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U.S. Is Now EXPORTING Fuel, But the Oil Companies Are Gaming the System to Keep U.S. Prices HIGH
Leah McGrath Goodman – who has written for the Financial Times, Barron’s, The Wall Street Journal, Forbes and Fortune – notes that the U.S. is now an exporter of refined petroleum products, but that Americans aren’t getting reduced oil prices because the oil companies are now pricing the oil according to European metrics:
The U.S. is now selling more petroleum products than it is buying for the first time in more than six decades. Yet Americans are paying around $4 or more for a gallon of gas, even as demand slumps to historic lows. What gives?
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Americans have been told for years that if only we drilled more oil, we would see a drop in gasoline prices.
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But more drilling is happening now, and prices are still going up. That’s because Wall Street has changed the formula for pricing gasoline.
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Until this time last year, gas prices hinged on the price of U.S. crude oil, set daily in a small town in Cushing, Oklahoma – the largest oil-storage hub in the country. Today, gasoline prices instead track the price of a type of oil found in the North Sea called Brent crude. And Brent crude, it so happens, trades at a premium to U.S. oil by around $20 a barrel.
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So, even as we drill for more oil in the U.S., the price benchmark has dodged the markdown bullet by taking cues from the more expensive oil. As always, we must compete with the rest of the world for petroleum – including our own.
This is an unprecedented shift. Since the dawn of the modern-day oil markets in downtown Manhattan in the 1980s, U.S. gasoline prices have followed the domestic oil price ….
In the past year, U.S. oil prices have repeatedly traded in the double-digits below the Brent price. That is money Wall Street cannot afford to walk away from.
To put it more literally, if a Wall Street trader or a major oil company can get a higher price for oil from an overseas buyer, rather than an American one, the overseas buyer wins. Just because an oil company drills inside U.S. borders doesn’t mean it has to sell to a U.S. buyer. There is patriotism and then there is profit motive. This is why Americans should carefully consider the sacrifice of wildlife preservation areas before designating them for oil drilling. The harsh reality is that we may never see a drop of oil that comes from some of our most precious lands.
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With the planned construction of more pipelines from Canada to the Gulf of Mexico, oil will be able to leave the U.S. in greater volumes.
The Wall Street Journal noted last November (subscription required) :
“The sale of an oil pipeline running from Oklahoma to Texas upended U.S. energy markets Wednesday, sending the price of crude surging above $100 a barrel …Enbridge Inc.—which bought a 50% stake in the Seaway Pipeline—announced it would reverse the direction of the flow, allowing more crude to move south from oil storage in Cushing, Okla., into the world’s largest refinery complex along the Gulf Coast. Over the past two years, the U.S. has started producing so much oil that existing pipelines have been unable to move it to refineries. That has led to a glut of oil in the center of the country, keeping the price of American crude far below that of petroleum traded overseas…With a new supply of oil headed to Gulf Coast refineries, exports of gasoline are expected to rise … For decades, oil has been imported from overseas to the Gulf Coast, then either refined there or moved elsewhere in the U.S. for processing.
“The pipeline system was set up to move crude from south to north…U.S. oil production, which had been declining since the 1970s, is climbing again. After bottoming out at five million barrels a day in 2008, domestic production has jumped by 10% in the past couple of years. It is expected to grow even more amid a drilling boom, as companies use hydraulic fracturing to free oil from shale rocks … More crude flowing to the Gulf Coast will feed a growing energy-export business to Latin America’s rapidly growing economies. U.S. exports of petroleum products have reached 2.6 million barrels a day, double the level of three years ago. Roughly 15% of the gasoline and diesel refined in the U.S. is now exported, according to U.S. Energy Department data. “The middle of the U.S. should start considering applying for membership in OPEC,” said Phil Verleger, an oil economist who runs PK Verleger LLC. Industry analysts don’t expect rising U.S. crude-oil production to translate into lower gasoline or diesel prices anytime soon. So much gasoline and diesel is exported from the Gulf Coast that U.S. customers compete with customers in Mexico and the rest of Latin America—and have to pay as much as these foreign users ….
Because of the glut in Cushing, the price paid for crude in the Midwest U.S. has been substantially less than European benchmark prices, such as Brent crude. This is expected to largely disappear by the middle of next year, as the Seaway pipeline change gets underway.”
