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How American companies profit by exporting Canadian heavy oil

How American companies profit by exporting Canadian heavy oil

In 1973, Arab countries choked off oil supply to Western Countries in response to their support of Israel’s Yom Kippur War. Gasoline prices in the US tripled overnight, causing widespread panic and fuel shortages.  In response to the Arab oil embargo, US President Gerald Ford enacted the Energy Policy and Conservation Act in 1975, forbidding the export of unrefined US crude oil. This put a severe restriction on the mobility of West Texas Intermediate crude oil (WTI) and explains why WTI trades at a discount to seaborne Brent crude, which can move freely to all markets with port access.

But US firm Tethys Partners has found an ingenious workaround. They have a license to export Canadian crude oil from US ports, provided it is not mixed with any US crude. In order to ensure its “purity”, Canadian crude must be transported to a US port by rail, where the crude is loaded into tankers and shipped to overseas markets. 

Ironically, crude oil that is pipelined to the Gulf Coast cannot be exported since pipeline operators will blend many different types of petroleum products and cannot guarantee its country of origin.

“Export of WTI is banned under the US Energy Policy & Conservation Act. But nothing stops the Americans from exporting Western Canada Select, allowing them to benefit from the discounted Canadian prices.”

Bottlenecks in the North American petroleum infrastructure network have widened the spread between world oil prices (i.e., Brent) and North American crude oil. The wider the spread, the more desirable Canadian crude oil becomes, since WTI cannot be exported overseas. European buyers therefore have become very interested in Western Canada Select (WCS) blends, which sells for about $30/barrel less than international Brent crude. The cost of rail and tanker transport is covered by the spread, making WCS highly desirable, leading to higher profit margins for European refiners. 

Although Canada has no such export restrictions, Canadians currently lacks the infrastructure to gets WCS crude oil to port (either to the east or west coast) and therefore do not get world Brent prices for its oil. As long as these infrastructure bottlenecks and restrictions persist, price differentials between the different crude supplies will continue to exist.  Free market capitalism generally prevails and refiners will continue to seek out the less expensive oil supply.

EIA predicting US oil imports could be reduced to zero by 2037

EIA predicting US oil imports could be reduced to zero by 2037

California dreaming

California dreaming