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Wednesday, May 12, 2010

The utter fallacy of "Drill Baby Drill"
Posted by Jill | 4:52 AM
As the price of gasoline begins its slow climb to, and now probably northward of $3.00/gallon here in New Jersey (one of the lower-priced states due to our ridiculously low gasoline tax), the parade of letters about domestic oil production have begun to appear in my local paper, even in the face of the BP mess.

I don't know why no one mentioned this when the Republicans started this "Drill Baby Drill" nonsense in the first place, but the fact is that any oil produced offshore in the U.S., or in Alaska, or anywhere else, is not "dedicated" to U.S. consumption:
U.S. Trade Flows

Crude Oil and Products Mix

Crude oil dominates U.S. imports just as it dominates world trade and for much the same reasons (see Crude versus Products, and see graph). Therefore, all of the U.S. leading suppliers are major crude producers. Imports of crude oil, having grown to replace declining domestic production and to meet growing demand, now account for around 80 percent of the total. Product import volumes have stayed relatively stable.

In spite of the seeming stability in product imports, there have been significant structural shifts over the last couple of decades in the mix of products that the United States imports. Residual fuel oil, for instance, formerly accounted for the majority of all product imports, but its share has shriveled into insignificance as utilities and industrial users have switched to other fuels, particularly nuclear and natural gas. In its place, the United States now imports a much higher proportion of petroleum products that are reprocessed or blended by the oil industry, such as the unfinished gasoline and gasoline blending components that are central to reformulated gasoline supply.

Canada is the one country that delivers oil to the United States by pipeline. (Only its relatively new offshore Eastern Canadian production, from fields like Hibernia, depends on tankers.) The vast majority of Canada’s crudes are landlocked and rely almost exclusively on trunk-lines from Western Canada that tie into the U.S. transcontinental network to reach their main export markets, which lie all across the Northern Tier of the United States. As domestic production has declined, these Canadian crudes have had a greater reach into the United States.

U.S. Exports

Since the United States is the world’s largest importer, it may seem surprising that it also exports around 1 million barrels a day of oil, predominantly petroleum products. Due to various logistical, regulatory, and quality considerations, it turns out that exporting some barrels and replacing them with additional imports is the most economic way to meet the market’s needs. For example, the Gulf Coast may export lower quality gasoline to Latin America while the East Coast imports higher quality gasolines from Europe. Exports in the 1990’s have been at record highs, the efficiency of the oil market has been increased, and consumers everywhere have benefited.

U.S. Regional Trade

There are significant differences between different parts of the United States in terms of their involvement in and dependence on international trade. Most of these differences are the direct result of the uneven distribution of both production and refining across the United States (see U.S. Supply, U.S. Refining). Thus, as shown in the graph, the East Coast imports over half of all the products that come to the United States, because it is the largest consuming area in the United States but, for historical reasons, it has only enough capacity to meet around 1/3 of those needs from its own refining. It fills the product gap with supplies from other parts of the United States, particularly the Gulf Coast, and with imports. Its limited volume of refining capacity also keeps it a distant third as a crude importer. However, because its local production is so insignificant, its crude import dependency is the highest of all, at almost 100 percent.

The only other region that imports significant amounts of products is the Gulf Coast. Its focus is not, like the East Coast's, on products that can be supplied directly to the consumer, but on refinery feedstocks and blendstocks, to support its role as the main U.S. refining and petrochemical center. That role, plus the need for all the Midwest’s non-Canadian crude imports to move through the Gulf Coast’s ports and pipelines too, has also led to the Gulf Coast being by far the most important crude oil importing region in the United States, accounting for nearly two-thirds of the total.

In other words, the Deepwater Horizon oil wasn't being drilled for the benefit of the shrimpers of Louisiana, or of Mississippi or Alabama truckers. It was being drilled to be sold on world petroleum markets, in any of a variety of "buckets".

