Early in my blogging career I wrote a blog piece discussing
factors that affect gasoline and diesel prices on the West Coast. The post was
called A
Primer: Why Cheap Oil Doesn't Mean Cheap Gasoline or Diesel and dealt
mostly with how gasoline is created in refineries. Well, the topic has come up
again and once again we have people complaining about gasoline and diesel
prices on the West Coast in a world of low oil prices. Most recently the
National Observer had a post of the subject “Canadians
get ripped off at the pumps” produced by a local economist Robyn Allan. Having read that article I
suppose it is about time I updated my earlier post and addressed some of the
obvious shortcomings in Ms. Allan’s piece in the Observer.
The first thing you need to know to understand
gasoline prices on the West Coast is that it is all about supply and demand and
has very little to do with the price of oil. The reason for this is simple: it
is not oil that you put in your gas tank; it is gasoline and diesel, both of
which are refined products. In my earlier post I give a description of how we
convert oil into gasoline and diesel and pointed out that there is a limit to how
much gasoline and diesel can be generated from a barrel of oil. This is especially
problematic with respect to diesel fuel since the component of the crude oil
mixture used to generate diesel fuel is also the same one used to make kerosene
and fuel oils (for household heating). The diesel market is, thus, heavily
affected by the current and future market for fuel oil (especially in central
and eastern Canada where fuel oil is heavily used for home heating).
As I note above we can’t use crude oil in our fuel tanks,
we need to use refined petroleum products and we all know where refined
petroleum products come from: refineries. So it is not just the amount of oil
on the market that defines the price of gasoline but the ability of the
refineries to convert that oil into useful things like gasoline and diesel. That
is not all, however; once we have refined the oil into gasoline we still have
to transport it to market. All the refined gasoline in the world does you no
good if it is stuck on the East side of the Rockies. These are the portions of
the story where Ms. Allan falls off the rails in her analysis in the National
Observer. In her piece she pretty much ignores the two critical bottlenecks in
the progression from oil in the ground to gasoline in your tank: refinery
capacity and transportation capacity. Today I am going to deal with refining
capacity.
As anyone who
follows the oil industry knows, we on the Canadian West Coast have allowed our
refining capacity to wither and die on the vine. Historically, there were
several oil refineries on the West Coast including the Chevron
refinery (still open), the Imperial
Oil Ioco refinery and the
Shell Refinery. Thanks to regulatory hurdles and market forces we are now
down to a single refinery (Chevron) which is able to handle about 57,000 barrels/day
(b/d) of oil. To put that number into perspective, the Chevron refinery only supplies
about 25%
of B.C.’s commercial fuel supply and 40% of YVR’s jet fuel needs. As a
consequence we import a LOT of fuel from refineries in Alberta (mostly around
Edmonton). According to Natural Resources Canada, we import almost 60% of our petroleum
product needs via pipeline and gasoline tanker cars (by rail) from Alberta.
Unfortunately, even that is not enough and so we are also dependent on the big
refineries in the Puget Sound for things like aviation fuel (from Cherry Point)
and additional volume
when the prairie market gets too tight. Because that additional fuel is bought on
an irregular schedule it is subject to the whims of supply and demand. This
makes US supplies a critical consideration in any gasoline price discussion in
BC.
The United States has broken their petroleum market up
into five Petroleum Administration of Defense Districts (PADDs). This was
originally done
during the Second World War to ensure energy supplies but is still in
effect to this day. The West Coast of the US, including California, Oregon and
Washington, make up PADD V. PADD V is a rather unusual district because of its
geography (it is mostly bordered on the east by mountains). Unlike the other districts,
which are linked internally with lots of pipelines and combined capacity; PADD
V is pretty much
stuck on its lonesome and has to be self-sufficient. There are some minor
cross-PADD connections but mostly when something goes wrong in PADD V it hits
the entire region. Well this year has
been a tough one for PADD V. In February, a major fire shut down the Torrence refinery
in California. Torrence is the third largest refinery in California and
supplies about 10% of California’s gasoline supply (remember the California gasoline
market is essentially equivalent to the entire Canadian gasoline market). The
loss of Torrence meant that all of the other refineries in PADD V had to make
up the difference. All of a sudden the Puget Sound didn’t have an excess of
fuel to sell to British Columbia as it was being sold in California.
In addition to the Torrence issue, the American mid-west
was also having a bad time. For most of August the BP
Whiting Refinery in Indiana was also shut down. This left a huge crunch in
the market in the prairies as mid-west suppliers were offering top dollar for
gasoline from Alberta. This left BC in a pickle. Alberta didn’t have any cheap
gasoline because it was all going to fill a need in the US mid-west and PADD V
didn’t have any cheap gasoline because of the fire in Torrence and another
disruption in April. We were the
equivalent of the lonely traveler wandering into town, during a nasty storm, in
the middle of convention season and demanding a room. Without a reservation (firm,
regular, fixed-rate contracts for gasoline) and without any alternatives (since
Edmonton couldn’t help us) we ended up having to pay top dollar for our
gasoline. Thus we had $1.20+ gasoline in a world where the oil price was below
$60/bbl.
Of course the piece in the National Observer completely
ignored these conditions. In the Observer it was all the greedy oil companies’
faults that we could not get cheap gas. No mention was made to the red tape,
fuel access restrictions (pipeline capacity) and bad political climate that
scared all but one of the local refineries out of the market. No mention was
made of the work to block expansion of pipelines that would have allowed more
refined gasoline to move east-west across the country. No mention is made about
protestors that locked
down the Chevron refinery further curtailing supply.
The truth is that we as Canadians have brought this
down upon ourselves. We made it uncomfortable for refineries to exist in BC by
limiting supply of crude (by fighting pipelines) and adding red tape. In
doing so, we have made ourselves utterly dependent on refineries in Alberta and
the Puget Sound to keep our cars and buses running. Like so many other
environmental fields (see my post on rare
earth metals) we have off-loaded all the environmental costs to other
jurisdictions and lived like environmental free-loaders letting others take the
risks while we reap the rewards. Well now it is time for our chickens to come
home to roost. We are not getting “ripped off at the pump” as Ms. Allan would claim;
rather we are getting a well-justified comeuppance. We made a politically
expedient decision to limit the production and transportation of a critical
component of our economy (refined fuels) and so now have to pay the price for
that decision when regional supplies are low. The ironic part of all this is
that from an environmental point-of-view this is a good thing. By making the
fuel more expensive we will force people to use less of it. This is supposed to
be a good thing. Why is that ironic? Well because a media outlet like the
Observer is the one complaining most loudly about the problem. That the
Observer would turn around and complain that the outcome they have been working
towards has come to pass? That is just rich!