Crude oil is a vital global commodity, impacting everything from gasoline prices to the cost of everyday goods. Understanding the factors that influence the price of oil can help you navigate the fluctuating energy market. So, how much is oil and what determines its cost?
Domestic Production vs. Refinery Demand
Approximately 60% of the crude oil processed in U.S. refineries is sourced domestically. However, U.S. refineries require a variety of crude oil types, some of which are either not produced domestically or are not economically feasible to transport. To meet this demand, the U.S. imports crude oil, with nearly 70% of these imports coming from Canada (60%) and Mexico (7%). This diversification in crude oil sourcing helps maintain refinery efficiency, control costs, and ensure energy security.
The volume of crude oil processed by U.S. refineries significantly exceeds domestic crude oil production. The United States is currently producing a record amount of crude oil, approximately 13.4 million barrels per day. However, U.S. refineries require about 16.5 million barrels per day to maintain current production levels, operating at roughly 90% utilization. This gap between domestic production and refinery demand necessitates the import of crude oil.
The Role of Crude Oil Type
Many refineries require heavier crude oil to optimize the production of gasoline, diesel, and jet fuel. Currently, most of the crude oil produced in the United States is light crude, particularly from regions like the Permian and Bakken. These light crude oils are not suitable replacements for the heavier crude oil sourced from Canada and Mexico. The specific composition of crude oil affects the yield of different refined products.
Infrastructure and Investment Considerations
Retrofitting refineries to process solely U.S. light crude oil would be a substantial undertaking, requiring billions of dollars in investment. This would also be a risky venture due to the lengthy permitting and construction timelines, potentially taking decades to realize a return on investment. Furthermore, the U.S. lacks the necessary infrastructure, such as pipelines, to efficiently transport U.S. crude oil and refined products to all regions. Even if the economics of retrofitting facilities were favorable, obtaining permits and constructing pipelines in the United States can take nearly a decade.
Benefits of Import and Export
The ability to both import and export crude oil and refined products benefits consumers and safeguards U.S. energy security. Global trade allows for access to diverse crude oil sources and provides flexibility in meeting domestic demand while also enabling the U.S. to participate in the global energy market.
For more in-depth information on U.S. energy security, you can read more here.
