Figure 7 shows the growth in product exports to Canada, Mexico, and the rest of Latin America and the Caribbean. In the year 2004, exports to these three markets were roughly comparable: refined product exports to Canada were 133 kbpd; exports to Mexico were 209 kbpd; and exports to the rest of the Western Hemisphere markets were 221 kbpd. By the first half of 2015, exports to Canada had grown to 512 kbpd, and exports to Mexico had grown to 646 kbpd. This is significant growth, but it pales in comparison to exports to other Western Hemisphere markets, which are now receiving approximately 1.48 million barrels per day of refined product from the United States.
A Flood of Crude or Product, Now Receding
Oil, as a liquid, needs to flow, and we have used the concept of “path of least resistance” to explain the movement. The Western Hemisphere has a complex web of oil trade patterns, some of which have evolved over decades according to laws of supply, demand and geography. But the Shale Revolution in the U.S. and the increase in oil sands development in Canada created a flood in the center of North America. If we view the oil as following a riverbed, the course tends to run north and south, with few tributaries managing to meander all the way West to the Pacific Ocean or East to the Atlantic Ocean. The flood caused many changes downstream, some of which came about because of the dam caused by U.S. policies restricting the export of domestic crude. Only a certain volume of oil behind the dam could access the spillway and be taken off, and most of this went to Canada, which is itself a net exporter seeking external markets—chiefly the United States. Pipelines and storage were full. Rail and truck traffic rose. North American crude prices fell relative to the rest of the world. Refineries along the path of the flood ran their units flat out, filling product pipelines and sending a growing flow of product out into the rest of the Western Hemisphere and beyond.
There was a major push to build new transport infrastructure, including the embattled Keystone Pipeline. This line would have eased the passage of both Canadian crudes and U.S. shale play crudes. Now, oil prices have been low for over a year, and they seem destined to remain low in 2016. U.S. and Canadian production are leveling off. The years of wrangling over the Keystone Pipeline were costly and politically divisive, but it is no longer such an important relief valve on the oil river system.
Figure 8 offers a final thought on oil flow. When pipelines—the main river channels—were full, the second option was rail. In 2010, the U.S. shipped 55 kbpd of crude by rail. There was also a small amount of rail trade from Canada to the U.S., and from the U.S. to Canada. The growth rail traffic has been astonishing. In 2014, U.S. crude oil by rail had grown to nearly 868 kbpd. U.S. receipts from Canada by rail had grown to 140 kbpd. Canadian receipts from the U.S. had grown to 35 kbpd. But was 2014 the peak? Based on data for the January to September period of 2015, all three of these flows have ebbed. U.S. crude by rail is now averaging 817 kbpd. U.S. receipts from Canada are now 106 kbpd. And Canadian receipts from the U.S. are a little under 17 kbpd. Although this data series shows only the first three quarters of 2015, there are many reasons to believe that the flood may indeed be ebbing.
Conclusion: The Flood Recedes, but the Rivers Flow
The Americas from north to south have an abundance of petroleum resources, a massive amount of refinery capability, and numerous population and demand centers. Channeling resources to their highest-value uses has created an extensive trade network that we have likened to a river system. The flooding of the North American internal river system caused numerous new flows and adjustments. One way or another, the path of least resistance for U.S. and Canadian crudes has been down the center of the continent, down to the U.S. Gulf Coast. But there, both geography and politics create a barrier. First, oil bound for the rest of the world must board a ship, changing its mode. Second, most domestic crude reaches a dam with only limited spillway, governed by export controls. The overflow crude must be refined. This created new flows of refined product that started as a trickle but now reach virtually every country in the Western Hemisphere.
The market changed immensely during the shale boom, and it is changing now once again in response to low prices. While U.S. and Canadian crude production will not plummet, certainly it will begin to level. In addition, if the restrictions on exports of U.S. crude are relaxed, this will change flows. The export of refined product in some places may fall in favor of crude exports and/or crude swaps.
Whether or not a group favors removing the restrictions on crude exports, all must acknowledge the restrictions for what they are: an artificial barrier to trade. We have likened it to a dam, with a limited spillway over the top. But upstream from it, who knows how many canals, weirs, ponds and the like have been formed over the years? If we contemplate the massive outflow of refined products as an estuary, certainly it is nourishing for some. If we drain it, some will lose that nourishment. Changing an element in our bioregion will change other flows. These diversions to oil’s flow become a political decision. In the political realm, however, nothing happens quickly, so government policy change will not cause an immediate drought or an immediate flood. In the near term, we can expect a gradual increase in crude trade with Canada and Mexico, but probably not an immediate opening of crude trade. If refining in Mexico and other Western Hemisphere markets is expanded, this will reduce the flow of refined products from the U.S. The less expensive resource will flow to where it is needed.
There are many forces at work that may affect the flow. On the crude supply side, the opening of Mexico’s oil industry may revitalize its flagging production. Like tides, the oil business has cycles. At this point in history, the low prices discourage the upwelling of oil from pools in shale plays, oil sands deposits and other unconventional oil reserves. There are more pools of oil available at lower cost, or available because of severe need to produce. Many oil producers, OPEC and non-OPEC, depend on oil revenues and cannot afford to shut in production.
Others, including Iran, hope to expand output. On the other side of the coin, supply may tighten because of war, political unrest or natural disaster. Trade flows may reach an equilibrium, or the tide may turn. The North American flood is receding, but the rationale behind Western Hemisphere oil market integration remains sound, and the rivers will continue to flow.
Dr. Nancy Yamaguchiis an author and petroleum industry expert specializing in the advanced analysis of energy markets. Dr. Yamaguchi is the President of Trans-Energy Research Associates, Inc. focusing on a wide spectrum of fuel related issues such as economics and the environment. She possesses a strong interest in global oil industry, including supply, demand, trading trends, as well as transport, refining, product blending, alternative and reformulated fuels, product quality and price behavior. Dr. Yamaguchi can be reached at [email protected].
