Like it or not, the world runs on oil and with interruptions in steady supply; uncertainty makes the price go up.  It’s a complicated process and complicated story.  

The United States is exporting oil today in large part to the advent of fracking. A process of extracting oil and gas from shale beds using horizontal drilling off a vertical well and then injecting a water solution into the shale beds to release the gas and oil. In 2005 American oil production spiked upward with the use of fracking which produces light or sweet crude. From 2012 to the present production has been booming and one might think that should make the price of gas go down; but it hasn’t.

The first and foremost reason: oil is priced on a global market.

US Oil

The US was the world’s greatest oil producer from the 1940s till the early 1970s. Texas, Louisiana, and California pumped what we needed. As the economy grew, cars and industry needed more supply, and we started importing more crude—mostly from Canada and Venezuela.

Different sources around the world produce different grades of oil. Canada and Venezuela are heavy or sour crude. The Middle East is medium crude, and our fracking is considered sweet.

As the supply from some of our oil fields was declining in the 70s, demand continued to grow. Imports shifted to the medium to heavy crude from the Middle East and Mexico. By 1977 OPEC (Organization of Oil Producing Countries) supplied 70% of our imported oil.

Over time, the turbulent nature of Middle East politics caused our relationship with OPEC to be problematic. OPEC regulated prices and how much was pumped and there was always the threat of oil embargoes.  For our own economic wellbeing, we gradually switched back to buying oil in our own hemisphere and limiting our dependance on OPEC. Drilling for oil at home was a political football between factions advocating energy independence and others demanding environmental protection above all.  Until fracking was introduced, most of our oil came from Canada, Venezuela, and the north slope in Alaska.

The 1970s was also a time of building refineries in America. They were tooled to process the heavy crude oil which made up most of our imports. Environmental regulations like the Clean Air Act of 1970 and the Clean Water Act of 1972 greatly increased the cost of building any project. There is also the “not in my back yard” problem of finding a location suitable for a refinery. Anyone wanting to build would need the guarantee of decades of operation to offset the investment. As a consequence, we are still operating on the systems built in the 70s.

Processing Oil Types

We can process the American sweet crude at some of our gulf coast refineries with the more advanced equipment they have.  

They could also retool some of the older plants to process the lighter crude. Retooling would be very costly. Besides that, they run most efficiently with the heavy crude. It makes sense to sell our sweet crude on the world market and continue to buy and process the heavy crude—which has the added benefit of the more byproducts which we need and also sell.    

So, what happens to that crude when it comes to the refinery? A barrel of crude is about 42 gallons. Percentage wise of that barrel, 45 to 50% will be gasoline, 25 to 30% will be diesel and kerosene (jet fuel is a form of kerosene). The rest will be a variety of other petroleum derivatives such as heating oil and petrochemical feedstocks, which are the basis for thousands of everyday products made from oil including clothing, packaging, fertilizer, plastics, medical equipment and pharmaceuticals, etc. And at the bottom of the barrel, literally is asphalt. There are 6000 products in our everyday life that come from petroleum.

In these sophisticated refineries the various grades of oil are mixed to produce what is needed. Very simply, light crude gives you methane and propane, then gasoline, then heavier oils like Kerosene, diesel, and heating oil. The lighter the crude, the fewer other products are realized from the process.

The US produces 13 million barrels of crude per day, and we refine about 16 million barrels a day. If we didn’t export our crude our storage would fill up, and we would have to stop importing heavy crude from which we derive diesel and kerosene for jet fuel.

We can export our light crude, about five million barrels a day, and import six million barrels of heavy. We need the heavy crude we don’t produce ourselves for products we make and sell at home and abroad.

Why Prices Are High

I’ve heard it said that it’s problematic that our refineries are old and can’t process the gas and oil we produce, and that’s causing the price of fuel to rise. But that doesn’t tell the whole story. It’s true that the last large-scale refinery built was in 1977, but that is due to our own environmental regulations and changing government policy. Some of the older facilities have been updated and expanded, but no new facilities have been built. Large investments need surety that a project started will be able to be completed.

Bottom line, we need heavy crude to derive the byproducts that come from that process and are not as available from the lighter sweet crude. We can sell the light crude to other countries. So it’s a win.

We are part of a world system in which we are a large player, but we are not totally self-sufficient. So, we need to work with other nations to support them and in turn be supported by them. These are high-stakes games not for the faint of heart, and sometimes world affairs force us into unpleasant situations. But our position is still a lot better than many countries and some states where gas prices are twice as high.