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The Seaway and Keystone XL pipelines: Plenty of oil in the bucket, but the spigot is too small to get it to market

"Red Oil Barrels" by photographer ezioman, Flickr, Creative Commons License
Photo by ezioman

NYMEX oil prices closed at nearly $100 a barrel today based in part on news that an old pipeline could help solve a major problem for the U.S. oil industry.  For quite some time high quality  U.S. Crude, which is represented on the NYMEX as WTI, or "West Texas Intermediary" has been selling for as much as $20 or $30 less per barrel that Brent Crude of equal quality from the North Sea.

A glut of oil the U.S.A.

For more than a year now there has been a glut of domestic oil at the cushing Terminal in Oklahoma. Pipeline infrastructure problems and new supplies of oil from Canadian Tar Sands have pushed more oil into Cushing than the industry had capacity to ship.

It's the same old story: The bucket got bigger but the spigot was too small to handle the increased flow.  One solution is the hotly contested KeystoneXL pipeline, which is loathed by environmentalists and has been (perhaps permanently) delayed. This has kept oil prices artificially low in comparison to Brent Crude. After all, why drill it when you can't ship it? 

New pipeline could ship 17 million gallons of oil a day

The Seaway crude pipeline currently delivers WTI from the Gulf Coast to the Midwest. The operators announced on Tuesday that they would try to reverse the flow in the pipeline so that it moves landlocked Midwest crude down to oil hungry refineries in the Gulf of Mexico, pending approval by regulators.  The reversed pipeline could potentially transport 400,000 barrels a day by Summer, 2012.  For the record, that's a lof oil - in gallons it is equal to 17 million gallons of oil every 24 hours.

The news sent Brent Crude down about $3 a barrel since Monday, and sent NYMEX WTI  screaming toward the $100 a barrel mark, closing at $99.10 a barrel this afternoon.

The effect on domestic crude prices may be temporary, but in an inflationary market where oil is worth more than money, the rapidly growing supply of North American crude from hydrofracturing and steam extraction is going to find a way to world markets somehow. This makes the the long-term outlook for American crude oil supplies bullish. This doesn't mean oil will be cheaper, but it does mean that a major plumbing problem for the oil industry could help beef up exports.

 In fact, the long term outlook for North America may well be that it moves from being an oil importer, to becoming a net oil exporter.

Charles Langley is a Public Advocate for UCAN, the Utility Consumers' Action Network. He can be reached at (619) 610-9006.