From the WSJ Micro Weekly Review (reviewed by Edward Scahill, University Of Scranton):
Canada’s Oil Market Finds Outlet in U.S. Demand
By Vipal Monga | September 12, 2019
Summary: An increase in the demand for dense crude oil from the U.S. and cuts in production ordered by its government has eased an oil glut in Canada. One year ago, Canadian oil sold at a discount of over $50 per barrel to the U.S. benchmark price as pipeline congestion increased inventories. In 2019, a U.S. embargo on Venezuelan oil reduced the difference in price between Canadian and West Texas Intermediate oil.
Classroom Application: The article demonstrates why the market for petroleum is an international, rather than a national or regional, market. Although oil supplies can differ in sulfur content, oil is essentially a homogenous product, as are commodities such as wheat and corn. This implies that market forces tend to reduce differences in the price of oil produced in different countries.
Questions:
- The article mentions that “…output from U.S. oil companies has been plentiful…” Why, then, has the U.S. imported oil from Canada?
- What is an oil embargo? Would an embargo be more likely to result in a shortage or a surplus of oil?
- The Keystone pipeline is used to transport oil from Canada to refiners in the United States. A proposed extension of the pipeline, called Keystone XL, was delayed by legal challenges raised by groups opposed to the route the pipeline would follow. Proponents of the pipeline argue that it would be safer for oil to be transported by the Keystone
- XL pipeline than by rail. Why do advocates for Keystone XL believe transporting oil via pipeline is less hazardous than transportation by rail?
- The article refers to a “glut of oil in Canada.” What is another term for a market glut?
- Draw and label a graph that illustrates the demand and supply for Canadian oil. Indicate in the graph a price that would be consistent with a market glut. In the graph, show how “…higher demand… from U.S. Gulf Coast refineries and government-imposed cuts…” reduced a glut of Canadian oil in 2019.
- “The U.S. imported an average 3.58 million barrels a day from Canada for the four weeks ended Aug. 30…That was an 8% gain from the four-week average recorded at the end of last year and a 3% increase from the end of August 2018.” From the article, cite one reason why the U.S. increased its purchases of Canadian oil over the past year.
- “Moving a barrel from terminals in Alberta to the U.S. Gulf Coast costs between $9 and $12 a barrel by pipeline and between $15 and $20 by rail.” If the cost of transporting oil from Canada to the Gulf Coast by pipeline is lower than the cost of rail transportation, why would any oil be transported by rail?
Here is the link ($): https://www.wsj.com/articles/canadas-oil-market-finds-outlet-in-u-s-demand-11568289600
