California Is Buying Oil From OPEC, and Texas Is Sitting on a Glut of Crude 500 Miles Away!

Shipping crude oil from the Gulf Coast to California, a distance of just over 500 miles, takes weeks due to a severe lack of ground infrastructure, resulting in the black gold being carried via tanker through the Panama Canal.

Even worse for California refiners, due to the Merchant Marine Act of 1920, also know as the Jones Act, the cost to carry American crude by sea is 10 times more expensive than the current market rate. California currently imports 24% of its crude from Saudi Arabia and another 13% from Iraq. With a glut of crude oil in America's heartland, who is profiting from the Jones Act and shouldn't Congress make a temporary compromise to ween ourselves off OPEC crude? 

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This segment is from Thursday's edition of "Digging for Value," in which sector analysts Joel South and Taylor Muckerman discuss energy and materials news with host Alison Southwick. The twice-weekly show can be viewed on Tuesdays and Thursdays. It can also be found on Twitter, along with our extended coverage of the energy and materials sectors, @TMFEnergy.

Read/Post Comments (3) | Recommend This Article (1)

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  • Report this Comment On February 04, 2014, at 10:57 AM, EGTalbot wrote:

    Hmm. Minor quibble is that from the Gulf Coast of Texas to the eastern border of CA is much closer to 1500 miles than 500.

    But regarding the Jones Act - the idea that using American crews and vessels costs 10 times more is hallucinatory. There's no hard data that could back that up, only wild conjecture. Normally one would assume that such a suggestion means the person making it has an agenda.

    Beyond that, eliminating the Jones Act is hardly an action without downside. One could argue that we should have no barriers to trade at all, in which case eliminating the Jones Act is consistent. It's the same philosophy that has led to the offshoring of tens of millions of jobs over the past three decades.

    That is a position held by many of America's corporate leaders. As such it certainly merits a place in the discussion. But let's at least be honest that this is what we're talking about instead of spouting garbage about shipping things for 90% cheaper.

  • Report this Comment On February 05, 2014, at 12:01 PM, MattZN wrote:

    A basic problem here is that most of the heavy oil going into the gulf is already spoken for, and CA refineries can't handle the light shale crude being produced in such large quantities. Also, the terrain isn't even remotely flat getting from the gulf to the CA west coast where the crude is actually needed... building a pipeline would be even more expensive than normal. And again, since we're talking heavy oil here we are talking Brent pricing, not WTI pricing.

    It winds up being cheaper to rely on domestic (in-state) production and to import the remainder from overseas.


  • Report this Comment On February 07, 2014, at 3:40 PM, beachinvest wrote:

    Besides California being 1,500 miles from Texas (or, more relevantly, Cushing, OK) it is light years away politically. The California political leadership leans heavily left and there is no interest in supporting a pipeline carrying crude oil to the coast. Tankers and rail are the only marginal options for additional crude.

    As for the Jones Act, I don't believe that applies if crude is shipped directly from Saudi Arabia. If it is transshipped from Texas, it must travel on US-flagged and crewed vessels. I am also skeptical that it costs 10x more to use a US-crewed vessel, labor does not represent such a significant portion of tanker transportation costs.

    Of course, these MF blurbs with the exclamation point headlines are meant as teasers to get you to look at the latest promo video so I suspect the research is not as thorough as other MF work.

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Joel South

Joel is a University of Washington graduate and covers energy and materials for The Motley Fool. Be sure to follow The Motley Fool's energy and materials Twitter for all your energy and materials coverage.

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