The Oil and the Glory
Are U.S. oil companies up to the task in this itty-bitty town?
We wish all Libyans the right to choose their leader freely, but do we want to pay higher oil and gasoline prices as a cost of our empathy? Decidedly no. Hence, our interest in the Libyan dividend — a plunge in oil prices if Col. Muammar al-Qaddafi finally falls. As for Saudi Arabia, it would ...
We wish all Libyans the right to choose their leader freely, but do we want to pay higher oil and gasoline prices as a cost of our empathy? Decidedly no. Hence, our interest in the Libyan dividend — a plunge in oil prices if Col. Muammar al-Qaddafi finally falls. As for Saudi Arabia, it would appreciate less pressure to save the world. So far, although rebels are rummaging through Qaddafi’s compound this evening and Libyans are dancing in the streets, prices have risen.
Yet, that isn’t exceedingly aggravating — no one in the end except the Libyans themselves can restore their 1.2 million barrels of crude exports. What is truly vexing is that, while we are transfixed on Libya, U.S. companies far from any war zone — the pioneers of the global oil industry 140 years ago — have failed to begin building a simple pipeline from Oklahoma to Texas that would help as much as Libya to stabilize oil prices at least in the United States.
We are speaking of Cushing, Oklahoma, a pin-speck town with an outsized impact on global oil prices because of its singular business — the storage of oil. Cushing currently can store 46 million barrels of oil, or well over double the daily volume consumed by the entire nation. For the last three decades, it has been the pricing point for West Texas Intermediate, one of the world’s two main benchmark grades of crude oil. When you hear "oil prices went up today," the chances are the person is talking about WTI.
The trouble is that, for at least four years, a lot more oil has surged into Cushing from various oil fields around the country and Canada than has gone out — there are insufficient pipelines from Cushing to Texas and Louisiana, which alone can process the heavier oils of North Dakota (pictured above) and Alberta that flow into those tanks. "It has to go south because there is nowhere else for it to go," Trisha Curtis, an analyst at the Energy Policy Research Foundation in Washington, told me this morning.
So the tanks are nearly full, and though the companies owning them plan to build more, that arguably exacerbates the current problem, which is that producers can’t easily get their oil to market.
I’m accustomed to this happening in Kazakhstan and Turkmenistan, whose landlocked status is enforced by Russia. But what’s the excuse in Oklahoma? If you needed any further signal of the mess, look at the pricing signal — under today’s closing prices, WTI is about $24 cheaper per barrel than Brent.
Companies are sort of responding. Four companies have announced plans to build pipelines out of Cushing and ease the glut. Yet none has solidly committed (though to be fair one of them — TransCanada — cannot proceed until the Obama administration decides whether Alberta oil sands can be shipped across the Canadian border at higher volumes).
Central Asians do better than this. In 2006, Turkmenistan and China decided to build a 1,100-mile natural gas pipeline connecting the two countries, and a little over three years later, it was complete and shipping gas. Yet, four years after the Cushing problem became clear, there is nothing — and won’t be until the end of next year and probably much longer. Futures markets currently are betting than an $18 spread with Brent — and hence the lack of a pipeline from Cushing — will persist through the end of 2012.
This is a complicated matter — this week, a fifth company, Enterprise Products Partners, canceled pipeline plans when it said it couldn’t muster enough customer interest in the line. Do the producers prefer to have their oil volumes bottled up in Cushing? One possibility is that they do, at least for limited periods of time — there is a trading premium to be earned by pledging volumes to the futures market at times of "contango," when traders place greater value on oil sold at a later date than they do today.
But that is taking place mostly on the margin — lots of the producers do want to sell their oil fast. Now we see that railroads may eclipse these pipeline plans. Rail shipments of crude oil from North Dakota are surging, and they could do the same for the Alberta oil sands, writes Reuters’ Joshua Schneyer. This is even though railroads currently charge $12 a barrel for shipments from North Dakota to refineries in Louisiana, much higher than pipeline rates.
One ends up less empathetic regarding the global politics that oil companies say complicate their work around the world. Sometimes the complexity appears to be of their own making.