TPT November 2013

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Global Marketplace
84 November 2013
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 Canada?
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
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