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“Crack Spread” and Refineries Choking US Shale Boom

US demand for oil is down, and thanks to fracking, domestic supply is up. Yet in a bizarre reversal of supply and demand imports of Middle Eastern oil are at a nine year high and gas prices are spiking. Who’s to blame? Our refineries. The Financial Times reports:

For the first time since 2003, Saudi imports accounted for more than 15 per cent of total US oil imports. The Gulf as a whole accounted for more than 25 per cent, a nine-year high. […]

Oil produced in shale fields like the Bakken in North Dakota and the Eagle Ford in Texas is of a light high-quality variety. But Gulf oil is still vital for the US because many US refineries are set up to process heavier crude oils. So while imports of light crudes from countries such as Nigeria have fallen dramatically, demand for Gulf crudes has not.

In addition to lowering our dependence on foreign oil, an increase in domestic oil supply should push the price of gas down. Yet gas prices have risen an average of 45 cents this year to about $3.75 per gallon, despite the relative stability of global oil prices.

Once again, refineries are to blame. The price difference between crude oil and its refined products—like gasoline—is called the “crack spread.” For gasoline, this spread has widened in 2013, suggesting that America doesn’t suffer from a lack of oil but from a lack of refineries to process that oil into gasoline. And indeed, the Energy Information Administration estimates that planned and unplanned maintenance at many US refineries has decreased gross inputs by 9 percent so far this year.

At the moment, most of our energy problems stem from the fact that our energy infrastructure hasn’t kept pace with the new energy realities. Our refineries can’t handle the high-quality shale oil now being produced in the United States, propping up demand for foreign oil despite abundance at home. And even if we had better refineries, we don’t have enough pipelines running from the Midwest, where much of this shale oil is coming from.

Our country needs smart energy policy to ensure that the shale boom doesn’t go bust. Our current infrastructure badly needs to be modernized to ensure we can make the most of our new abundance.

[Refinery photo courtesy of Shutterstock]

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