- October 13, 2022
- Posted by: Art Berman
- Category: The Petroleum Truth Report
The United States is energy independent. Banning oil exports would lower oil prices. Strategic Petroleum Reserve releases lowered gasoline prices. There is a shortage of refinery capacity in the U.S. The cancelation of the Keystone XL Pipeline has limited U.S. oil supply and contributed to higher energy prices.
These popular memes are wrong.
The U.S. is not Energy Independent
The U.S. produced about 11.3 mmb/d of crude oil in 2021 and imported about 6 mmb/d of crude oil per day. That doesn’t sound very energy-independent.
When politicians and journalists talk about American energy independence, they’re not really telling the truth. They’re playing with truth. The energy independence meme confuses oil and refined products. They’re not the same. Let me review the facts.
The U.S. is a net importer of crude oil. U.S. net imports of crude oil averaged 2.9 mmb/d in the first seven months of 2022 (Figure 1 blue fill). That’s way down from almost 9.4 mmb/d during the same period in 2001, and moving in the right direction but it’s hardly energy independent.
The U.S. is a net exporter of refined products. Net exports averaged 5.9 mmb/d in 2022.
The problem arises when crude oil and the products refined from it are combined. That’s the blue curve in Figure 3 and voila. A country that imports more oil than Europe uses, magically became a net exporter in October 2021.
No other country in the world accepts this definition of being a net exporter. A country is a net exporter of oil only if it exports more crude oil than it uses. Saudi Arabia’s net crude oil exports are about 7.3 mmb/d. Canada exports almost 3 mmb/d of crude oil. The U.S. is a net importer of 3 mmb/d of crude oil.
About ten years ago I read article by Michael Levi in which he discussed this peculiar notion of American energy independence. Imagine, he wrote, a country that produces no automobiles but buys millions of unpainted cars from other countries. It brings them to domestic factories, paints them green, and then sells them on the world market. Is that country a net exporter of automobiles? Of course not. It’s a net exporter of green paint.
In the first seven months of 2022, America imported an average of 6.3 mmb/d of crude oil and exported an average of 5.9 mmb/d of refined products. Green paint.
Banning Oil Exports Would Not Lower Oil Prices
Several congressmen recently proposed that President Biden ban oil exports. They argued that this would lower make the country more energy independent and lower oil prices. It sounds like a good idea but it’s wrong because most of the oil exported from the United States cannot be used in U.S. refineries.
Refined products are made by heating crude oil in a distillation tower (Figure 4). The lightest fractions—butane, propane and gasoline—are separated first and the heavier fractions—jet fuel, kerosene and diesel come off later at higher temperatures.
Not all oil is the same. It comes in different grades like most commodities. Crude oils are classified by their densities. Some oils are heavy and some are light. Some contain relatively complex hydrocarbon molecules and others contain simpler compounds. Some are good for making diesel and the entire spectrum of refined products while others can only be used to make gasoline and lighter products.
These different properties of oil are expressed in the API gravity scale which is a variant of specific gravity or density. Figure 5 shows where major U.S. crude oils fall on the API scale and the approximate API ranges needed for production of key refined products. Many U.S. oils lack the heavy compounds needed to make diesel but are good for making kerosene, jet and gasoline.
The average API gravity crude oil input for U.S. refineries is about 33° but Figure 5 shows that the average values for many U.S. oils do not meet this requirement.
Figure 6 shows the API profiles of key U.S. oils and imported oil. Most U.S. regions produce oil that includes some refinery-ready grades that are 35° or less (light blue fill) that can be used to refine diesel but only in small proportions. They all have ample light grades of 36° to 45° (yellow fill) and greater to produce kerosene, jet and gasoline.
The 6 mmb/d of imported oil (right-hand profile), on the other hand, is refinery-ready or heavy enough to be blended with lighter U.S. oil to create a refinery-ready mix although special refineries are needed to manage the heavy fractions and bitumen.