In 1995, Samuel Van Vactor of the conservative think tank The Cato Institute, called for a lifting of the ban on Alaskan oil exports, writing:
In mid-1977, when the Trans-Alaska Pipeline opened and shipment of North Slope crude began, government regulators and oilmen were slow to understand the economic implications of the oil export ban. Suddenly, the West Coast was flooded with oil--which should not have surprised the industry, since there was no other profitable destination for Alaskan oil. Total petroleum demand in the western states (known as PAD District V) at the time was about 2.6 million barrels per day.(7) Production on the North Slope, however, totaled 1.5 million barrels per day by year's end, in addition to production from Cook Inlet and California. ARCO and Exxon had West Coast refineries, but Sohio, with half the North Slope crude production, had no immediate market.

Not only did a new set of producers have to find willing buyers, but refineries had to be modified to run North Slope crude oil. Alaskan crude oil is of better quality than most California crudes, but it is still heavier than most of the foreign crude oils it would displace. From 1977 through 1981 refineries in California, Hawaii, and the Puget Sound area were modified and upgraded at great expense to run heavier crude oil. By the end of the period, only occasional cargoes of specialty crude oil were imported. Figure 1 illustrates the situation. Until 1977 the gap between West Coast petroleum demand and indigenous oil supply was filled by foreign imports. That gap was closed abruptly by Alaskan oil. The region developed a surplus of about 600 thousand barrels per day that lasted through 1988 and then began a gradual decline. (The rise in oil prices in 1979 caused a significant drop in the quantity of oil demanded, which helped prolong the surplus.) When the Prudhoe Bay field began its decline, the gap narrowed quickly. In the early 1990s West Coast oil demand and supply were nearly in balance, with about 200 thousand barrels per day of North Slope and California crude oil moved to the Gulf Coast by tanker and pipeline, offset by about 100 thousand barrels per day of light, low-sulfur foreign oil imports.

Figure 1
PAD District V Demand and Supply, 1960-94
[Graph Omitted]
Source: Economic Insight, Inc.

Although PAD District V now produces just about the same volume of crude oil it refines, prices remain depressed. Petroleum product demand in PAD District V is for gasoline, diesel, jet fuel, and other light petroleum products. In contrast, the region's crude oil is heavy, and that of California is very heavy. The mismatch between the petroleum products demanded and refinery feedstocks results in a surplus of residual oil and a shortage of "light ends"--the building blocks of gasoline and distillate fuels.

Briefly, this is what goes on. Crude oil from Alaska is shipped to California refiners. Although it is of higher quality than most local crude oils, it is not light enough to offset the impact of California's heavy crude oils on refinery processing--a classic case of "bringing coal to Newcastle." Overall, about one-quarter of refinery production is residual oil. Local regulations effectively prevent the heavy fuel oil from being used in the Los Angeles Basin or the San Francisco Bay area. It is sold as heavy oil for ship fuel (known as "bunkers"), sold at a discount in the Pacific Northwest, shipped to the Gulf Coast, or exported to the Far East.

At the same time, California has a legendary demand for gasoline. Local refiners do not produce enough to satisfy the local market, particularly for high-octane fuels. So refiners top off production by using foreign imports of octane-enhancing additives, unfinished gasoline, and other light ends.

Were the market allowed to function unmolested, however, Alaskan crude oil would in all likelihood flow to northeast Asia, where there is a demand for heavy fuel oil. In turn, light imported crude oil from the Middle East and Southeast Asia would move into California, where it could be manufactured into gasoline and diesel. That would reduce the need to import gasoline additives and dramatically reduce the need to export heavy fuel oils. The crazy system of cross-transportation would be eliminated. Not only would unnecessary transportation be reduced, but refiners would be willing to pay more for local supplies of West Coast crude oil.

This piece may have been written in 1995, and perhaps it demonstrates how conservative think tanks have degenerated into asylums of batshit crazery since then, but whether you agree with its premise or not, it does illustrate that where oil goes depends on not just where it is, but what it is. And there are no guarantees that what comes up from the ocean floor in the Gulf of Mexico is ever going to make its way into the pickup trucks and SUVs of the "Drill Baby Drill" crowd.


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Anonymous shahzaib said...
Thanks a lot!
really really good stuff men !!!
Good luck !

Anonymous Anonymous said...
U.S. Exports

Well, there might be oil contracts from the 1910s where the US oil companies extract oil from countries like Ecuador and Peru and then move the oil to be refined in the US and then shipped back to the country of origin for only 3 times as much crude as they took out.

Oil companies do not just bribe in the US.