Sometimes in policy debates, just as the volume is getting almost deafening, quietly a solution to the problem at hand is being hatched.
So it is with the Cushing, Oklahoma delivery point of the New York Mercantile Exchange. Increasingly since its 1983 launch, it had suffered from a lack of supply, as domestic crude production in Texas, Oklahoma and nearby areas declined, leading to questions whether such an important benchmark could remain vital when supported by such a small amount of production. The price of WTI was becoming disconnected from the rest of the world, on the high side.
But then just as that question roared on, various new pipeline projects began bringing lots of Canadian crude to Cushing. And then in the first half of this year, several refineries that draw their supply from Cushing went down, leading to a surve in inventories and a slide in price relative to other benchmarks; suddenly, the criticism was that the price of WTI was becoming disconnected from the rest of the world, but this time to the low side. With Cushing built to take in crude, and not send it out in significant quantities to the refining center of the Gulf Coast, it was difficult to take cheap crude in Cushing and put it elsewhere, which otherwise is the type of arbitrage that keeps global oil markets roughly in balance.
Again, the volume on this issue grew, with the business pages of several newspapers jumping in with stories. It's at this moment, however, that it's possible to see this debate eventually disappearing into the rearview mirror.
First, there is the Keystone Pipeline, a not-yet-fully-approved project of TransCanada that would bring 450,000 b/d of Canadian crude into Patoka, Illinois, and then have interconnections that can take crude in to Wood River, Ill., Cushing and the US Gulf Coast. That's link number 1.
Link number 2 could be put in place by Teppco Partners, which several weeks ago said it is considering reversing the direction of its 300,000 b/d Seaway crude pipeline, which runs from the Texas Gulf to Cushing. That would provide a direct egress to the Gulf for any excessive amounts of crude that might build up in Cushing.
And then last week, Enbridge unveiled a plan for an Alberta-Texas pipeline to carry 400,000 b/d of oil sands crude by 2011 to its array of delivery systems out of Alberta. The $3.6 billion project would connect Canada, the Rockies, Cushing and the Gulf Coast.That would be link 3, and it would be a big one.
In the meantime, there is no short-term solution to the buildup of crude in Cushing, except for refineries to get back online. But Schumpeter's "creative destruction," the core of capitalism, appears ready to link Cushing to the rest of the world in a few years.
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