Anyone who has sat in traffic understands the importance of good roads. A four-lane highway leaves plenty of room to drive, but merge down to two lanes and you have a rush hour bottleneck. Look at your gas gauge while idling and you become even more frustrated that you are paying a high price at the pump.
EIA.gov reported Monday “the average U.S. retail price for regular motor gasoline is up about 45 cents per gallon since the start of 2013, reaching $3.75 per gallon on February 18. The rise in gasoline prices is partly due to higher crude oil prices.”
Explaining High Prices
More oil is being produced but worldwide demand continues to climb due to pressure from fast rising Chinese and Indian markets. To the north, Canada is consistently producing more oil than can be physically transported to markets, resulting in a discount that has reached as much as $60 a barrel. Here at home, because of horizontal drilling and advancements in hydraulic fracturing, the United States is on pace to overtake Saudi Arabia as the world’s top oil producer. With all this oil, why aren’t gasoline prices dropping?
Boom to Bottleneck
Oil from Western Canada trades at a dramatic discount compared to its overseas counterparts in the Middle East but a lack of infrastructure is keeping it from reaching American refineries and in turn the American motorist. Whether it is development in the Bakken formation in North Dakota or Canadian oil imported from Alberta, the roads to American refineries are jammed.
A recent report from the Energy Information Administration points out that several new pipeline projects need to be completed before there is a significant decrease in U.S. refinery utilization of higher cost light, sweet crude imports.
From EIA.gov: “During the next two years an additional 1,190,000 bbl/d of pipeline capacity for delivering crude oil from Canada and the midcontinent to Cushing is planned, but this is balanced by 1,150,000 bbl/d of planned pipeline capacity additions to deliver crude oil from Cushing to the Gulf Coast. In addition, about 830,000 bbl/d of new pipeline capacity is planned to move crude oil directly from the Permian Basin to the Gulf Coast, avoiding the congested Midwest. If this capacity is constructed and fully utilized, waterborne imports to the U.S. Gulf Coast, particularly of light sweet crude oil, could drop significantly.”
What the EIA report doesn’t discuss is the fact that the North American crude supplies that could move through these pipelines will be substantially cheaper than the waterborne imports that they will replace – which will place significant downward pressure on the price at the pump.
In an editorial endorsing Keystone XL construction, USA Today notes because of global competition and market access constraints, it is easier for Canada to ship their oil abroad than it is to sell it to the United States. Add a new lane for oil to travel south and you begin to ease the backup.
USA Today Editorial: “At a time of rising global competition for energy resources, the pipeline would bring reliable new oil supplies to a U.S. that still imports 40% of its crude, 7.6 million barrels a day last year. And 40% of those imports come from OPEC nations such as Venezuela, Iraq and Nigeria. Keystone is expected to supply 830,000 million barrels a day, a key step toward the long-sought goal of North American energy independence, which suddenly seems attainable.”
The United States needs to back its production boom with an infrastructure boom. The two must keep pace with each other or else oil will bottleneck by the barrel. Adding new capacity by completing the Keystone XL pipeline will help make North American energy self-sufficiency and lower gasoline prices, to borrow from USA Today: “attainable.”