Wednesday, November 23, 2011

Reversing an Oil Pipeline Pushes Up Oil Prices and the U. S. is Exporting Gasoline

How Does Any of This Make Sense?

The Dismal Political Economist prides himself on his knowledge of economics and finance, hence the name, but the current forces in the oil market have left him puzzled.  It starts with this story about the sale of an oil pipeline and the decision to reverse the direction of oil flowing in that pipeline.

The sale of an oil pipeline running from Oklahoma to Texas upended U.S. energy markets . . . sending the price of crude surging above $100 a barrel as America copes with the promise and pitfalls of its new energy boom.

How can this be.  Well it turns out the new owners of the pipeline plan to reverse the flow of oil in the pipeline.  The oil currently flows from south to north.  Soon it will flow north to south, taking oil from the big new finds in the midwest to the south where it will be refined into gasoline and exported.  Exported?

Over the past two years, the U.S. has started producing so much oil that existing pipelines have been unable to move it to refineries. That has led to a glut of oil in the center of the country, keeping the price of American crude far below that of petroleum traded overseas.

[CMDOIL_p1]That will change once the pipeline is reversed, a process expected early next year, the pipeline's operator said. Though in the short term the change is unlikely to affect gasoline prices paid by U.S. drivers, it will increase gasoline exports and create jobs, according to industry analysts.

What!!  The United States is exporting gasoline?  How can this be?  Doesn’t the United States buy huge amounts of oil from overseas to support our driving habits.  Don’t Republicans want to drill for oil in some of the most environmentally sensitive lands because the country does not have enough oil?  Why is the U. S. exporting gasoline.

The U.S. requires companies hold a special permit to export oil from the Gulf Coast, but the restriction doesn't apply to gasoline. With a new supply of oil headed to Gulf Coast refineries, exports of gasoline are expected to rise.

Okay that explains why the U.S. oil companies want to export gasoline, but what about the problem that the U. S. does not have enough for our own use.  And just how much gasoline is the U. S. exporting anyway?

U.S. exports of petroleum products have reached 2.6 million barrels a day, double the level of three years ago. Roughly 15% of the gasoline and diesel refined in the U.S. is now exported, according to U.S. Energy Department data.

"The middle of the U.S. should start considering applying for membership in OPEC," said Phil Verleger, an oil economist who runs PK Verleger LLC

So one can see North Dakota joining OPEC, and maybe even voting to shut off the U. S. if the government does things they don’t like. 

It turns out the change may help the U. S. by moving crude oil to where the refining capacity exists.  If so, why is that pushing up the price of oil?  And why is the U. S. exporting any gasoline, much less planning to increase its exports?  Like so many other things he is asked about, The Dismal Political Economist can only answer “We don’t know”.  

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