CNN Money reported in March that the Keystone Pipeline might also raise fuel prices within the U.S:
Gas prices might go up, not down: Right now, a lot of oil being produced in Canada and North Dakota has trouble reaching the refineries and terminals on the Gulf. Since that supply can't be sold abroad, it reduces the competition for it to Midwest refineries that can pay lower prices to get it.
Giving the Canadian oil access to the Gulf means the glut in the Midwest goes away, making it more expensive for the region.
Tyson Slocum – Director of Public Citizens’ Energy Program - explained in November:
How does bringing in more oil supply result in higher gas prices, you ask? Let me walk you through the facts. A combination of record domestic oil production and anemic domestic demand has resulted in large stockpiles of crude oil in the U.S. In particular, supplies of crude in the critical area of Cushing, OK increased more than 150% from 2004 to early 2011 (compared to a 40% rise for the country as a whole). Segments of the oil industry want to import additional supplies of crude from Canada, bypass the surplus crude stockpiles in Oklahoma in an effort to refine this Canadian imported oil into gasoline in the Gulf Coast with the goal of increasing gasoline exports to Latin America and other foreign markets.
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Cushing typically is a busy place – I noted in my recent Senate testimony how Wall Street speculators were snapping up oil storage capacity at Cushing. And all of that surplus capacity is pushing WTI prices down – and for many in the oil business, downward pressure on prices is a terrible thing. As MarketWatch reports, “[B]y running south across six U.S. states from Alberta to the Gulf of Mexico, [the Keystone pipeline] would skirt the pipeline hub at landlocked Cushing, Okla., a bottleneck that has forced Canadian producers to sell their oil at a steep discount to other crude grades facing fewer obstacles to the market.
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There are several global crude oil benchmarks, and the price differential between Brent and WTI now is around $10/barrel, which is a fairly significant spread, historically speaking. Moving more Canadian crude to bypass the WTI-benchmarked Cushing stocks, the industry hopes, will align WTI’s current price discount to be higher, and more in line with Brent.
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The Keystone pipeline isn’t just about expanding the unsustainable mining of … Canadian crude, but also to raise gasoline prices for American consumers whose gasoline is currently priced under WTI crude benchmark prices.
In an interview in January, Slocum noted that oil is America’s number 1 import at time same that fuel is America’s number 1 export.
Specifically, more oil is being produced now under Obama than under Bush. But gas consumption is flat.
So producers are exporting refined products. By exporting, producers keep refined products off the U.S. market, creating artificial scarcity and keeping U.S. fuel prices high.
Slocum said that the main goal of the Keystone Pipeline is to import Canadian crude so the big American oil companies can export more refined fuel, driving up prices for U.S. consumers.
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Because the government of Dubai pays the difference. Out of their profits from a massive hydrocarbon supply lying under a tiny country which requires very little gasoline (because it's tiny you see...............).
actually it goes to the "prosperity" of your own country. There is no greater friend of Gigundo Government than Big Oil. They are BY FAR the biggest consumer of the goo after all...
I have made money on this trend by investing in tubular steel. Still plenty of opportunity.
You get better margins on tube alloys.....
How do I rate this piece of garbage article a -10?
The one thing I expect on Zero Hedge is an understanding of basic economics and markets. It is THE reason I come here so often - to see the unvarnished and unmanipulated implications of markets & their mechanisms.
Leave it to GW to post utterly ignorant and mind-numbing stupidity on just those areas.
Oil trading markets are the broadest and most liquid markets on the planet. Those markets set the global price. WHERE a product is produced is important only in the context of 1) what it costs to transport it to 2) a refinery capable of efficiently producing products from that feedstock. The WTI/Brent spread exists because WTI requires delivery to Cushing Oklahoma which has a limited storage capacity vs the current demand.
It's true that there has been an increase in export from the Gulf Coast. There is currently a large supply from reservoirs in the middle of the country - sending that supply to the Gulf Coast is the only option as there is not the ability to transport it to the coasts effectively (do you want to run tankers across the Great Lakes and down the east coast to refineries??? I suspect GW would happily post mindless inuendo copied from leftist sources under breathless headlines about that as well). It's all about efficiency - US refineries run in the mid-90% of their capacity constantly. If it's more efficient to bring tankers of N Sea crude to New Jersey and refine them than to move crude from the mid-continent the market does that.
