Fundamentals: Overview of the U.S Oil Market-Post 2015

Introduction

Before the recent shale boom, most of oil produced in the country was kept at home. More so, there was a restriction on oil exports which dated back to the 1973 oil embargo and lasted about 40 years (officially lifted in December 2015). The purpose of the restriction was to keep as much crude oil inland while limiting exposures to the volatile global markets by reducing the nation’s dependence on imports.

Shortly after the shale revolution and with increasing light crude production mainly from North Dakota and Texas, oil producers began to encounter a ‘new’ challenge as they could not find enough refineries to process their crude. In addition to this, there were no pipelines to move all the crude oils gathered in Cushing, Oklahoma (the pricing point for WTI oil prices) to the refineries on East coast (with more capacity to process light density, low sulfur crude). As prices fell below the world market, complaints surged from producers, and industry analysts about what was perceived to be “artificially depressed prices” – which led to the ultimate lifting of the export ban. Today, U.S oil producers now export most of their oil to buyers abroad!


Winners

Producers (oil companies) have benefited from growing exports by taking advantage of higher prices in the global market which increases their profit margins. This has in turn incentivized more production and generated additional income to the Federal Government due to oil sales from federally owned reserves and royalties on federal leases. Royalty revenues to the producing states have also increased.
So, while Increased oil revenues spur even more greater oil development, who then is at the losing end?


Losers

Domestic Consumers: Gas Prices

In the previous era of export restriction amid increasing domestic production and refinery bottleneck (2010 – 2015), consumers (particularly in the Midwest) benefited from lower prices of petroleum products, like gasoline – coming from depressed crude oil prices. However, this is different today. With the removal of export restrictions in 2015, retail gasoline prices have been rising (fig 1).

Fig1: U.S retail gasoline prices from 1994 to 2018
Source: U.S Energy Information Administration (EIA), 2019

Domestic Demanders: Refining Margins

While the export restriction (Energy policy and conservation act of 1975) did not include exports of petroleum products, refiners were getting the crude oil (feed stock) for cheap and exporting refined products abroad at international prices based on Brent – hence making good profits (refining margins) and widening the Brent-WTI spread (fig 2 a & b).

However, following increased U.S exports, there has been a narrowing of the Brent-WTI spread (fig 2b) which has a hurting effect on U.S refiner’s refining margins. Refining more expensive crude results in higher input costs, ultimately leading to lower margins and earnings.

Fig 2 (a): Brent-WTI spread between 2007 and 2012 (b) Brent-WTI spread between 2011 and 2019
Source: Avondale Asset Management, 2012; Bloomberg, 201

Environmentalists

Proponents of climate change argue that greenhouse gas emission (from crude oil production) has increased as exports now allow U.S oil companies to drill for more oil. “Drill – baby – drill” has been the chant in the industry – among drillers; and environmentalists are not finding comfort in the current situation.


Petroleum Import and Export

Historically, the U.S has mostly been an exporter of petroleum products (for reasons already discussed), but in the last few years began exporting significant amounts of crude oil. In fact, the topical increase in domestic crude oil production has had a momentous bearing on both U.S petroleum imports and exports (fig 3). Since 2010, imports have been on an overall decline, while exports have continued to rise.

Fig 3: U.S Petroleum Imports and Exports from 1996 to 2018
Source: US Energy Information Administration (EIA), 2019

In 2018 alone, petroleum imports dropped to 9943 thousand barrels per day (decreasing 2% from the previous year) with exports reaching an all-time high of 7601 thousand barrels per day. The EIA has projected that the U.S would start exporting more crude and petroleum products than it imports by the end of 2020.

Presently, the top five sources of U.S imports are Canada, Saudi Arabia, Mexico, Venezuela and Iraq; and the top five export destinations are Mexico, Canada, Japan, Brazil and South Korea.


Why then is it impossible to stop U.S imports?

  • Location

Oil fields, producing wells, refineries and transportation infrastructures are not distributed uniformly across the country. They differ geographically. In fact, most of the infrastructure needed to produce and refine crude oil as well as to transport refined products are located mostly in the middle of the country (mid-west) and gulf coast regions (fig 4).

4a
4b
Fig 4: (a) map of U.S refineries and (b) pipeline transportation network
Source: US Energy Information Agency (EIA), 2012

This has negative effects on states outside of these regions who must depend on more expensive transportation modes (shipping, rail and trucking) and imports for petroleum products to meet their demands. Hence, in as much as domestic production volume is rising, the infrastructural constraints have not changed much, and therefore, it is impossible to stop the importation of crude oil and petroleum products.

Quality

Another reason why the U.S still imports crude, while also increasing its export is because crude oil is not the exact same all over the world and varies in quality. More so, since the quality of crude oil depends on its density and Sulphur content, refineries can only match their processing capabilities to the different types (qualities) from around the globe.

Most of the U.S refineries are configured to process heavy crude oil (mainly from the oil sands produced in Canada and Venezuela). Conversely, with the increasing domestic production of light crude oil, the US now has more than it can handle (refine) domestically. In addition, this same quality of oil is in high demand in other regions of the world that have more refineries suited for them.

Therefore, geographical distribution of the resource as well as differences amongst crude oils are important reasons why the U.S. continues to import oil in an era of domestic abundance!


Reference

EIA, “How much petroleum does the United States import and export?”, October 4, 2019, https://www.eia.gov/tools/faqs/faq.php?id=727&t=6

Energy API, “Why the U.S must import and export oil”, January 19, 2018, https://www.api.org/news-policy-and-issues/blog/2018/06/14/why-the-us-must-import-and-export-oil

The Washington post, “U.S oil exports have been banned for 40 years. Is it time for that to change?”, January 8, 2014, https://www.washingtonpost.com/news/wonk/wp/2014/01/08/u-s-oil-exports-have-been-banned-for-40-years-is-it-time-for-that-to-change/

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