How the Removal of a Market Barrier Enhanced Market Efficiency: The Case of WTI and Brent Crude Oil Prices

If the world oil market is efficient, arbitrage should lead the West Texas Intermediate and Brent crude oil price indexes to converge whenever they stray apart. From the beginning of the sample on May 20, 1987 until December 1, 2010 when U.S. oil production began to accelerate due to hydraulic fracturing (fracking), the two series were cointegrated. However, from this point formerly nonbinding constraints became binding. The domestic and world markets were well adapted to the U.S. being a large importer of oil, but the increased production from fracking disrupted this equilibrium, making the decades old U.S. ban on crude oil exports and pipeline capacity from the new well sites to the existing refineries binding. From late 2010 until the crude export ban was lifted on December 18, 2015, the two price series were not cointegrated. From the lifting of the ban through October 31, 2016, the end of the sample, the two prices were again cointegrated, indicating the transatlantic market for crude oil was operating more efficiently. The convergence in the two series was occurring more quickly in this last period than in the first period, suggesting another source of efficiency gains.