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The swinging pendulum: US oil

Hydrocarbon Engineering,

The US oil market is in a remarkable period of change, after years of what appeared to be staid and predictable performance. Demand was expected to grow modestly, domestic crude supply was expected to continue to fall, refinery capacity was viewed as stable, and import dependence was expected to continue its slow rise.

Today, many elements are changing, and the supply/demand pendulum is swinging backward. The structure and volume of oil demand is changing, and there are distinct differences in supply and demand in regional submarkets. The development of shale oil resources is causing a resurgence in oil production, reducing the level of US dependence on imported crude oil. Expanded output in Canada, much of which flows to the US, is further reducing dependence on Middle Eastern crude imports. The concentration of new crude output in the centre of the country is giving an enormous boost to refineries with access to these new crudes. It is also causing a comparative disadvantage to other refineries, mainly those situated on the US West Coast and US East Coast.

The new crudes are steeply discounted against other international crudes for two main reasons. First, crude transport infrastructure is overwhelmed by the new volumes. Pipeline transport is far and away the most economical means of transport, but most refineries on the western and eastern coasts have very little, if any, crude pipeline access to the new crudes. Second, US law severely restricts the export of domestic crude, the exceptions being trade with Canada, volumes from state waters in Alaska, and specially permitted cargoes. The issue of whether the US government should lift the ban on crude exports is once again under debate, yet concerns of supply security and import dependence remain.

US oil product demand

At the beginning of the decade, most forecasts anticipated slow but steady product demand. Demand reached 20.7 million bpd in 2005, but it leveled off and began to stagnate. In 2008, a serious price shock hit the international market. The US economy had been languishing, and it fell into a serious recession. Oil demand fell in concert, despite a plethora of macroeconomic policies and programs designed to stimulate the economy.

Between 2007 and 2008, demand dropped by 1.109 million bpd. Between 2008 and 2009, demand dropped by another 701 000 bpd. Demand rebounded slightly by 343 000 bpd in 2010, then fell again by 184 000 bpd in 2011 and 466 000 bpd in 2012. Data for the first four months of 2013 shows an increase of 80 000 bpd, but few forecasts anticipate a serious long term rebound in US oil consumption.

Rebounding crude supply and the shale boom

Without a doubt, one of the most remarkable turnarounds in the US oil market has been the rebound in crude oil production made possible through development of shale oil.

The breakthrough in shale oil production via horizontal drilling and hydraulic fracturing, or ‘fracking’, pulled US production out of its slump. US crude production grew from 5.0 million bpd in 2008 to 7.1 million bpd in 2013 (January - April average). The two key shale deposits are the Williston Basin, which cuts across PADDs 2 and 4, and extends north into Canada, and the Eagle Ford shale play in PADD 3. While the Eagle Ford resource is relatively close to Texas refineries and the Gulf Coast, the Williston Basin resources are landlocked and far from centres of refining and population. As Figure 6 illustrates, crude production has soared in North Dakota, rising from less than 100 000 bpd in 2005 to 766 000 bpd during the first four months of 2013. North Dakota has only one refinery, Tesoro’s 58 000 bpd gasoline oriented refinery at Mandan. Transporting Williston Basin crude to refiners is already posing a major challenge to transport infrastructure, and shale oil output is expected to reach 1.2 million bpd or more within the next six years.

Refinery utilisation and changes in trade flows

The new crude resources, particularly the Williston Basin output, have limited access to refineries. The booming production in the centre corridor of the US has suppressed crude prices, and refineries with access to the lower cost crudes are enjoying more favorable economics.

The country’s oil transport infrastructure is straining to optimise trade flows. As noted, pipelines are typically the most economical means of transport, often by orders of magnitude. But the pipelines are running at capacity, despite line reversals and expansions, more of which are planned and underway.The new supplies and high levels of refinery throughput in the centre of the country also have changed the flows of crude and product between PADDs. Figure 12 presents the trend in pipeline shipments of crude oil and refined product from PADD 3 (the Gulf Coast) to PADD 2 (the Midwest and Great Lakes).

Concerns over import dependence and crude trades

The changes in US crude and product flows have been enormous, and it is clear that some of the changes are being caused by the lack of sufficient transport infrastructure and the lack of international outlets. With most US crude restricted from export markets, and with a lion’s share of the new crude production in landlocked states, the only practical option is to run the crude through existing refineries, whether or not they are geared for it. Many refineries are not geared toward the new light output, having been built and upgraded to take advantage of heavy sour crudes and bitumen based products from Canada. This has resulted in high refinery utilisation rates in the centre of the country, but the bulk of the population and the demand is located on the coasts. A surplus of both crude and product in the centre of the country is creating new trade patterns, as oil is pushing out along hitherto little used avenues. Naturally, some of these trades are occurring because crude exports are largely disallowed while exporting refined products is not.


The US oil market finds itself in a period of unusual change. After many years, decades even, of what seemed to be slow moving and predictable behaviour, several of the moving parts in the oil supply and demand equation are now heading in different directions. Oil demand, which had been expected to grow slowly but more or less steadily, fell sharply after the price spike in 2008 and the economic recession. Current demand is approximately 2.5 million bpd below its level in 2007. Demand for gasoline, in particular, has dropped, and there is little reason to expect a resurgence of growth in gasoline demand. US crude production has pulled out of its long downward slide, growing from 5.0 million bpd in 2008 to 7.1 million bpd in 2013 (January - April average). Foreign crudes now account for 51% of the refinery slate, down from a peak of 67% in 2008. Western Hemisphere crude exporters, led by Canada, provide 65% of this, while exporters in the Persian Gulf provide only 25%.

The US oil market is complex, and peopled by companies, groups and individuals with strong views, often working at cross purposes. Free market economists tend to favour the elimination of policies such as restrictions on energy exploration and development, crude oil exports, transport modes, and product trade. But the US energy market has evolved with a number of political, economic and environmental regulations that are so deeply ingrained that changes come slowly. The pendulum is swinging back, however; domestic energy demand has fallen, and domestic supplies are expanding. US oil import dependence has fallen significantly. Some geologists even believe that it is possible for the US to become fully self sufficient in oil supply, though many urge caution about such forecasts for a variety of environmental, political and technical reasons. Moreover, most large petroleum markets operate most efficiently only when free trade is allowed, so it is unlikely that shale oil and other developments would continue to climb without access to international markets. Fully satisfying every market demand in every corner of the continent using only domestic resources is inherently inefficient. There is no shortage of energy modeling and analysis identifying energy market reforms and strategies that would increase efficiency and maximise profits. But the public inevitably asks, maximise whose profits? And thus the politics of energy in the US remain complicated. But the current relaxing of the oil supply and demand balance may indeed continue, and insofar as it visibly improves the country’s economic situation without damaging the environment, many new directions are now becoming possible in the US.

The full article can be found in the September issue of Hydrocarbon Engineering

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