When the year began, WTI was only about $8 per barrel below Brent-- a hefty discount for a crude that routinely traded at parity or a slight premium to Brent until a couple of years ago. As of today, however, Brent's advantage is closer to $21/bbl. Nor is this just a US/European difference. Recent settlements for the "swap" between WTI and Louisiana Light Sweet (LLS), a Gulf Coast crude unaffected by the massive bottlenecks in the Midcontinent, were around $22/bbl. And if that doesn't seem like a big enough discount for a transportation disadvantage, consider that similar crudes produced near Midland, TX--another hotspot of the US crude oil resurgence--were recently selling at nearly $10/bbl below WTI.
It's important to note that these price differences are too big to be explained by distinctions in quality. Most of these crude types are quite similar, light and sweet--low in sulfur and relatively easy to refine into valuable products like diesel and gasoline. Instead, the discounts reflect the absence of a low-cost means of delivering much of this production from source to refinery as existing pipeline capacity has been filled or as new production unserved by pipelines emerges. To illustrate the magnitude of this problem, in a recent panel discussion on the future of fuels Frank Verrastro of the Center for Strategic and International Studies indicated that 1.4 million barrels per day of US crude production is currently shipped by rail.
That's a figure that ought to cause opponents of pipelines like the Keystone XL to reflect on the unintended consequences of their success in delaying such projects. It should also warm the hearts of railroad shareholders, since rail freight is much costlier than pipeline tariffs, and the volume in question is nearly double that of US corn ethanol, which also largely moves in railcars. Yet while this benefits railroads and refineries such as PBF's Delaware City plant, which is installing facilities to receive up to 110,000 barrels per day of low-cost crude by rail, it exacts a substantial penalty from those domestic producers who receive well below world prices for their output.
At current price levels, that hasn't impeded the rapid growth of production in places like North Dakota. However, if global oil prices declined significantly, and the discounts between new sources and benchmark Brent didn't compress dramatically, then some of the output that the US is counting on to drive out imports could become uneconomical to produce. Some refiners and Midwestern consumers have gained a temporary advantage from the bottlenecks that are trapping hundreds of thousands of barrels per day of oil in the Midcontinent or forcing it onto railcars. However, they, along with producers, stand to benefit more in the long run from new pipeline capacity that would make today's production more recession-proof, while supporting further development.
Relief is on its way, and at least one project, the reversal of the existing Seaway pipeline, has already started shipping oil. Adding more capacity to transport crude oil from the Plains states and Midcontinent to the major refining centers of the Gulf Coast makes strategic sense and should eventually narrow the price differentials described above. Despite opposition motivated by environmental concerns and organized via social media, it seems likely that many of these pipeline projects will ultimately be built, because their economic, trade and even environmental, health and safety advantages look compelling. But that doesn't mean it will happen overnight, or without a lengthy process of give-and-take with regulators and stakeholders. Until this new infrastructure is in place, whenever someone tells you the price of oil, be sure to ask which oil they have in mind, and where.