American oil companies, using modern hydraulic fracturing techniques, have reversed a trend that started in the 1970s.
American oil production has stopped declining and has begun to rise. In 2013, it reached its highest level since 1989.
If we produce more, then we should import less, right? Not yet, anyway.
Crude oil is not a single substance. Some is black as tar. Some is clear. Some is sour (that is, it contains a lot of sulfur). Some is sweet, with less sulfur. Some is light and floats on water. Some is heavy and sinks in water.
The oil that comes from shale via fracking is light and sweet. The oil we import from Saudi Arabia or Venezuela is heavy and sour—and cheaper. Refineries configured to refine one kind of oil are not equipped to deal with the other. Most of our Gulf Coast refineries refine heavy, sour oil.
Lighter, sweeter oil from Texas or North Dakota is closest to refineries on the Gulf Coast, which cannot refine their products. East Coast refineries are better equipped to process it, but there are not enough pipelines to get crude to them from the shale oil fields.
In other words, American oil producers can’t find enough refining capacity, while we continue to import heavy, sour crude from places in the world that, to put it mildly, don’t have America’s best interests at heart.
Now, it turns out, we are beginning to run out of places to store our own crude oil.
The price of gasoline has fallen dramatically in recent months. We are currently seeing the spike in gas prices that always takes place this time of year when refineries switch from winter fuel to summer fuel. But prices are still much lower than this time last year.
The glut of oil could send the price of crude oil to low prices not seen in decades. Oil futures have fallen to just over $50 a barrel, and some analysts are talking about the possibility of $20 oil.
Companies can cut back on new drilling, but it will take months for it to reduce supplies of oil. They can’t sell it outside the US because of federal export restrictions. They can’t send it to the Gulf by pipeline and ship it to East Coast refineries by tanker because of the Jones Act of 1920.
Building new refineries or reconfiguring existing ones is costly and takes a long time. The quality of shale oil varies widely and unpredictably, adding another layer of complication.
So it looks like the short-term solution is to build more storage capacity and wait for the summer travel season to increase demand for gasoline. That’s how the industry dealt with a glut of oil in 2009. Oil storage is becoming a commodity for traders and futures markets. Meanwhile we keep importing and refining the dirtiest crude oil on the planet from people who don’t like us much.
Does that make sense to anyone besides oil industry professionals? How is it sustainable?
Don’t let low gas prices lull you into wasting gas. Everything you know about saving gas is just as important whether we’re paying a lot or a little for imported oil while our own sits in tanks.
Please let me and other readers know what you think.
Light on the Top, Heavy on the Bottom: A Crude Oil Refinery Primer / Dan Eberhart (Canary, February 14, 2014)
US Running out of Room to Store Oil: Price Collapse Next? / Jonathan Fahey (Associated Press, March 4, 2015) http://finance.yahoo.com/news/us-running-room-store-oil-171025359.html
Oil Glut Sparks Latest Dilemma: Where to Put It All / Nicole Friedman (Wall Street Journal, March 5, 2015)
Photo credit: AP /Mark Lennihan (2008 as Tropical Storm Gustav approached the Louisiana coast)