The real cost of Canadian crude: A look at US landed costs for foreign oil imports
It's no secret that over 98% of Canada's crude oil exports are destined for the US. But it's a common misconception that US customers take advantage of cheap Canadian crude simply because Canadian producers have no other export market.
Every month, the US Energy Information Administration (EIA) provides a glimpse into what US refineries actually pay for their oil - both domestic and foreign.
There are two prices that matter - FOB at the port of sale and landed costs.
FOB is free-on-board or simply the sale price at the port of export excluding transportation and insurance costs. Oil prices quoted on the evening news are priced out of a specific port of sale. For West Texas Intermediate (WTI), that's the price at Cushing, Oklahoma. Brent crude is priced out of the UK. Western Canadian Select (WCS) is priced out of Hardisty, Alberta.
But that doesn't include the cost of transportation. The more relevant price for a barrel of oil is the landed cost, which includes transportation and insurance. A higher transportation cost translate into a higher landed price for a barrel of crude.
Here's what the US actually payed for foreign oil imports during the month of June, delivered to the customer:
Landed Costs for US foreign oil imports (June 2016)
Canadian Bow River is less sour and slightly lighter than WCS. Bow River is one of the least expensive imports into the US, even though it is slightly better quality than Ecuadorian crude oil streams, which can earn a premium of up to US$5/bbl.
Mexican Maya crude is the most similar in quality to WCS. At the port of discharge (FOB) Mayan crude presently sells a premium of about US$9/bbl to WCS. However, when factoring the cost of transportation, Mayan crude is actually US$2/bbl cheaper than WCS. That US$11 difference reflects the much higher cost of transportation for Canadian crude.
When looking at a basket price by country, Canada isn't actually the cheapest. At least not anymore.
In June 2016, the average landed cost for Canadian crude was US$42.42/bbl, about US$2/bbl more than the average import from Venezuela. In fact, Venezuelan crude has been the cheapest US oil import for the past year.
But that wasn't always the case. During the haydays of $100 oil, Canadian oil was actually the cheapest oil imported into the US. In fact, almost US$10/bbl cheaper than oil imported from Mexico or Venezuela.
Perhaps most surprising is the price US refineries pay for domestic and foreign oil feedstock. In June, the average price paid for a barrel of domestic oil was US$45, delivered to the refinery's door. Foreign oil imports were actually significantly cheaper, at just over US$40 per barrel.
The reason? As production grows and demand stagnates, many state-owned oil companies, including Venezuela, have offered price discounts in order to maintain market share. As heavy oil production in Canada and around the world continues to grow, the landscape will become more competitive.
Much like Canada, the US also has infrastructure bottlenecks when it comes to oil transportation by land. Production out of North Dakota is largely land-locked, and the country has relied heavily on crude-by-rail to reach markets in the West Coast. Major refineries hubs, such as the in the Gulf Coast, can get foreign oil delivered for less than US$1/bbl, making crude imports by tanker much cheaper than domestic or Canadian supply.