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Thursday, October 8, 2015

Idle Chatter; Commentary In Response To A Reader's Question -- October 8, 2015

A reader asks in a comment to an earlier post:
Why do we allow this situation to continue, where US producers are being forced to curtail producing while we are importing very large quantities of crude oil? Would it not benefit our economy to tax imports and if necessary, subsidize domestic oil. I can see a significant reduction in the trade deficit in conjunction with a boost to the economy. What am I missing?
My opinion as I would express them if I were having coffee at Cashwise in Williston.

There are at least two questions being asked. The easy one first: why not, if necessary, subsidize domestic oil industry? Politically it can't happen, especially under this administration. As recently as yesterday President Obama suggested eliminating "subsidies" already in place for the domestic oil and gas industry and "using" that money for intermittent energy (wind and solar). Even under the most conservative administration, subsidizing the domestic oil and gas industry would be the wrong way to go. Taking away some of the regulatory obstacles would be a lot better. Free market capitalism will sort this all out. Low prices have made the industry much more efficient. Some (maybe many) oil and gas companies will not survive but the overall US oil and gas industry will do just fine, over time.

The second question has to do with imports. RBN Energy and others have addressed this very, very well. US refineries were optimized for heavy oil back in the 90's or before, back when US production was "dead" and no suggestion that it was every going to come back. Most of the oil being imported then was heavy oil. Western Canadian oil was also heavy oil and that's why the Keystone was so important -- to continue bringing heavy oil to the refineries along the Gulf coast that were optimized for heavy oil.

Then the perfect storm: the frackers cracked the code on lifting tight US oil; unfortunately it was all light oil and not what the US refiners (except some on the East Coast) wanted or could use. These refiners were holding out for the Keystone to bring heavy Canadian oil; it was way too expensive (billions of dollars) to retro-fit all those refineries to optimize them for light "shale" oil. Those refineries are still optimized for heavy oil -- which US oil is not.

While all the haggling over the Keystone was going on, the refiners jerry-rigged their operations so that with a "mix" of heavy oil and light oil they could make things "just barely" work.

What the US really needs is more imported heavy oil, and that's what is being imported for the most part. Rather than worry about exporting our crude oil in the short time (politically not going to happen), efforts would be better spent to "trade" our light oil for overseas heavy oil (from Venezuela, example). Obviously Venezuela doesn't need our light oil but the global market could come up with a system where trade-offs were made [Venezuela heavy oil to the US; US light oil to Europe or Asia.]

A significant amount of imported Saudi oil is going to the refinery that Saudi Aramco owns along the US Gulf Coast. That, I doubt, will ever stop as long as Saudi has ownership in that refinery.

The one area that is of concern -- and part of your question: recently US refineries on the east coast specifically said they were not going to use any more Bakken light oil (for the time being) because the light oil they were getting from African west coast was less expensive. In a perfect world, the US could have stepped in and targeted West African operators with higher tariffs to protect the Bakken, but trade wars tend not to work out very well.

There is much more that could be written but that's at least a start.

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