Game Changer: La Entrada al Pacifico

The official Mother-in-Law of The Wolf Camp admonished me to write about something else other than oil & gas… “But it interests me!” I whined. She cared not… She’s a tough old coot. She’s convinced I’m a polymath, when I’ve explained that I’m not even a unimath.

One must follow instructions from authoritative figures, however. So… Today, instead, I shall talk about oil & gas transportation! Boom! (She only thought she could control The Wolf Camp… I cannot be contained.)

In your sportscaster’s humble opinion, one of the most valid knocks against the effect of exporting crude oil from the United States to world markets has been the problematic transportation linkage. (My background is in transportation, so I always think that talking about transportation is valid.)

Mainly, the problem WTI faces in attaining international market share is that only smaller tankers fit through the Panama Canal – you know, because the canal, like, really old. You see, we simply did not have ULCC’s back when Teddy Roosevelt first decided to build a shipping channel through a jungle. (Long-time readers of this column will note that I am REALLY nerdish about tankers… they’re so neat.)

Why does this matter, you ask? Because European markets do not care anything about West Texas Intermediate! I reply… And the EU is just about the only importer of crude that doesn’t require us to travel across a canal.

You see, almost to a unit, every refinery in the EU is designed and constructed to refine Brent crude. Brent is a heavier variety – meaning it contains things like additional sulfur that our domestic brews do not. Light-sweet crudes, like the stuff pumped in Libya or, you know, Texas, need different refinery setups. (Interestingly enough, light-sweet crude is actually better quality stuff, aside from the fact that the number of refineries that can efficiently process it are limited in number.)

Because we have had 1). an embargo on exports for several years and 2). a deficiency between supply and demand in the domestic market, the exporting refiners in the United States are also not setup to refine enough of the WTI to begin exports anytime in the near future. It wouldn’t matter anyway, since most refined products would not last much beyond the transit-time anyway. One wants to refine crude oil as close to the point of consumption as absolutely possible, you see.

So, then, who wants all this Texas Tea??? The answer, as with everything else, is China (well, Asia… but, let’s be honest, China). Unfortunately, the only way to get WTI from ports in Texas to Asian markets is through… you guessed it… the Panama Canal! The only current way to get it through the Panama Canal is by using smaller container ships. As a lesson in economics, when one downsizes from a larger to a smaller vessel, the operating costs do not necessarily fall linearly. What I mean is that, just because one has decided to use a ship that is 1/2 the size, it does not necessarily follow that it costs 1/2 the price.

In practice, this means that the per unit costs of shipping on a smaller container vessel are somewhat higher. When oil was $147/bbl (Oh, those heady days of early 2008), such an issue would not have been a problem. Now, however, pricing is… shall we say… competitive. The only real way to ship crude and make money in this market is to use the largest, most cost-efficient, vessel available.

Or is it???

Enter the La Entrada Al Pacifico. Never heard of it? You’re not alone. Again, it is in West Texas and does not involve football, so the line to make movies about it is not really all that long.

La Entrada Al Pacifico is an agreement between the United States and Mexico, or, perhaps more accurately between Texas and the states of Chihuahua and Sinaloa in Mexico – which are then supported by the federal governments of those two countries. The idea of a transportation corridor between western Texas and Mexico to the Pacific Ocean was actually a brainchild of George W. Bush back when he was governor, and a pet project early in his presidency.

But how does this affect the export of crude oil? Pipelines, my good student! You see, it opens up tariff-free (or at least drastically reduced), customs-light, traffic between the United States and the rest of the world.

Pull out your maps. You see the country of Mexico? You see that little doohickey hanging off the end of California? You might notice that little blue patch in between the mainland and said doohickey (Baja), which is known as the Sea of Cortez. Besides being home to one of the meanest cephalopods known to man, the Sea of Cortez is, beneficially, also WEST of Panama. Meaning that, if one were to lay a pipeline from… Let’s just say… Odessa, Texas all the way to the coast of Mexico, to a drayage point in the Sea of Cortez, then another one could sail a ULCC ship right up to that point and fill up before returning to Asian markets. Easy-peasy!

So, if this is the case, contractors must be turning shovels in West Texas right now, eh? Well of course not! Laying a pipeline across this much prairie land would take two things 1). foresight and 2). public money. The Texas legislature, in its infinite wisdom, is typically short of the first, and notoriously tight-fisted with the second.

As I have argued before, in a down economy, fiscally responsible governments should use money (even, gasp, debt!) to fund infrastructure projects – you know, like pipelines – to bolster employment figures (and, you know, incomes) until such time as the effects of the market correction subside. However, as I observed before, this concept seems to be beyond the grasp of politicians… The same shortsightedness I’ve seen at the local level can be seen at the state capitol as well, where lawmakers are already busy chopping into public receipts in the middle of a downturn… Because trickle-down economics… works? NAH!

At any rate, a short-term cure to a long-term problem is right in front of our collective nose… and at the same time, such a project will not be funded in a timeframe that may help the short-term price of WTI remain competitive on world markets.

This entry was posted in Economics, Foreign Policy, Oil & Gas, Oil Prices, Politics, Public Affairs, Uncategorized and tagged , , , , . Bookmark the permalink.

2 Responses to Game Changer: La Entrada al Pacifico

  1. When are you going to talk about football? You tricked me this time by referring to yourself as a sportscaster.

    I think international politics may play a role in the EU’s strategy to stop using the heavy crude and start using the sweet stuff. Hopefully, Europe sees us a better partner for purchasing oil then Russia and Iran. Interesting stuff on the Al Pacifico point. I think a pipeline is possible, if the oil companies want it. As you’ve I know you’ve mentioned before in other conversations we’ve head, the Texas Legislature and the oil companies have a fairly close relationship.

    Make it happen, Jefe!

    Liked by 1 person

  2. Pingback: Two Items of Note | The Wolf Camp

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