Continuing growth in U.S. crude oil production is causing significant changes in the way crude oil moves within the United States. The Midwest (PADD 2) has been one of the major sources of this production growth, especially from the Bakken formation in North Dakota. Pipeline flows from PADD 2 to PADD 3 will increase over the next two years as several major pipeline projects, starting with the Seaway Pipeline's current capacity expansion, are completed.
As PADD 2 crude oil production has rapidly increased, pipeline capacity to move crude oil out of PADD 2 to refineries in other regions, particularly to the major refining centers on the U.S. Gulf Coast in PADD 3, has become highly constrained. While crude oil shipped on pipelines from PADD 2 to PADD 3 has increased sharply in recent years (Figure 1), capacity additions have not been able to keep up with production increases. Thus, pipeline capacity constraints have led to regional differences in crude oil prices within the United States, as modes of transportation that can be put into service more quickly than pipelines are being used to move marginal crude oil production. These modes of transportation include railroads, trucks, barges, and tankers.
The growth in crude oil shipments by rail has been particularly noteworthy. The Energy Information Administration (EIA) does not yet collect data on rail shipments — therefore they are not included in Figure 1 — but other sources suggest total rail shipments of crude oil from the Bakken formation grew from 170,000 barrels per day (bbl/d) in January of 2012 to about 425,000 bbl/d by October 2012. Although shipments are increasingly being directed to the East and West Coasts, the majority went to PADD 3 refiners.
Before the recent growth in crude oil production in the United States, the pipeline system was configured to deliver both crude oil imported to the U.S. Gulf Coast and domestic production from West Texas to the refineries in PADD 2, via Cushing, Oklahoma (the delivery point for the light sweet crude oil futures contract traded on the New York Mercantile Exchange). In 1999, almost 2.1 million bbl/d of crude oil was shipped from PADD 3 to PADD 2, all by pipeline. Through the first 10 months of 2012, that number had fallen 1.1 million bbl/d to an average of 927,000 bbl/d (Figure 2). Based on press reports, a portion of this decrease is likely the result of reduced shipments on the Capline Pipeline, which runs north from the U.S. Gulf Coast through Memphis, Tennessee, and on to Patoka, Illinois. The decrease in volume has been partially offset by growing volumes of crude oil shipped to PADD 2 on pipelines running from West Texas, including pipelines running from the Permian Basin, where production is rising, to the Cushing area. EIA includes West Texas production in PADD 3 data, but West Texas lacks sufficient pipeline connections to major refining centers in PADD 3 along the Texas and Louisiana coasts.