There is a true global market in crude - where a particular molecule originated does not matter to the markets except as stated above. The reason it's important to produce domestically and use Canadian crude is because the jobs & capital associated with that production STAY HERE.
Oil markets are transparent and "liquid"? HAHAHAHAHA. What planet you livin' on bro. TREASURIES are transparent and liquid but oil requires MASSIVE up front capital (or at least they did until the shale boom) in order to produce. After the bust of the 1980's "they learned their lesson and did whatever they could to manipulate the price." That would be HIGHER. Hence: "run up to 40 bucks going into the first Gulf war" (whereupon it completely collapsed and led to the extraordinary boom of the 90's.) Then it was "Run Up 2.0" during Gulf War II. That one was so successful it blew up the entirety of Wall Street! HOWEVER...I would agree "there's a dilemma." Prices and demand are collapsing everywhere. Alternatives already exist. The fact is oil is merely a consumer durable as the USA pulls back from war and makes nice with Iran. Since SPECULATORS however "tie the price of everything to the price of oil" should be interesting to see what happens as the price falls to say...5 bucks a barrel.
$5... ?
Best of luck with that bet.
For some times GW has been abandoning conventional economics and venturing further and further into tabloid "journalism". Increasingly he is using the language of the Left, finding conspiracies behind every event, seeing complex cabals doing strange things, negating the Occam's Razor outlook. And worse, he has adopted the proposals of the Left - authoritarian government action on a variety of issues. I'm not sure what's driving GW but something is not quite right.
I clicked into this article for the exact same reason. If I make some product and my neighbor is willing to pay X but someone in another country is willing to pay X+Y+shipping then I am shipping it.
Beans in the Teens seems to be working for farmers shipping to China.
I agree with you insanelysane, unless there are forces at play which force or trick the other country into paying X + Y + Shipping.
Here here, I second that. If one is to accept true free markets, one must accept that producers will sell their product to the highest bidder. Nationality is not a factor. Occasionally I post this truth and common sense and I'll get roasted but facts are facts despite the emotional responses of nonsense I get (plus the thumbs down). It shows how ignorant some here are on economics as most liberals and the occupy people are. It doesn't mean there aren't excesses that upset people, but the free market must address those excess.
It would seem some here only believe in free markets when it benefits them.
"Free Markets"...Are you kidding?
It's the new digital mining techniques.
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Pure Commie claptrap, George.
Is this the first shot across the bow? Next you'll be calling for the nationalization of oil companies.
Then we can watch production really plummet...
http://www.economist.com/node/7276986
I love it. You're getting screwed but you look away and blame supposed commies. That's a good serf!
I'm getting screwed all right, by the state with tax assessments on each gallon of gasoline.
WTI oil is showing bearish.
http://bullandbearmash.com/chart/spot-wtic-oil-daily-9-2012/
I am glad to see production increase and refined productexports increase. Can fraking also rejuvenate old oil fields and change the slope of the depletion curves? If it can then america will boom again for a brief while.
Long enough to save my portfolio anyway.
big oil doesn't game the system, it's the politicians that need money to fund their genius social schemes and the slavish Fed who prints money to keep up with these politicians master plans. Everyone knows these vicious political spending scams and necessary printings drive up the price of everything, including oil. This 'big oil' cliche is so intellectually childish.
Why such a misleading title ???
Otherwise our time is peak oil time guys (maximum of barrels per day extracted), and the way down is going to be real harsh.
wow, minus 4 :)
You people do not know the difference between what's come into a refinery, that is oil (extracted from the ground), and what comes out of it, that is petroleum products, or what ?
Oil is the thing that we are most encouraged by our government to consume: "go to work!!" they yell "and drive a car, a heavy one preferrably". And then they wave their fingers at us for spending our money and missing debt payments. Well what is it? Spend or don't spend? Seems to me like the government is serving two gods - the oil industry and the banking industry. one tells them to keep consumption up, the other tells them to keep collecting on loans and tax revenue for interest payments. Our government is wholly and completely owned by these two industries. our government is nothing more than a giant collection agency for the top .001%. Whenever an employee acts up or fails to follow orders, they are replaced, simply put. A politician steps into the fray and won't accept their payouts? no problem. destroy the politician's career or "suicide" him if absolutely necessary. these guys play hardball, and our politicans bend right over for it. they'd rather make an extra $2,000,000 than take two minutes out of their days to concern themselves with the well being of the public. in their minds, the public is simply a nuissance, a sideshow that they have to step into every so often when a PR disaster occurs. The politicians are so wholly owned and controlled, even the slightest move out of line results in immediate termination. it is a perfectly operated kleptocracy - "we are like the gears in a clock"
Exactly! At the same time, they've also been telling us, for decades, that we're killing the planet with our cars. But when demand for cars drops, the auto-industry must be bailed out.
