Transportation Deployment Casebook/Life cycle of the U.S. Petroleum Imports

Introduction

The US has the 12th largest oil reserves on earth. However, because of the great consumption and demand, it still needs to import petroleum from other countries. Its main oil suppliers are Canada, Mexico, Saudi Arabia, Venezuela, Nigeria, Angola and Iraq.

The petroleum imports talked in this paper include crude oil (including lease condensate and import for the Strategic Petroleum Reserve) and petroleum products (beginning in 1985, motor gasoline blending components and aviation gasoline blending components are included). Petroleum is widely used as fuel, for example, vehicles, airplanes, thermal power plants. It is also the raw material of industry. Its non-renewability makes it even more precious.

The US probably had started importing oil long before 1900. In Jan 1920, it imported 6294 thousand barrels . It continued to increase during the past several decades and has experienced some events which result to a declining for a short time. After 2006, the imports seemed to reach its peak and began to decrease.

Quantitative Analysis

Data Collection

Table 1. Data for U.S. Petroleum Imports

This homework is mainly focused on the life-cycle of U.S. petroleum imports. The data of actual imports in Table 1 come from Bureau of Transportation Statistics, USDOT.

Two things need to be mentioned here. First, USDOT only provides data of every fifth year (1960, 1965, 1970, 1975, 1980, 1985 and 1990) before 1990 and data of every year after 1990. The data of 1960 and 1965 is used to estimate the imports in between the two years. For example, import of 1961= 0.8*import of 1960+0.2*import of 1965, import of 1962= 0.6*import of 1960+0.4*import of 1965. Second, after 2006, we can see a declining in import, indicating that the life-cycle coming to post-mature stage.

Curve Fitting

We use the equation(1) below to predict the imports.

$S(t)=k/[1+exp(-b(t-t_{0})]$ Eq(1)

where:

S(t)is the status measure,

t is time (usually in years),

t0 is the inflection time,

k is saturation status level,

b is a coefficient.

Derived from Eq(1), we can get equation(2)

$t-t_{0}=-log(k/S(t)-1)$ Eq(2)

With the help of MS Excel, we are able to do the regression easily. Table 2 is the results that we get from Excel Sheet.

Table 2. Regression

Then we choose K=20, b=0.059151, t_0=1996, t-statistics is 25.45. With all parameters available, we then calculate predicted imports by using Eq(1) and get Table 1. Finally, we get Figure 1.

Figure 1. Life-Cycle of US Petroleum Imports

Qualitative Analysis

Events

1973 Oil Embargo

The oil embargo started from 1973. US’s support and arms-supply to Israel angered the Arab nations. OAPEC announced an oil embargo, which lasted until March 1974 . It could be predicted that there will be a declining of petroleum import in 1973 and 1974. However, we have data only for 1970 and 1975 and we don’t know what happened during the oil embargo. My assumption is that the US did need petroleum. The imports declined during that time, but the US could still import from other countries such as Canada and Mexico. After the cancelation of the embargo, it continued to import from OAPEC members and imported more than before the embargo.

Table 3. U.S. Imports of Crude Oil (Thousand Barrels)

Iranian Revolution and Iran-Iraq War

The Iran-Iraq War lasted from Sep 1980 to Aug 1988, shortly after Iranian revolution. Both the countries are oil producers. The combined production of both countries dropped to 1 million barrels per day in November, 1980. The shipment of petroleum must have been affected during that time. The US was also involved in the war. The war caused the crude oil prices going up and the US petroleum imports going down, as we can see a declining in 1985 in Figure 1.

Gulf War

In august 1990, Iraq’s invasion to Kuwait caused Gulf War. Again, both countries are oil producers. The US was more involved than last time. The war ends in Feb 1991. And the US petroleum imports declined in the year of 1991. The oil spill and Kuwaiti oil fires also had a great impact over oil production. The fire was said to last ten months, losing 6 million barrels of oil each day. The oil spill wasted 400 million gallons of crude oil.

