After my 1700 word rant the other night, I thought I’d tell you the same story with two figures.
Source: EIA Data, Author's Figure
The first figure shows you two things – the difference between crude oil prices in the Midwest US (WTI in PADD 2) and the US Gulf Coast (Brent or LLS in PADD 3) is shown in blue, with the widening Brent-WTI spread as the rising portion on the right. In red, you see the difference in gasoline prices, in $/gallon, scaled on the right axis. Through 2011, averaged weekly, crude oil in the US midwest was $15.75/bbl LESS expensive than on the Gulf Coast, while gasoline was, on average, 11.1c/gallon MORE expensive. The historic depreciation in crude oil in the midwest over the past year actually coincided (correlation, not causation) with higher gasoline prices. The real story, however, is that gasoline differentials do not track local crude differentials.
The second image gives some indication as to why this may be the case – the market for refined products is a national one, and so local refiners and not local consumers are able to profit from the depressed local crude prices. This figure shows the 3:2:1 crack spread, or the difference between the value of a hypothetical refinery output (2/3 of a barrel of gasoline and 1/3 of a barrel of distillate fuel oil) and a barrel of crude.
Source: EIA
This isn’t a matter of collusion or market power, it’s simply a matter of a broad market for refined products not affected in the same way by pipeline shortages and transportation bottlenecks which affect crude oil prices in one region but not another. Since refiners can sell their product in higher priced markets, they won’t sell locally at a discount, and so margins increase. Obviously, over time, gasoline prices track world crude oil prices very closely – they just don’t necessarily track local ones. Think about this before you decide that blocking export pipelines and stranding crude in Canada, which will lead to a discounted Canadian crude oil price, will translate to savings at the pump in Canada.
But the reverse is also true…
By building export pipelines and freeing stranded crude, will not translate into savings at the pump in Canada either…
Right, but no one is arguing that Northern Gateway will lower gas prices. Point is to increase the value we capture from oil production and export.
Understood. I just want to ensure the PR spin does not make a point in promoting the pipeline on a basis of lowering gasoline prices.
I haven’t seen anyone spinning that message.
I get the arguement here but I’m wondering if it says anything about the need for refining capacity in Alberta. The arguement I always here about why its better to export raw crude rather than the products resulting from refining (gasoline, diesel, kerosene, etc) is that its more efficient to build one pipeline to the demand centre for all those products than building many pipelines (or other transport method) for each refined product.
That intuitively makes sense but does it take into account the discount on crude we must accept because of the fragmented crude market? It would be interesting to see a graph like above but with lines added for the other major refined prodcuts.
Great blog by the way
Not necessarily. It says that you could increase potential refining margins in Alberta, and thereby potentially stimulate more refining capacity, by blocking pipelines, but you’d be doing that by forcing a discount on Alberta crude. It would be, effectively, a subsidy to refining by another name. So, you’d dissipate the rents in refining margins and a little bit more employment, and lose on the royalties.
I realize it doesn’t change the underlying point (and not meaning to nitpick), but is the date scale in Figure 1, ranging from May ’92 to May ’95, accurate? I suspect the period covered includes 2011, in accordance with the discussion below the figure. In any event, thanks for this revealing presentation.
Greg, thanks for catching this. I had changed the length of the data series, but didn’t catch the impact on the X-axis scale. I’ve updated the picture to show the whole data set and will re-insert the zoomed-in image later on today.
Hi Andrew thanks for the graphs. However, the point out oul and gas prices. However, if we live in a market driven economy do n’t those who have a resource hold power? Look to the developing countries lack of resources equals poverty. Dors not history dictate countries that have natural resources always give their resources away to buy back finished? What countries are leading world powers that sell reslurces to others to finish the product? Secondly, if you say that value added lacks long term benefit then why does n’t our country lay off everyone and just stop local production and see were the economy goes
Hi Stewart. Not sure I follow. Refining and production are, for the most part, separate activities – they don’t benefit much from integration in the physical sense (oil sands upgrading from mines is a bit of an exception, since the waste heat from the upgrader can feed the extraction plant). The real issue is whether we should be subsidizing refining through discounted resources, to which I answer no. You might say that you’re not proposing that, but you would be if you proposed to limit exports of “raw” product. What history tells us is that petro-economies do poorly when they allow rent-seekers to capture the resource rents – those rent-seekers may be international companies looking to profit at the expense of the locals or they may be locals in one sector looking to profit at the expense of other sectors. A regulation requiring refining before export would be a redistribution policy – it would take rents from those who own the resource and work in the resource extraction industries and transfer them to the people who own and work in the refineries. Maybe that’s a group of people you wish to advantage, but I don’t see why one group would be intrinsically better than the other.
Sorry obiviously some spelling mistakes point local production is what built Canada and the States. Resource exploitation almost wiped out the buffalo the First Nations were not given fair value. They were used as cheap labor. While the traders profited. It is time Albertans took back control of their own resources. Germany is not economically nor is China on selling their goods for others to finish.