Soaring U.S. Crude Output Could Buoy Trucking Industry

This story appears in the Dec. 9 print edition of Transport Topics.

The significant growth in U.S. crude oil production, which recently overtook imports for the first time in 18 years, should help trucking by increasing freight volumes and possibly keeping a lid on prices, industry experts said.

U.S. oil production reached 7.74 million barrels a day, the U.S. Department of Energy reported in mid-November, topping the 7.59 million barrels of imports.

Within 12 months, DOE expects 8.8 million U.S. barrels daily and 6.2 million from imports, a sharp contrast to mid-2010, when imports were nearly double domestic production.

“From a business opportunity standpoint, higher domestic production is very positive because of the downstream impact on manufacturing,” said Graham Brisben, CEO of energy and transportation advisor PLG Consulting.

He estimated that $100 billion of new U.S. manufacturing of products such as chemicals and steel will be stimulated by lower energy prices, resulting in more trucking demand.

Bob Costello, chief economist for American Trucking Associations, agreed.

“More production is great,” he told Transport Topics on Dec. 4. “It will lead to more freight, more jobs and energy independence.”

At the same time, Costello, Brisben and others indicated there is no certainty that higher domestic production automatically will lower diesel prices.

“Hopefully, the additional production will help keep a lid on prices, but it won’t necessarily decrease the price of diesel significantly,” Costello said.

“The more domestic oil that we produce, the better it is in terms of security, deliverability and supply for refiners,” said Dan Kish, senior vice president for policy at the Institute for Energy Research in Washington. “That ought to temper price increases.”

Others aren’t so optimistic that higher production will bring down recent diesel price levels that rankle truckers.

“The boom in domestic crude oil production has had very little impact on diesel prices, and this will remain the case because diesel prices are driven by development of global markets,” said Derik Andreoli, senior analyst at Mercator International, who specializes in transportation and energy issues. “Any movement in future prices will be driven by the relative rates of growth of global supply and demand.”

DOE analyst Sean Hill said the lower price of West Texas Intermediate crude, relative to the Brent Crude price mostly used overseas, has encouraged exports.

Over the past 12 months, WTI on average has been about $10 per barrel cheaper than Brent, according to data compiled by Bloomberg News.

Costello said the United States this year will export 1.1 million barrels of diesel, nearly triple gasoline exports that have been declining over the same period.

“If the domestic price of diesel doesn’t remain high enough, and since diesel is in high demand in other markets, refiners will export it,” he said.

Kish believes that exports of diesel could moderate if the two crude prices were more comparable.

Hill noted that higher domestic production already has had some positive effects on fuel prices.

“We already have seen the effects of [domestic production],” Hill said. “We have seen diesel and gasoline prices falling steadily. I would expect more of the same.”

Differing demand for gasoline and diesel also are having an effect on fuel prices.

“We are awash in gasoline,” Hill said, as demand for gasoline has fallen 6% since 2007.

Meanwhile, diesel demand has been flat over the past several years, though production is increasing by refiners seeking to capture higher margins overseas, Hill said.

The gap is likely to narrow once the northern portion of the Keystone XL pipeline is approved and completed, opening the way for more Canadian oil, Kish said.

TransCanada plans to start deliveries from the southern portion of its pipeline Jan. 3 to Port Arthur, Texas, via Cushing, Okla., Bloomberg News reported. TransCanada split its original Keystone XL project after President Obama rejected a prior route last year on fears its path through the Midwest would threaten ecologically sensitive lands.

Andreoli said that the Keystone Pipeline relieves a “transportation bottleneck.”

“Much of this oil is being transported by rail, which is a much less efficient mode than pipeline,” Andreoli said.

“This bottleneck has caused a fairly steep discount to emerge for crude from these regions, but the benefit of the lower prices has not, for the most part, been passed along to consumers of diesel precisely because diesel is stable and can be easily exported from refineries.”

Still another question is the long-term effect of natural gas prices relative to diesel, Andreoli said.

Right now, the gap between compressed natural gas and diesel prices is about $1.50 per gallon as fleets increasingly test that fuel, as well as liquefied natural gas, as an alternative to diesel.

“Overall, however, the total CNG/LNG fleet size will remain very small compared with the diesel-powered fleet, so the adoption will not have a significant impact on diesel demand,” he said.

Other industry observers, such as ACT Research, believe the presence of natural gas-powered trucks will be far larger, with projections as high as 50% market share for natural gas by 2020. Share growth will be stimulated by the lower fuel price and expected cost reductions for specialized equipment such as tanks.