Most of the oil that the U.S. exports is the surplus of light oil that is not needed to produce the range of refined products that U.S. consumers demand. Banning or restricting exports of that oil would not result in greater usable supply or lower prices. Re-designing U.S. refineries would not change the underlying light composition of U.S. oil so would do little to increase the domestic supply of diesel.
I’m not arguing for or against crude oil exports. I’m merely making the point that banning or restricting exports would probably make little or no difference for oil price.
There is no shortage of refining capacity
Analysts and journalists have been hyperventilating about the fact that the U.S. “lost” about 1 mmb/d of refining capacity during the COVID recession in 2020. It’s true but most of those shuttered refineries were old, small and inefficient, and would have been closed anyway. The economic closure during the pandemic was simply a good time to make those changes.
Figure 7 shows U.S. refinery utilization compared to the pre-Covid 2018-2019 average level. It shows no evidence that refinery capacity is a problem since so far, 2022 refinery utilization is consistent with 2018-2019 levels.
Refining is an industry, not a public service organization. The industry chose to close refineries and may decide in the future to build new ones. At the moment, however, it does not seem to agree with analysts who think it has a capacity problem.
Lower Gasoline Prices Because of Lower Demand, Not SPR
The U.S. government announced plans to release approximately 260 mmb of crude oil from the its Strategic Petroleum Reserve (SPR) between October 2021 and October 2022 in order to lower high gasoline prices. Releases actually began earlier in August 2021 and so far, about 205 mmb have been released or 3.7 mmb per week. Gasoline prices have fallen so the Biden administration has claimed “mission accomplished.”
Figure 8 shows U.S. gasoline price, consumption and the consumption 5-year average since November 2021. It seems fairly clear that demand destruction was the main reason for lower gasoline prices and not SPR releases.
U.S. gasoline consumption fell below the 5-year average in early June when gasoline prices reached more than $5.00 per gallon. Lower consumption led to lower prices. It appears that consumers are sensitive to an approximate price threshold of $4.00 per gallon. When the price falls near that level, consumption increases but remains far below the 5-year average which includes the pandemic years of abnormally low vehicle use.
Energy is a complex system so I would not want to conclude that the SPR releases had no effect on refined product prices. At the same time, the evidence does not suggest those releases were the principle cause.
The Keystone XL Pipeline Has Had Little Effect on Oil Supply
Some Americans believe that failure to build the Keystone XL Pipeline is a cause of high energy prices. It’s not. How can something that never was be a cause of anything?
I supported the project because it would have made imports from Canada more efficient and therefore, less costly. I publicly criticized Obama for canceling the pipeline a decade ago.
At the same time, presidential politics have not slowed increased oil imports from Canada to the U.S. Imports have increased 1.9 mmb/d (98%) since the pipeline project was announced in 2008, and 20% since Obama canceled the Keystone XL Pipeline in November 2015 (Figure 9).
We are energy-blind. Energy is the basis of life and yet we know less about it than how to search for cat videos on our phones.
Fossil fuels have provided the unparalleled productivity of human society over the last 75 years. They allowed population to grow from 2.5 to almost 8 billion over than period, and lifted billions of people out of poverty.
“Instead of appreciating this giant one time windfall, we developed stories that our newfound wealth and progress had emerged purely from human ingenuity…One barrel of oil represents almost 5 years of human labor, and human economies only pay the cost of its extraction…not the tens of millions of years of natural processes to create it. We have underpaid for the main input to human economies – and economic texts do not recognize this fact…We had become Energy Blind.”
–Nate Hagens, The Great Simplification
There is some limited truth behind all of the memes that I have discussed but not nearly enough to say that they are true. Most Americans want to believe in energy independence so they are eager to accept it as true. Analysts invent what become memes to get attention and pitch their companies’ products. Other analysts and journalists repeat them and before long, most people believe that they are true. We like simplistic reductions of a complex world because it’s easier than thinking which requires study and work.
I’m not suggesting that everyone needs to become an energy expert. I’m saying that memes are a lazy approach to something too important to be lazy about.
Thank you, Art!! Wake ’em up!