May 21, 2012:

The development of Canada’s tar sands and North Dakota’s Bakken oil shale region have profoundly transformed the U.S. energy landscape. U.S. and Canadian oil production has risen 11 percent since 2010 and could rise by as much as 50 percent over the next decade. More plentiful North American supply has lowered costs for some U.S. refineries, but mainly in places such as Oklahoma and Illinois, where it can be shipped via the Keystone pipeline. But there are no pipelines to carry this oil to the U.S. coastal refining hubs. Thus refining costs in the Midwest have fallen far below those in coastal cities such as Philadelphia.  You can see the problem in the difference between the two main types of crude oil traded on global futures exchanges. Brent crude, which comes from the North Sea near Britain, has traded for significantly more than has West Texas Intermediate, the benchmark for North American crude oils.

Because Midwestern refineries use crude that follows the WTI price, their owners have reported large profits over the last year. Meanwhile, East Coast refineries, such as the former Sunoco and Conoco plants near Philadelphia, have been mothballed, because expensive crude imports rendered them unprofitable. Without adequate pipeline links to the rest of the country, Pennsylvania, New Jersey, and Delaware refineries must rely in large part on more expensive imported crude from Europe and Africa. East Coast refineries are also set up to produce gasoline as their major product, demand for which is likely to be flat at best over the next decade as Americans shift to more fuel-efficient vehicles. Demand for heating oil, by contrast, is likely to grow modestly, while diesel will remain a fuel of choice for commercial trucking.

At the same time, growth in global oil output will come increasingly from places that primarily produce heavy, sour crude, including Canada, Saudi Arabia, and Latin America. East Coast refineries that are less able to process this crude oil will benefit little from rising supply and continue to pay premiums for light, sweet crude from Europe and Africa. Such thinking likely influenced Sunoco’s decision to sell or close its Philadelphia refinery this year. With fewer refineries on the East and West Coasts, gasoline prices for the majority of U.S. consumers are likely to rise. Reliance on imports also reduces U.S. energy security and makes pump prices potentially more volatile, raising the risk of energy price shocks to the economy.

By Philly.com