They are selling the products to Europe because the Europeans pay a higher price. The same reason that gold, corn, soybeans, copper and iron are sold to China. It's not artificial scarcity, it's market economics. Artificial scarcity would occur by government keeping prices artificially LOW, thus increasing demand and leading to shortages. Artificial scarcity could also occur if a producer controlled the bulk of production and calculated that decreasing production could increase total profit. (For example, if a 10% cut in volume leads to a 20% increase in price). Here, the world market for energy is higher and U.S. producers are not in control of the world oil market, as it says the U.S. exports and imports. Lower the price domestically through export controls and demand would go up as Americans could burn cheaper gas, while simultaneously pushing global prices even higher.
Essentially, what this news shows is that the U.S. economy doesn't need the energy as much as the rest of the world because it's economy isn't growing. Lowering domestic gas prices would lead to waste by American consumers, who would take the market signal of lower prices to drive more, while the profit from the refiners would simply be transferred to other sectors of the economy, such as farmers, who also sell into a global market. The market distortion would lead to no economic gains for the U.S., and at best would suffer mild losses due to the imposition of government regulation and interference. At worst, it would seriously distort behavior and lead to unsustainable activity that is wiped out once market forces overcome government interference.
@ragnar
perfectly fine in theory, that being market capitalism, if i read you correctly.
but in practice, this country's lack of growth is not economic, it is due to central planning and crony 'capitalizm'.
i'd be happy with your explanation if we in the US had a market economy, but its a mask. what we have is fascism.
members of the cabal lobby and maneuver to prevent themselves being subject to market forces.
ask yourself if you think anyone in this country should invest in infrastructure or agree on benefits for private enterprise if those advantages will be used against those investing. think of eminent domain for oil pipelines, etc, and whatever else the connected fascists come up with.
localized cheap energy can have tremendous economic advantages. look at iceland and its aluminum smelting industry. not a simple story, but a good illustration of how theory and practice differ, especially when one hand is greasing the wheels against the other.
all this is certainly not the government acting as referee for a level playing field (one of only a few legitamate functions of government). people sense the corruption, and everything is being questioned. there is no doubt that the oil industy has no objection to strip mining what productivity they can from the sheeple slaves. They are certainly not the last bastion of honest competition, and they'll use the same dirty tricks the bankers use. Does anyone doubt they are in league with banks? plenty of examples of using greasy fiat to and their access to the same, which is again limited to the connected.
we are playing on a greasy tilted playing field, and God help us, but when the scales really come off everybody's eyes, expensive gas will be the least of our worries.
The thrust of the above article hints that banning exports would be good?? Look at it another way should other countries ban exports to the US e.g. Us is a big net importer of oil, how about rare earths....
Since oil is traded globally it does not really make much sense to use the price based on some land-locked point because a small increase in oil production has meant the tanks are full at Cushing.
This is what Obama meant when he said he wanted us to be more like Europe. Higher gas prices = more tax revenue.
Hobbleknee 2412413
This is what Obama meant when he said he wanted us to be more like Europe. Higher gas prices = more tax revenue.
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Which also shows how obama has no understanding of the economy and economics. Higher gas prices is a drag on GDP which correlates in LOWER overall tax revenue through out the rest of the economy, most of which is service. I spend more on gas which means I have less disposable income to spend on services.
The price of oil is most governed by market forces. It is not Obama, specs, as prime movers but a totality. The stupidity of Zerohedge is reinforced.
The real point is that our oil, which we need, is going overseas and not staying local. This is maarket forces at work and oil is an internatioal game. Those who wish oil is governed by dark mysterious specultive sources are just ignorant.
The idea that markets are governed by sinister, dark, mysterious, devious forces of ill will is BS. Buying and selling is not manipulation. Even hoarding is not manipulation. These are all legit forces of a free market at work. Flipant ignorance, otherwise.
At ZH obama is responsible for everything, get with the program dude!
No, I think the proper expression is "It's Bush's fault; we inherited a mess."