For months, the price difference between “West Texas Intermediate” and Brent oil from the North Sea has been huge – pretty consistenly around $26 a barrel. The oil is not identical but fairly similar (unlike Venezuelan oil which is about as thick as tar).
So what is the problem and is there an opportunity there? The root of the problem is Canada. Cushing became the benchmark price because it was where oil used to be produced. Oil would be shipped outward to Chicago, Canada, and Houston.
The problem is now Canada is producing large amounts of oil and they have reversed a pipeline to carry oil to Cushing – but Cushing is a small place in the middle of nowhere. The tanks are full and there isn’t enough outbound capacity to send the oil anywhere.
With a glut in Oklahoma, that depresses the “benchmark” price – to the point the Saudis declared they no longer will sell their oil based in US prices, but based on North Sea oil.
So pretend you run a refinery in Houston and you have the choice of buying Cushing Oil from Canada @ $85 a barrel or Saudi oil at $121 a barrel (almost $1 a gallon cheaper? The answer is you can’t get there from here. Several companies want to build a new pipeline, but they are scared of the US government interfering for political reasons, and concern that some day Canada might lose interest in selling oil to Texas.
http://www.ft.com/intl/cms/s/0/72f4192c-d3ac-11e0-bc6b-00144feab49a.html#axzz1X9nqXzOW
Even if it is built, 2013 is the earliest it could be running.
So what are your options?
Truck? – Cushing is about half way between Tulsa (on the East) and Oklahom City. The nearest interstate highway is 15 miles away. According to Google Maps, the trip from Cushing to Houston is about 511 miles, and takes about 9 hours. Your truck is going to be returning empty. So a driver going back and forth is maybe going to be about to do 4 trips a week. The cost to ship crude by truck is a bit over $2 a mile – so each round trip for the truck costs around $2,500. A truck can hold about 200 barrels of oil – so that option costs about $12 a barrel – except there aren’t 1000s of idle tanker trucks sitting around. Canada is sending about a million barrels a day, which would mean you would need 5000 trucks a day making the round trip.
Barge? – Sorry, Cushman is nowhere near a river
Train? – Sorry – the nearest rail line is 35 miles away.
Tulsa has significant refining capacity and you can run trucks back and forth – but Tulsa is not on the main finished products (gasoline / Jet fuel) pipelines that are in Houston – so once you make it into gasoline, you still have to move it somewhere that can use it.
Rather similar to Wyatt Oil and Taggart Transcontinental, eh?
Maybe someone should build a railroad.
This is the same problem with ethanol – the places ethanol is produced are nowhere near the existing refineries, and pipelines used for regular oil can’t transport ethanol – it’s too corrosive. So it has to end up being trucked or by using trains (with not enough specialized cars available, and people reluctant to build them since ethanol may go away in a year or two)…. so moving ethanol long distance by truck ends up consuming a large portion of the energy that theoretically ethanol “saves”.
To digress for a moment, that’s one of the problems I had with the book. Part of it was the book was written 60 years ago, but part of it is Ayn Rand not understanding railroads. When carrying bulk cargo like oil products, speed is not all that important. Passenger travel and bulk cargo are two different businesses. When transporting dangerous goods, safety and fuel efficiency are more important. Pipelines only move oil products 3 to 8 miles an hour – it takes three weeks to get from the Gulf Coast to New England – but it is done with extreme energy efficiency
http://www.pipeline101.com/reports/Notes.pdf
(Excellent article, which validates the calculations I guestimated yesterday)
The growth of transcontinental container traffic has created a middle ground in the past 20 years or so – getting containers from Asia to Europe, crossing the US at 70 mph – but that’s not hazardous cargo for the most part – just iPads and Toyotas.
Interesting you mention, that someone should build a railroad. Well they did, actually two use to go through Cushing, OK. M.K.T, or Missouri,Kansas,Texas (The Katy) and a AT&SF branch (Santa Fe).
But the wholesale mega mergers needing cash, leading to abandonment of so called marginal lines, to raise that cash has left many area with inadequate transportation opportunities. Hmmm, shortsightedness ? I don’t know, maybe they couldn’t have forseen such a thing going on in Cushing? The U.S. is really in between a rock and hard place these days.
You can see the old right of way in Google satellite, M.K.T runs southwest to Northeast, from Oklahoma city, through Cushing to Bartlesville OK and points north.
(Does that town, Bartlesville, OK. ring a bell) ? anyone?
Yes, it is headquarters to Conoco Phillipps (66).
I guess U.P. didn’t need a M.K.T line that ended in Oklahoma City, so they abandoned the whole thing. AT&SF eventually merged with Burlington Northern that had the SLSF(Frisco) line south of Cushing, that ran close to perpendicular, to the MKT, so they probably didn’t need a small branch.
No short line is listed in my Handy Rand McNally Railroad Atlas, so they are all gone.
Good luck on re-laying the rails down again!
Bummer
I worked for Phillips for a year in Bartlesville (1980/81). I could bore you with all my Bartlesville stories. It was an interesting year. The highlight was probably eating buffalo at Woolaroc at the end of the project. Our group’s subsystem was the only one that made it to production before they abandoned trying to computerize their record keeping
AT&F – cue the music – is the “Atchison Topeka and the Santa Fe”. Thanks to Parrot – we know there were railroads. Railroads are dying due to infrastructure cost – expensive rights of way, maintenance, unions and also from overregulation not unlike any other private concern.
They still play a key role in freight transport – they carry the sea vans, raw materials and chemicals in bulk around the nation. The RR doesn’t have the one thing a 777 or 787 has – immediate gratification. Not sure where the RR goes in the future, I would love to see a resurgence.
“Several companies want to build a new pipeline, but they are scared of the US government interfering for political reasons…”
Multiply that concern by about 10 million similar business decisions and you begin to see the size of the root cause of the problem with the U.S. economy.
Oh, come on, now. The US government has tens of thousands of, ah, agents, in the field, all dedicated helping businesses. Just look how they are giving a boost to Gibson Guitars, for example. So, let your hearts be at ease, my good Prol friends. All is well. May Mother Gaea smile sweetly upon us.
Gibson’s CEO is a Republican and his shop is non-union. All guitar manufacturers use rosewood from the same countries and the 2008 legislation is beyond obtuse. I suspect the Justice Dept is dispensing a little partisan “elbow” because it can. Thanks for the reminder Piquerist!
I guess this turns on what the meaning of the word “Justice” is.