TPT November 2013

Global Marketplace

Western Canada has been cheaper for years. A barrel of West Canada Select is $21 cheaper than a barrel of WTI, twice the discount that the Mexican crude offers.” Valero, the biggest refiner in the US, started its own oil swap with Canada this year, sending at least two shipments of west Texas light crude to its refinery in Quebec. This facility is set up to process lighter oil rather than the heavier grades that Valero’s Texas refiners are now capable of handling. Said Valero spokesman Bill Day, “We would like to increase heavier supplies from Canada and continue sending Texas crude up there.” [Mr Philips’s translation: Valero wants the Keystone XL pipeline to be approved.] › In mid-August, as the Obama administration inched closer to a decision on the pipeline expansion that would transport heavy crude from the Canadian province of Alberta through the states of Montana, South Dakota, Nebraska, Kansas, Oklahoma and Texas, costly cleanup efforts in two US communities devastated by oil spills highlighted potential hazards. Even if Keystone XL does win approval, fluctuating oil prices make it unclear that the US refiners will ever recover their collective investment in heavy oil processing. “They’ll never make that money back,” Fadel Gheit, an energy analyst at Oppenheimer, told Bloomberg Businessweek . “It’s gone.” Automotive In a banner year for car and truck sales in the US, parts suppliers can be overwhelmed by the faster pace With their sales likely to reach 16 million for 2013, American automakers are poised to send more new cars and trucks into the market next year than shoppers have seen in about a decade. But, writing from Detroit, Free Press business writer Alisa Priddle sounded a cautionary note: it takes only one missing part to delay or stop production. Confident of selling more cars if it could make more, Ford Motor Co is squeezing extra production from all of its domestic plants. Jim Tetreault, Ford vice-president of North American manufacturing, told Ms Priddle that the company increased the line rate at almost every plant this year, even after a 3 per cent increase in capacity in 2012. On the supply side, a May survey of its members by the Original Equipment Suppliers Assn (OESA) found median capacity use of 75 per cent. And Federal Reserve Board data showed auto suppliers operating at 79 per cent capacity in June, further suggesting a comfort zone. The problem is, according to the Free Press , that “about 25 per cent of suppliers are running close to 100 per cent capacity, leaving no room for hiccups or error.” Sectors experiencing the most shortages are powertrain and electronics, especially highly machined components. Some suppliers can tap underused plants in another region – Europe, say – to meet demand in North America. But Staci Kroon, president of Eaton Automotive (Beachwood, Ohio), pointed out that this expedient raises transportation costs and can disrupt JIT (just-in-time) delivery schedules. (“Auto Suppliers Scramble to Keep Lines Running,” 11 August). With automakers set to launch 41 new vehicles in the US next year, up from 17 this year, Neil DeKoker, CEO of OESA, said that 75-80 per cent of

associate editor for Bloomberg Businessweek in New York, pronounced it “some of the best oil on earth.” Not the least of the light oil’s attributes is that it is readily refined into gasoline, and this has confounded American refiners who responded promptly when heavy mining equipment in western Canada began teasing bitumen out of tons of dirt and sand. Hard to extract, this heavy crude is also hard to refine. US refiners invested some $20bn in new equipment designed to process thicker types of oil. The plentiful light oil coming out of North Dakota and west Texas changed the picture in another way: it quickly brought down the price of domestic crude. Starting in 2011, West Texas Intermediate (WTI) – the benchmark for US light, sweet crude – began trading at a discount to Brent, its international equivalent. From March 2011 to March 2013, a barrel of WTI was, on average, about $17 cheaper than a barrel of Brent. But, as reported by Mr Philips, by midsummer the price of WTI had surged nearly 25 per cent, rising from $86 a barrel in April to above $107 on 1 August. With the discount now under $2, all that new US crude was still of high quality but no longer cheap. Alert to a chance to finally recoup their investment, domestic refiners began casting about for cheap heavy oil. An attractive source lay near at hand. Since the end of June, Mexican heavy crude had traded at a discount to WTI. As of 2 August, a barrel of Mexican Mayan crude was $8 cheaper than a barrel of WTI. US imports of Mexican crude reflected that discount, rising from an all-time low set in March. As it happens, Adam Sieminski, who heads the US Energy Information Administration (EIA), had been talking publicly for more than a year about a swap of US light, sweet crude for heavy, sour oil. “When I first took over I said we should start thinking about [it],” he said in a recent interview. “The first place to look should be Mexico.” mexico a stand - in for C anada ? The Mexican option may seem attractive, but Bloomberg ’s Mr Philips is not persuaded. (“Swapping US Crude for Mexico’s Heavy Oil Won’t Really Work,” 6 August). Here, briefly, are his objections: • Mexico uses heavy oil to generate electricity. The EIA chief reasons that sending more light crude to Mexico could help the country make the transition to using cheap, US natural gas in its power plants. While the amount of natural gas the US exports to Mexico has tripled in the last three years, swapping it for more expensive lighter crude is improbable; • Mexico’s oil production is falling. President Enrique Peña Nieto has proposed breaking the state-owned monopoly on oil production and allowing private companies to invest in oil and gas operations. That could spur Mexican production, but real gains are probably years away; • The US has been so successful at cutting oil imports – reducing them by more than a million barrels per day over the 12 months through July 2013 – that its stockpiles are lower than normal. Given tight supplies, said Sam Margolin, an energy analyst at Cowen and Company, “A swap with Mexico just doesn’t make sense right now. Plus, I’m not sure how it really helps Mexico.” › In Mr Philips’s view, what US refiners “really want” is Canada’s heavy crude. He wrote, “While Mexican oil has only just started trading at a discount to WTI, heavy oil from

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November 2013

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