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March 4, 2015

U.S. Crude Oil Reaching Storage Limit


By Economy Watch

Producers prepare for drastically low oil and gasoline prices in the coming months as stockpiles increase. The United States has been producing a million more barrels a day than it is consuming in the last seven weeks.

The U.S. Department of Energy reported American supplies are at its highest capacity in 80 years. Crude inventories have been reaching overcapacity in storage tanks, otherwise known as "tank tops." Companies are reducing drilling in the short-term, but excess supplies do not expect to decline until later in the year..

How Low Prices Could Go

Ed Morse from the Council on Foreign Relations and other forecasters believe oil prices could fall as low as $20 a barrel. But there is some good news for the energy industry. Unknown factors such as power outages and low refinery output could prevent a sudden decrease in energy prices. Rising demand would also help ease additional inventory, and storage construction is underway to hold future stockpiles. American producers have already been struggling from Saudi Arabia's flooding of the market with cheap crude, and an added glut on the domestic front could place the American energy sector at a virtual standstill..

Shale Industry in Peril

The shale industry is most vulnerable because extracting oil from shale rocks is an expensive endeavor that requires renewed investment. Investors need to pour more funds into projects to see results, but many producers would have no other choice but to stop drilling until oil prices rise to productive levels. Further, many American refineries are not equipped to process the light crude coming from the energy boom, further contributing to the glut. And shale producers are still in the crosshairs of OPEC. The Saudis have made no secret about their intention to drive U.S. producers out of the energy market. But American drillers have continued producing regardless of the extra crude on the international market..

Oil Exports Not an Option

American energy companies cannot export domestic oil due to a 1970s law passed in response to the Arab oil embargo. Other than Canada, American producers cannot export oil to foreign markets. Analysts have been predicting for some time that the United States needs to start exporting more of its oil to alleviate oversupply and compete against other oil powerhouses such as Russia and Saudi Arabia. However, supporters of the law contend that American oil is a natural resource that stabilizes gas prices and keep greenhouse gas emissions to a minimum. Even though U.S. leadership has already approved lighter oil exports in the form of condensates, the issue of a full export market will not be up for a vote anytime soon. No politician who wants to remain in office would vote to ship oil if gas prices skyrocket. However, the United States will have to find a way to maintain low gas prices while exporting enough oil to sustain the energy boom.

Producers prepare for drastically low oil and gasoline prices in the coming months as stockpiles increase. The United States has been producing a million more barrels a day than it is consuming in the last seven weeks..

The U.S. Department of Energy reported American supplies are at its highest capacity in 80 years. Crude inventories have been reaching overcapacity in storage tanks, otherwise known as "tank tops." Companies are reducing drilling in the short-term, but excess supplies do not expect to decline until later in the year..

Courtesy Economic Watch

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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