Why Canada has become a critical supplier of crude oil to the U.S.
Why Canada has become a critical supplier of crude oil to the U.S.
In the car-centric United States, we have a bit of a love affair with oil. And that romance is really an international love story — one where our neighbors to the north play a starring role, accounting for a growing share of oil that the U.S. refines and imports.
If Canadian crude and U.S. refineries were in a rom-com, Canadian crude would be the boy next door, the one U.S. refiners overlooked when they were courting Latin American oil back in the late 1980s and early ’90s.
“So, you can think of Venezuela, Mexico,” said Kevin Birn with S&P Global Commodity Insights, alluding to when the world thought we were running out of oil. “The Gulf Coast refineries were looking for security of supply. A lot of these refiners entered into long-term joint-venture agreements with the suppliers to get access to security of that heavy barrel supply.”
Big money was put into refining capacity that catered to the heavy Latin American oil, which is more expensive to refine into diesel or gasoline, Birn said.
“You need the ability to reach higher temperatures, and you need to have specially designed facilities that can handle that as well,” Birn said. “And so those joint ventures led to an expansion in U.S. refining capacity to process heavy barrels, first in the Gulf Coast region in the early ’90s, and that continued through to the early 2000s.”
Those refineries had really invested in their relationship with heavy Latin American oil.
“But as we entered this century, millennia, we saw that kind of slow down,” Birn said. “A lot of those deals were rolling off, and the Latin American supply began to slow.”
And even though we saw fracking and horizontal drilling transform the Permian Basin in West Texas into one of the most significant oil producing regions in the world, the oil there was not as compatible with the expensive new U.S. refineries, said Ryan Kellogg with the University of Chicago.
“All of that capacity was built before the shale boom started. And all of a sudden, we had all this really nice, light, sweet crude available in the U.S.,” Kellogg said. “So, we’re now in this position where we have these very high-tech refineries that can process the really heavy crude.”
We needed to get that heavy crude from somewhere else.
“Think about the oil sands or tar sands of Alberta. Basically, this is like really thick, heavy, goopy crude oil,” Kellogg said.
And Chuck Mason with the University of Wyoming said Alberta’s oil sands also had a geographical advantage.
“In the grand scheme of things, not super-duper far away from the refining sector,” Mason said.
And for Canada, exporting heavy crude by pipeline and rail to its oil-hungry southern neighbor made sense.
“This source of production that we’re talking about is the very epitome of land a landlocked resource,” Mason said. “U.S. refiners were just better buyers, because they were there easier to connect. The transactions costs associated with connecting up with them are massively smaller.”
It was a sensible match.
“The relationship was very symbiotic,” Birn said, and that has only strengthened over the years. “Canadian growth occurred at such a rate and scale that it overwhelmed that region, and additional infrastructure was designed to deliver that crude oil into the Gulf Coast region of the United States, and increasing volumes and then making it to the U.S. Gulf Coast.”
Many miles of new pipeline later, 60% of U.S. crude oil imports come from Canada, according to the U.S. Energy Information Administration. A decade ago, it was just 33%.
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