Tuesday, August 21, 2012

US: Higher Gas Prices with Plenty of Energy Supplies

Oil prices are on the upswing in the U.S. again. National average for a gallon of gas has increased by 34 cents since July 1. Factors that attributed to the spike include anticipation of more stimulus aid to Western and Chinese economies, uncertainty over the status of the Strait of Hormuz as a result of tightening sanctions against Iran and its threat to close the globally important waterway, high driving season that summer tends to be, production disruptions in South Sudan and North Sea as well as a few refinery outages in the U.S. Some observers predict the price of gasoline would ease after Labor Day, which might just happen without releasing oil from the U.S. Strategic Petroleum Reserve.

In fact, there is no shortage of oil in the U.S. right now and, if anything, oil production and refining have been on aggressive rise. What seems to matter to understanding the vagaries of oil prices is not necessarily the scarcity of domestic oil supplies, but global market reactions to geopolitical events and sudden changes in physical factors, such as refinery shutdowns. In fact, recent developments in the U.S. refining sector should give signs optimism about supplies of refined oil products available in the country. U.S. could benefit more from it once prices of various domestic crude benchmarks narrow (e.g. Louisiana Light Sweet, West Texas Intermediate, and Bakken); if its capability to refine both heavy sour (Canadian imports) and sweet crudes (from domestic shale formations) improve; and if more supplies become available to the East Coast.  All three factors appear to have positive indications. It is worth noting that the Atlantic region has faced a price spike at various times due to limited refining capability on the East Coast and relying more on imports of sweet crudes from abroad.

In recent years, availability of copious supplies of oil and gas in the U.S. boosted its refining industry, which has been increasingly willing to “improve value through share buybacks and dividends” and investments in upgrading a lot of its coking capacity to profit from processing heavier crudes. It is likely that easing of prices for refined oil products, including gasoline, may maintain for a few years in the U.S., aided by a recent reversal of the Seaway pipeline from Cushing, Oklahoma, to Texas and with weakening of Louisiana Light Sweet and Brent crude benchmarks, which have traditionally been linked to refined oil products. In the end, the level of domestic oil supply alone cannot be the answer to price fluctuations, but it can be found more in exogenous factors such as weather, a geopolitical crisis or war, shifts in global oil demand and supply, natural disaster, or unexpected production or refinery shutdowns here or abroad as a result of these.

Wednesday, August 8, 2012

Love It or Hate It, You Need the Keystone Pipeline

The controversial Keystone pipeline is in the news again after the Canadian pipeline company, TransCanada, secured last three permits from the U.S. Army Corps of Engineers to extend the southern leg of the pipeline to the Gulf Coast. This move upends the January 2012 rejection of the Keystone XL pipeline by the U.S. Department of State, which was reportedly based on insufficient time to evaluate the pipeline’s environmental impact. Unpopular among environmental groups in America, the Keystone pipeline’s new extension is likely to generate another wave of disagreements and protests over a potentially damaging impact of the heavy and low-quality Canadian oil on ecosystem of the U.S. Some of my friends have been eager to express their disappointment and frustration in various social media outlets on the approval of the Canadian pipeline at what they see the time of hastening rate of climate change.

But Keystone is, in many ways, inevitable for the U.S. The country is still over 90 percent reliant on gasoline for transportation and it seems like people here tend to forget (or to not know) how the recent history of U.S. oil production, trade and refining have permanently changed the types of oil used in the U.S.  Steady decline of U.S. sweet crude oil output from the early 1990s through the middle of 2000s have led to a change in the relationship of the West Texas Intermediate (WTI) benchmark towards other regional benchmarks, shutdown of many refineries in the Gulf Coast and reversal of directions of some, as well as to an increased demand for more offshore imports of sweet crude to meet local refinery needs, including rapidly rising Canadian supplies.

As imports of Canadian synthetic crude oil to the U.S. began to increase, Gulf Coast refineries were adjusted to handle heavier crudes from the northern neighbor. In fact, the recent surge in shale oil development in places such as North Dakota, which ramped up domestic sweet crude production again, is likely to find a good market abroad since “the Gulf Coast refining hub is more suited to process heavier crudes,” in the words of the recently appointed head of the Energy Information Administration (EIA), Adam Sieminski. Canadian oil, which stood at number one in U.S. net crude imports (29 percent) in 2011, is bound to increase its market share in the U.S. via the existing Keystone pipeline and its planned southern leg. So, what to do with the dirty Canadian oil? The answer lies in oil (gasoline) consumption of every American, who cannot, and should not, separate the influx of dirty oil from Canada from his/her own contribution to its rising supply to the U.S.