Why US refiners are worried about Canada’s new oil policy

Gasoline prices in the United States have fallen recently, with diesel prices falling to a 900-day low. While this provides temporary relief for consumers, a looming shift in Canada’s oil policy could disrupt the supply chain, particularly for U.S. refiners dependent on heavy crude imports.

Canada’s Emissions Cap Proposal

Prime Minister Justin Trudeau has proposed capping emissions for the oil and gas industry to align Canada’s environmental policies with its climate commitments. This cap is expected to limit production and increase operating costs for Canadian oil producers. A Deloitte report commissioned by Alberta suggests that without a cap, Canadian oil production could continue to rise, but the cap could stall or reduce production, affecting overall supply.

US refining capacity

The US Energy Information Administration (EIA) puts total US oil refining capacity at 18.4 million barrels per day. The US is the world’s largest refiner, and Canadian crude accounted for 24% of total refinery output last year and is critical to US energy security.

US dependence on Canadian crude oil

Canada plays a crucial role in supplying crude oil to the United States, particularly for refineries in the Rocky Mountain and Midwest regions. In fact, many US refineries are specially equipped to process the hard-to-find oil in Canada’s oil sands. Refineries in these specific regions, according to the US Energy Information Administration (EIA), continue to process heavier grades of crude oil, which are becoming less prevalent in other regions due to trend towards lighter crudes processing. That confidence is evident in crude oil import data, where Canada has consistently topped the list of US suppliers, supplying more than 3.8 million barrels per day, according to the data. annual EIA data.

Global sources of heavy crude oil

Apart from Canada, other major suppliers of heavy crude oil include Venezuela, Brazil and Iraq. However, geopolitical and logistical challenges make these sources less reliable. Venezuela faces sanctions and infrastructure challenges, while Brazil and Iraq have fluctuating production rates and export capabilities. Thus, Canada’s stable and politically secure oil supply is essential for US refiners.

Venezuela, Russia, and Iraq, all heavy oil producers, pose logistical, security, and optical challenges for the United States. In Venezuela’s case, sanctions, industry mismanagement and corruption have hampered its ability to produce and export its heavy crude oil. Russia’s crude oil exports are limited by a price ceiling imposed by the West. Iraq’s oil industry is still extremely unstable.

The implications of heavy crude supply cuts

A reduction in the supply of Canadian heavy crude could lead to increased competition for heavy crude from other sources, driving up prices and impacting refinery margins. This could lead to higher gasoline and diesel prices in the US market. A shortage could also force refiners to adapt their operations or invest in infrastructure to process crude oil more easily, which could be expensive and less efficient.

Heavy crude oil is essential for the production of a range of refined products, including gasoline, diesel and jet fuel, as well as lubricants and petrochemicals. Processing heavy crude oil requires specialized equipment and expertise, which many US refiners have invested in over time. These upgrades provide a competitive advantage, but they also come with significant costs.

The potential reduction in Canadian oil production is not only an economic threat, it also raises environmental concerns. A decrease in the supply of heavy crude could lead to an increased reliance on light crude, which may not align with current refinery configurations. Going lighter would also lead to lower profitability because lighter crude oil comes with a higher price.

Moreover, this change could affect the global oil market, influencing prices and supply dynamics. US refiners’ need to secure heavy crude could lead to heightened geopolitical tensions as they compete for resources in a consolidating market.

The resulting high refinery costs would then trickle down to the industry.

Canada’s proposed emissions cap for the oil and gas sector poses a complex challenge for US refiners and the oil market in general. As Canadian production may decline, U.S. refiners must prepare for a shift in supply dynamics that could disrupt operations and hurt the domestic economy.

By Julianne Geiger for Oilprice.com

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