This Week In Petroleum | |
Released: May 1, 2013 Absorbing Increases in U.S. Crude Oil ProductionU.S. crude oil production has been rising in recent years following a decline from 9 million barrels per day (bbl/d) in 1985 to 5 million bbl/d in 2008 (Figure 1). Production was 6.5 million bbl/d in 2012 and EIA's latest Short-Term Energy Outlook forecasts production of 8.2 million bbl/d by the end of 2014, driven by the continued rapid pace of tight oil development that almost exclusively produces light crude. While long-term projections are inherently uncertain, reflecting assumptions about hydrocarbon resources as well as advances in technology, U.S. crude production in the High Oil and Gas Resource case of EIA's Annual Energy Outlook 2013 averages 10 million bbl/d over the 2020 to 2040 period (Figure 2), with light grades of crude oil providing the bulk of output growth. Some recent commentary has suggested that it was likely or even inevitable that the growth in U.S. oil production from tight resources would be significantly curtailed unless there was a relaxation of current U.S. policies toward crude oil exports. However, this is likely an overstatement of the actual situation, because there are several other midstream and downstream adjustments that could help to accommodate changing production patterns. Recent Developments There have also been major developments in rail transport, where shipments of crude increased dramatically in 2012 compared to 2011. Rail is generally more costly than pipelines for crude oil transport, but unit train loading and unloading facilities, which can often be built quickly and without many regulatory hurdles, can help to narrow the gap between rail and pipeline shipment costs. Rail also can provide greater flexibility in destination points. For example, while most of the major pipelines that are under discussion focus on linking inland crude streams with the U.S. Gulf Coast, home to about half of the nation's refining capacity, some of the less-complex refineries on the East Coast and in the Northwest that have historically run imported light sweet crude provide attractive opportunities for switching to domestic light tight oil. Rail shipments to take advantage of these opportunities have already begun, and are likely to increase significantly in the near future. Even with these midstream adjustments, continued strong growth in U.S. production of light crude oil from tight resources raises the prospect of a quality mismatch between domestic crude supplies and refinery capabilities. Many Gulf Coast refineries, and increasingly those in the Midwest and West Coast, have invested in secondary upgrading units that are used to convert heavy sour crudes into high-margin petroleum products. Heavy sour crudes are very attractive to these refiners, both because they yield slates rich in diesel and other distillates that are in high demand and because heavy crudes typically sell at a discount to light sweet grades on world markets. For this reason, refiners with upgrading capability are very interested in increasing their runs of heavy crude, including that produced from Canadian oil sands. At the same time, U.S. refinery closures in recent years, largely concentrated along the East Coast, have reduced the amount of capacity optimized to run light sweet crude. To date, the increase in U.S. light sweet crude production has been accommodated by displacing imports. However, with light sweet crude imports (35 degrees API or higher and sulfur under 0.5 percent) to the Gulf Coast in February 2013 (the latest data available) running at 80,000 bbl/d, and total U.S. light sweet crude imports at only 500,000 bbl/d, the opportunity for like-for-like displacement of light sweet imports is running out (Figure 3). If imports of light, higher-sulfur crude oil are also replaced by domestic light production, an additional 440,000 bbl/d of imports could be displaced. Future Options There are market reasons that make it attractive to both import foreign-produced crude oil and export domestically produced crude oil in order to maximize the value of crude production and refining capabilities. For example, the United Kingdom is a net crude oil importer, but is also an exporter of Brent crude. While a change in export policy is one option, some combination of the following outcomes could occur in a hypothetical situation with high production growth of domestic light tight oil and no changes in current export licensing policies: As television announcers used to say, "Stay tuned." Gasoline and diesel fuel prices down for a ninth consecutive week The national average diesel fuel price decreased four cents to $3.85 per gallon, 22 cents lower than last year at this time. The largest decrease came on the Gulf Coast, where the price decreased five cents to $3.76 per gallon. The West Coast price is $3.95 per gallon, the East Coast price is $3.89 per gallon, and the Rocky Mountain price is $3.81 per gallon, all down four cents from last week. Declining three cents, the Midwest price is $3.84 per gallon. Propane inventories gain Text from the previous editions of This Week In Petroleum is accessible through a link at the top right-hand corner of this page. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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