Saturday, March 10, 2012

Canadian and North Dakota Oil Help Explain Why Gas Prices in Midwest Are Lower Than the Coasts

In a recent speech, Obama mocked the "drill, drill, drill" strategy, and called it a "bumper sticker," not a real solution to high prices at the pump.  Well, the drill, drill, drill strategy does seem to be working to keep gasoline prices lower in certain states like Minnesota and Colorado than in the rest of the country, due in part to less expensive Canada's Alberta oil sands and crude oil from North Dakota.  Here are some recent news reports about this:

1. Northern crude oil keeps gasoline prices lower in Minnesota: "As gasoline prices soar on the coasts, less expensive crude oil from Canada and North Dakota is easing the pain for Minnesotans."

2. Colorado gas prices 50 cents cheaper than national average: "Some of the cheapest gas prices in the country routinely are in the Rocky Mountain states. The reason is cheaper crude prices and refinery costs, according to the agency. Refineries get most of their oil from within the Rocky Mountain states or nearby parts of the Midwest or from Canada."

3. Why Is Gas Cheaper In Midwest? Thank Canada: "When you think "foreign oil," the Middle East probably comes to mind. But Canada actually is the No. 1 supplier of foreign oil to the United States. The amount of oil Canada delivers to this country is growing, thanks in large part to the Alberta oil sands."

"Consumers in Colorado, consumers in Illinois, consumers in Minnesota should all be sending thank you notes to the province of Alberta," says oil market analyst Philip Verleger, who lives in Colorado. "We're benefiting from the increased supply in Alberta because it can't make its way to the Gulf Coast."

Bottom Line: Without all of the increased supply of North Dakota crude oil and Alberta tar sands oil, it's likely that gasoline prices would be much higher in the Midwest and Rocky Mountain states. 

Update: See previous CD post on how increased drilling for natural gas has brought prices to the lowest level in a decade.


At 3/10/2012 11:37 AM, Blogger Larry G said...

Just out of curiosity when oil is quoted to be a price per barrel, that price is before the transportation costs, correct?

so.. you'd think that the actual price of a barrel of oil is what had to be paid for the oil PLUS the transport costs.

It would then seem to make sense that the closer you could have oil refined and sold - the cheaper it would be to oil that had to be transported longer distances.

so you'd think that ALL of the Canadian oil would be cheaper sold in the US than pipelining 2500 miles and then putting it on a ship.

so what am I not understanding?

At 3/10/2012 12:01 PM, Blogger Frymaster Speck said...

Here's what you don't understand, Larry G: this is classic academic-playing-at-politics.

The headline (which is mostly what people will get from this article) declares a causal relationship between crude supply and retail prices. And, certainly, there is some connection.

But the actual article uses terms like "due in part" or "likely to be", because the author _KNOWS_ that there are a giant number of reasons that retail prices are higher on the coasts than in the Midwest. Real estate prices and taxes come instantly to mind, but whatever.

The intended take-away is that people can say "this professor wrote an article that says drilling more lowers gas prices", even though this article in no way demonstrates the case. To _ACTUALLY_ make the case, he would need to apply some regression analysis to get the transport costs, the retail costs, the taxes, etc. out of the equation.

In fact, the quote from the second article says "cheapest prices _routinely_ found in Rocky Mountain states". So perhaps it's not these new supplies coming online at all.

The point of the article is not to make the case. The point of the article is to write an article with the headline "Drill, Drill, Drill Lowers Gas Prices in Midwest".


At 3/10/2012 12:06 PM, Blogger Paul said...

"so what am I not understanding?"

That since taking office, Obama has declared 85 percent of our offshore areas off-limits, decreased oil and gas leases in the Rockies by 70 percent, declared an illegal drilling moratorium in the gulf, and cancelled the Keystone XL pipeline. He routinely calls for higher taxes on oil companies that would only drive prices up. He pushed for a cap-and-trade legislation that would make gas prices even higher if he had succeeded. He and his Energy Secretary are both on record calling for higher gas prices. During the 2008 campaign, he openly declared he had a plan to make electricity prices "necessarily skyrocket." He has 10 different federal agencies sniffing around the areas where fracking is occurring. Think they're there to promote it?


Clear anything up for you?

At 3/10/2012 12:09 PM, Blogger Paul said...

"These have been the most difficult three years from a policy standpoint that I've ever seen in my career," said Bruce Vincent, president of Houston-based oil and natural gas producer Swift Energy. "They've done nothing but restrict access and delay permitting."

At 3/10/2012 12:16 PM, Blogger John B. Chilton said...

Price differences across persist across locations only because they can't be arbitraged away. There are transportation bottlenecks that keep the price of gasoline near Canada low. Ironically, from the political perspective, if the Keystone pipeline existed today those price differences would evaporate. The question would then become, is the oil production that has come on line from Canada enough to tame the recent price increases? Modestly would be my guess.

By all means, let's drill. But don't think it will have much effect on the world price of energy.

At 3/10/2012 2:08 PM, Blogger Larry G said...

it would seem that the further you transport the oil - the higher the transportation costs would be.

I assume that the buyer pays the price per barrel FOB at the destination.

At 3/10/2012 4:19 PM, Blogger juandos said...

This comment has been removed by the author.

At 3/10/2012 4:21 PM, Blogger juandos said...

"regressive analysis'?

Why bother flymaster?

Try this YouTube explanation...

At 3/10/2012 5:12 PM, Blogger Paul said...

"it would seem that the further you transport the oil - the higher the transportation costs would be."

And right now alot of that oil is being shipped via Obama pet billionaire's railroad. Would seem to me a pipeline would ultimately be cheaper.

At 3/10/2012 6:01 PM, Blogger Larry G said...

why transport it at all if you can refine it and sell it right where you extract it?

how does that work?

At 3/10/2012 8:40 PM, Blogger crj said...

I think this chart should accompany's this post. Heat Map of US Gas Prices

At 3/11/2012 8:47 AM, Blogger Henry H said...

There is a bottleneck of oil at the refineries in the Midwest, so prices are depressed by oversupply. Once the Seaway pipeline gets reversed to allow oil to flow to the Texas refineries, prices will rise for the next few months to the same as the coast.


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