9/11

9/11 is the event that could effect everything in the US. The economy was greatly infected. Airline ridership decreased. The imports of petroleum declined due to the impact of 9/11.

Unknown Event

In 1995 there is also a decline in Figure 1. What happened at that time is unknown. One fact is that the US produced more oil than it imported in Feb 1995. If the total demand is constant, then the more it produces, the less it imports.

Technology

Oil Tanker

Figure 2. Hellespont Tara-023

The petroleum ocean shipment could be dated back to 1861. The brig Elizabeth Watts sailed for England, carrying petroleum for the first time. The tanker industry has a history of over 120 years. Even Tollefsen of Norway constructed the world’s first oil tanker. Nobel Brothers overcame several challenges and successfully improved oil tanker. The 2700-ton Gluckauf, is the first ship to place engines astern. And oil could be pumped directly into the ships tanks instead of shipped in barrels or drum as previous. The tanker design followed Gluckauf ever since. Americans invented tank steamship for carrying oil in bulk. With the idea that the larger the oil tanker was, the cheaper it cost to transport, the oil tanker was built even larger. During the two World Wars, oil tanker continued to develop, growing in size and power. The oil industry was encouraged by political and technical reasons to move the refineries to the markets, which resulted to an increase in the demand of tankers that were designed for carrying crude oil. After the 2nd World War, the standard sized oil tanker was the T2 tanker. However, the Suez Canal limited the size of oil tanker. After two closures of the Suez Canal, the Suez Crisis in 1995 and the Six Day Way between Israel and Egypt in 1967, the tanker sizes began to grow significantly. We embrace the supertanker era with the new generation of tanker, the VLCCs (Very Large Crude Carriers) and the ULCCs (Ultra Large Crude Carriers).

In the 1950s, 33% of the oil price was due to shipping costs. In supertanker’s era, it dropped to 5%. Now it is less than 3%. With the decreased costs, there are increased imports

Pipeline

Table 4. Petroleum Transported by Pipeline

Figure 3. Petroleum Transported by Pipeline

Pipeline is a good transport means to deliver gas, liquid. It is safe, fast and efficient. The US imports petroleum by pipeline mainly from Canada and Mexico.

Iron pipe for transportation could be dated back to the 1830s. Since 1860, people began to use pipeline to transport oil. Then the pipeline business continued to grow in quality. Better materials and better techniques were studied as well as the safety regulations. In 1905, crude oil pipelines crossed the country, carrying oil from Texas, Oklahoma and Kansas. In 1917, crude oil pipelines traversed much of the country and in 1920s, pipeline mileage tripled to over 115,000 miles with the booming automobile business. During the 2nd World War, pipeline continued to grow because oil tankers were vulnerable on sea. With the increasing of imports of petroleum from overseas and Canada, the pipeline business shrank. In 1968, Alaskan Prudhoe Bay oil field was discovered and a pipeline was built across 800 miles of frigid, snow-covered mountains and frozen tundra. Nowadays, pipeline has become versatile and could carry oil, gas and even special chemicals.

From Table 4 and Figure 3 (data from USDOT), we can see that the number of total petroleum transported by pipeline (crude oil + petroleum products) is around 600,000 (the unit is not given) from 1990 to 2008. The change is slight.

Early Market Development

Table 5. Petroleum Domestic Production, Imports and Consumption

Figure 4. Petroleum Domestic Production, Imports and Consumption

The imports of petroleum depend on several reasons. Although the US has plenty of oil reserves, it still imports petroleum and imports far more than its domestic production, as shown in Table 5 and Figure 4 (Source: USDOT). Two reasons could explain it. First, it is a national strategy. Petroleum is non-renewable. The more we consume, the less we have. The US does not want its domestic petroleum be used up. If any war happened and ocean petroleum delivery line was cut off, whichever country that reserves more petroleum will win the war. The Strategic Petroleum Reserve, which began in 1977, could also prove this point. Second, price is obviously an important factor. If the price of import petroleum is cheaper than that of domestic petroleum, one certainly will choose the former.

