Monday, September 21, 2015

Why the West Coast’s gas prices are so high and who is to blame


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!  

6 comments:

  1. Well presented summary, but for so many post modern Eco greenie types, it will be classified as "pesky facts" and quickly ignored because it does not support their guilt driven quest for environmental purity.

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  2. This is a really good example of people (environmentalists) not thinking things through (the law of unintended consequences). By restricting both refining and transport, the cost of fuel had to increase. To blame the "greedy oil companies" for a consequence that really is a direct consequence of the environmentalist agenda seems childish.

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  3. An interesting analysis, and some good links there. However, there was little to support your point that it was a "bad political climate that scared all but one of the local refineries out of the market". Having worked at both Ioco and Shellburn, I always understood their conversion to storage terminal had to do more with an industry-wide trend towards terminal consolidation than began in the 80s with the progressive deregulation of the industry. Not sure if you could clarify, because it seems important to the argument of who the "we" is in the statement "we on the Canadian West Coast have allowed our refining capacity to wither and die on the vine".

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