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America is awash in oil. According to the U.S. Energy Information Administration (EIA), the country is on pace to produce an average of 10.7 million barrels per day (BPD) this year, which is a huge jump from last year's average of 9.4 million BPD. Meanwhile, the EIA sees oil output in the country rising to an average of 11.5 million BPD next year, with additional growth likely in the future.
There's just one problem with this gusher of new output: America doesn't have the infrastructure necessary to transport and process this oil. Because of that, crude that sells at the U.S. benchmark price, WTI, currently fetches roughly $10 a barrel less than oil priced at Brent, which is the global oil benchmark. Multiply that by the country's current production rate, and U.S. producers are missing out on more than $100 million in revenue per day. While the industry is working to solve this problem and narrow the discount, it could be years before U.S. producers will be able to capture the full value of the country's oil.
Image source: Getty Images.
From one bottleneck to another
As bad as the price spread between WTI and Brent might be, an even deeper discount exists between WTI and oil sold in the Permian Basin, which has been as much as $20 a barrel. Driving that wide gap has been the fact that pipelines transporting crude out of the region are quickly filling up. Currently, the Permian has enough capacity to move 3.6 million BPD. Output, however, has been growing at a fast pace and is expected to average around 3.5 million BPD by next month.
The region's capacity constraints will likely hold back the Permian's growth engine until the end of next year, when new pipelines enter service. One of those projects is the Grey Oak Pipeline system, which is an 800,000-BPD pipeline under development by Phillips 66 Partners (NYSE: PSXP) and Andeavor (NYSE: ANDX). The companies currently expect the $2 billion oil pipeline to start up by the end of 2019.
While the start-up of that pipeline and others currently underway should narrow the gap between oil produced in the Permian and WTI, there's another problem just behind it. Ryan Lance, the CEO of U.S. oil giant ConocoPhillips (NYSE: COP), spoke about it at a recent industry conference, stating:
The bottleneck or the problem that's occurring today in the Permian...that's going to get fixed in the next couple of years. There'll be plenty of capacity. I think there is some concern that, that bottleneck just moves to the Gulf Coast.
That's because the country doesn't have the refining capacity along the Gulf to effectively process the light oil produced in the Permian and other shale regions, since the industry built these facilities to handle heavier crudes from Canada and Venezuela. That leads ConocoPhillips' CEO to believe that "we do need to export that" excess oil. However, he warned that "I think there is some building concern out there that export capacity might be restricted for a period of time."