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December
06
2019

Momentous Change in US Crude Oil Market, with Global Impact
Wolf Richter

But US “Energy Independence” is More Complicated.

US exports of crude oil and petroleum products – this includes gasoline, diesel, jet fuel, naphtha, and many others – exceeded imports in September by 89,000 barrels a day, the EIA reported today, and so the US became a “net exporter” of crude oil and petroleum products for the first time on a monthly basis in the  EIA’s data going back to 1973:

The US has exported petroleum products – gasoline, diesel, heating oil, naphtha, propane, etc. – for a long time. This is the business some refineries are in. They buy crude oil from wherever they can get it, including other countries, and sell refined product to customers in the US and other countries.

For example, California produces some crude oil and gets some crude oil by tanker from Alaska and some by oil train across the Rockies. But there is no oil pipeline across the Rockies. So refineries in California, including in the San Francisco Bay Area, also import some of their crude oil from other countries, refine it, and then sell gasoline, diesel, and other petroleum products to other countries largely in Latin America.

Texas, the largest oil-producing state in the US, faces a still more complex landscape, with its enormous crude-oil production, its large refinery operations, pipelines connecting oil producers in the state to refineries in other states, and its import and export terminals, via which it both imports and exports various grades of crude oil and all kinds of petroleum products, depending on market conditions and other factors.

In other words, some of the crude oil that the US imports is then re-exported as value-added finished petroleum products, such as motor gasoline and diesel.

And so imports of crude oil exceed exports of crude oil, given that the US imports some of the crude oil for the purpose of re-exporting it as refined products. But this difference between imports and exports of crude oil has been plunging as well, to 3.4 million barrels per day in September:

Imports of crude oil and petroleum products from OPEC dropped to just 1.4 million barrels per day, the lowest in the data series going back to 1993, down 75% from 5.6 million barrels per day at the peak in 2008:

Saudi Arabia was in first place among OPEC countries, selling the US about 0.45 million barrels per day of crude oil and petroleum products in September – down 73% from 2003. Ecuador was in second place among OPEC countries, selling the US about 0.16 million barrels per day. Imports from Saudi Arabia are now minuscule and nearly irrelevant in the US, given the surge in US production.

US production of crude oil and petroleum products has spiked from 6.8 million barrels per day in 2008 to 17.5 million barrels per day in September, largely due to the ramp-up in shale oil production. Shale wells can also produce large quantities of gases that are counted separately as gas. These production figures here are just crude oil and petroleum products:

But “energy independence” is more complicated.

The US market is tightly interwoven with global markets, in numerous aspects. For example, unless a pipeline appears out of nowhere across the Rockies, the West Coast will continue to import foreign crude oil. Hauling crude oil via oil train across the Rockies is risky and expensive, and while this is being done to some extent, the added transportation cost renders this oil a difficult business proposition; and the risks of oil trains have engendered a lot of resistance in populated areas that the oil trains have to go through.

Then there are the various grades of crude oil and various petroleum products that are being produced and refined in the US and around the world, and it makes economic sense to trade with other countries – importing some and exporting others – to balance out the supply and demand equation around the world. So the US remains dependent on the global market, at least in normal times.

But the US cannot be blackmailed anymore over oil.

If another oil embargo came along, the US would just shrug it off, and when the price of oil rises due to this embargo, US drillers would ramp up production and within months, the world would be awash in US oil. In other words, the US cannot be blackmailed anymore over oil – the way it used to. And the world knows it. And that’s a form of independence.

The glut and the costs of shale oil.

That surge in production in the US over the past 10 years – from 6.8 million barrels per day to 17.5 million barrels per day – added nearly 11 million barrels per day to the US market, and thereby to the global market. And this completely changed global pricing dynamics.

As a result of this production boom in the US, the price of crude oil started to collapse in mid-2014. Today, at $55 per barrel of WTI, it remains about half of where it had been before the oil bust in early 2014.

US shale oil drillers are among the high-cost producers. They need a high oil price in order to sustain their businesses. You’d think that the collapse in the price of oil would have curtailed production, and it did briefly in 2015 and 2016 – see the dip in the chart above – but then new money started to pour into the sector, in the hope that prices would rise again, and they did, only to re-collapse late last year. But shale oil drilling is not sustainable at these prices, and investors are losing their shirts.

In 2019 so far, at least 33 oil and gas drillers in the US have filed for bankruptcy. Since January 2015, over 200 have filed for bankruptcy. Others are now jostling for position at the bankruptcy filing counter. Investors who’ve jumped into this in 2016, thinking they’d picked the bottom, have grabbed falling knives, and their fingers have gotten sliced off, including those of fracking billionaires. Read… Fracking Blows Up Investors Again: Phase 2 of the Great American Shale Oil & Gas Bust 

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Founder, Wolf Street Corp, publisher of WOLF STREET.

In his cynical, tongue-in-cheek manner, he muses on WOLF STREET about economic, business, and financial issues, Wall Street shenanigans, complex entanglements, and other things, debacles, and opportunities that catch his eye in the US, Europe, Japan, and occasionally China.

Wolf lives in San Francisco. He has over twenty years of C-level operations experience, including turnarounds and a VC-funded startup. He has a BA, MA, and MBA (UT at Austin).

In his prior life, he worked in Texas and Oklahoma, including a decade as General Manager and COO of a large Ford dealership and its subsidiaries. But one day, he quit and went to France for seven weeks to open himself up to new possibilities, which degenerated into a life-altering three-year journey across 100 countries on all continents, much of it overland, that almost swallowed him up.

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