2011.