I believe imports of petroleum started before 1900. However, data at that time is hard to trace. The early market is mainly influenced by demand and transport means.

The Growth of Petroleum Imports

Figure 5. Number of Vehicles, Highway and Air Carrier

Figure 6. Vehicle-miles, Highway and Air Carrier

After the 2nd World War, imports of petroleum continue to grow. Supertanker makes shipment of petroleum much easier and cheaper. A supertanker could move 2 billion tons of oil every year at a cost of 3 cents per gallon.

The world was relatively peaceful at that time. The economy grew fast. Americans became rich and bought more cars. The number of vehicles, highway-vehicle-miles, number of air carriers and air-carrier-vehicle-miles continued to grow from 1960 to 2005, as we can see in Table 6 (Source: USDOT). The growth of the above indicates a greater demand for petroleum since highway and air carrier vehicles both consume petroleum.

The Maturity of Petroleum Imports

Figure 7. Predicted Life-Cycle of Petroleum

In around 2005, the imports of petroleum reach its peak. Why don’t I use the data after 2005 to calculate the life-cycle curve? Because I believe that 2005 is the peak point, after which the imports are declining and will continue declining afterwards.

Figure 7 is the predicted life-cycle of petroleum according to Eq(1) and the parameters we have. It will reach its peak after 2050, nearly 20 million barrels per day. However, this prediction may not necessary be accurate. As we can see from Table 6, Figure 5 and Figure 6, the number of vehicles, highway-vehicle-miles, number of air carriers and air-carrier-vehicle-miles stopped increasing and began to decrease, which means that the demand for petroleum is decreasing. Several factors could explain this pattern. First, with the help of internet, people are able to work at home, so they don’t need their vehicles very much. Second, people become aware of environment issues and prefer to use public transit such as subway, LRT and bus. Third, the economic recession (2007-2009) may have something to do with it, but we don’t know how much it has influenced the demand of petroleum. Actually we are not at recession right now, but the imports continue to decline after this recession. So the economic recession should not be the main factor.

Besides, domestic production of petroleum is increasing since 2006, meaning that the US needs less petroleum from outside of the country (or outside of North America, the US still imports a lot from Canada and Mexico).

What’s more, America is in the process of the Obama Energy Policy, which is also a reason to explain the declining in petroleum imports. It will be discussed in later section.

So I think we should draw another curve to indicate its declining trend instead of increasing after 2005. According to the predicted life-cycle, 1996 is the nought node, before which the rate of increasing is positive and after which the rate of increasing is negative. It may reach 20 if there are no external factors, such as energy policy, economic recession and war. However, external factors are inevitable, and some of them have already been influencing it. That’s why we see a declining since 2005.

The Obama Energy

Figure 8. Sales of Hybrid Vehicles

Table 8. Electricity Net Generation by Energy Source

The aim of the energy policy of the Obama administration is to use clean energy and make America more energy independent and reduce carbon emissions. It will open new areas for oil and gas exploration. It will increase the use of energy from renewable sources, such as wind, solar and hydropower. It will build new cars and trucks with higher standard. It will develop its large supply of nature gas.

The president wants to raise fuel efficiency standards. He himself has decided to purchase 5,000 hybrid vehicles for the federal fleet. There is a trend that hybrid vehicles, which are believed to be more energy-efficient, are becoming more and more popular since 2000, as we can see from Figure 8 (Source: USDOT). With the encouragement from government, they will be even more popular. Improved fuel efficiency, increased bio fuels and economic recession together are responsible for the reduced petroleum consumption, which then causes reduced petroleum imports.

Not only hybrid vehicles, renewable power has been strongly supported by the current Administration and has increased from 3.1% to 5.9% of total U.S. power generation (excluding hydropower) from 2008 to 2012 . As we can see from Table 8 (Source: USEIA), petroleum used to generate electricity is declining and renewable sources are increasing.