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Permian Oil Glut Sees Producers Lose Out on $1.2 Billion Profit

A huge increase in shale oil production from the Permian basin in Western Texas, coupled with a lack of pipelines in the area, has led to a bottleneck of crude oil, forcing prices down.

According to the US EIA, production in the 75,000 square mile Permian basin increased to 1.29 million barrels a day in 2007 and could grow further to 2.3 million barrels a day by 2022. This vast output far exceeds local pipeline capacity which has caused oil prices in the region to fall by an average of $9.82 a barrel in November alone, and robbed oil producers of a potential $1.2 billion in profit a year.

Similar stories can been seen in the Bakken Shale in North Dakota as well as around Oklahoma’s Midwestern pipeline hub, which is unable to cope with the increased supply from shale formations and Canada’s oil sands.

Related Article: Mexico to Privatize State Oil Company Pemex?

Michael McMahon, the managing director of Pine Brook, a private equity firm, explained that “Permian oil is actually very high-quality and should be selling at a premium, if it weren’t for the logistical challenges.”

James West, an analyst at Barclays Plc, has warned that the lack of pipelines will choke any growth in crude production in 2013, suggesting that capital expenditure will likely increase by just one percent compared to this year; that’s after a 20 percent rise in 2010, a 31 percent rise in 2011, a 9 percent rise in 2012. “This is putting a pause on what should be continued spending growth in North America.”

By. James Burgess of Oilprice.com



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